Governance and Performance of Microfinance Institutions in Central and Eastern Europe and the Newly Independent States

Abstract

This paper presents the first evidence on the impact of external governance mechanisms, board diversity and independence, and management compensation on outreach and sustainability of microfinance institutions in Central and Eastern Europe and the Newly Independent States. Results indicate that among external governance mechanisms only auditing affects outreach, whereas regulation and rating do not affect performance. Board diversity improves both outreach and sustainability while larger and less independent boards lower sustainability. Performance-based compensation is not effective in aligning the interest of managers and stakeholders, and underpaying managers reduces outreach.

Keywords: Central and Eastern Europe and the Newly Independent States, governance, microfinance, board of directors, managerial compensation, regulation, and rating

JEL Classification: G21, G32, L22, L31, O16, P23, Q14