Economic Freedom and the Success of Microfinance Institutions

This study looks at the relationship between the success of microfinance institutions and the degree of economic freedom in their host countries. Many microfinance institutions are currently not self-sustaining, and both theoretical and empirical work suggests that the economic environment in which they operate is an important factor in their ability to reach this goal, furthering the mission of outreach to the poor. The sustainability of the microfinance institutions is analyzed here using a large cross-section of institutions and countries. The results show that microfinance institutions operate primarily in countries with a relatively low degree of overall economic freedom and that government intervention in the economy can reduce their sustainability.