The rapid expansion of microfinance has been uneven across emerging market countries. Our study examines whether the regulatory and legal environment for small and medium enterprises (SMEs) associated with microfinance institution (MFI) lending in informal markets may be part of the explanation. Our study of 51 emerging market countries for the period 2007–2015 used two measures of MFI lending: 1) the market penetration index (PI) which reflects MFI outreach and 2) gross loan portfolio per capita (GLP) which gauges the volume of MFI lending. Based on our search, this is the first study to incorporate both measures of MFI lending. We find that excessive regulation and weak legal institutions are associated with less MFI lending both in terms of outreach (PI) and loan volume (GLP). Hence, the international differences in MFI expansion may be partially attributable to business-unfriendly regulations and legal structures.

Ahlin, C., Lin, J. and Mayo, M. (2011) ‘Where does microfinance flourish? Microfinance institution performance in macroeconomic context’, Journal of Development Economics 95(2): 105–20 <https://doi.org/10.1016/j.jdeveco.2010.04.00>.

Ayyagari, M., Beck, T. and Demirguc-Kunt, A. (2007) ‘Small- and medium- enterprises across the globe’, Small Business Economics 29(4): 415–34 <https://doi.org/10.1596/1813-9450-5631>.

Ayyagari, M., Demirguc-Kunt, A. and Maksimovic, V. (2014) ‘Who creates jobs in developing countries?’ Small Business Economics 43(1): 75–99 <https://doi.org/10.1016/j.jdeveco.2010.04.004>.

Beaugrand, P. (2004) ‘And Schumpeter Said, “This is how thou shalt grow”: The further quest for economic growth in poor countries’, IMF Working Paper, International Monetary Fund, Washington, DC.

Crabb, P. (2008) ‘Economic freedom and the success of microfinance institutions’, Journal of Developmental Entrepreneurship 13(2): 205–19 <https://dx.doi.org/10.2139/ssrn.927033>.

Cull, R., Demirguc-Kunt, A. and Morduch, J. (2009) ‘Microfinance tradeoffs, regulation, competition and financing’, World Bank Research Working Paper 5086, World Bank, Washington, DC.

Cull, R., Demirguc-Kunt, A. and Morduch, J. (2011) ‘Does microfinance regulation curtail profitability and lending?’ World Development 39(6): 949–65 <https://doi.org/10.1016/j.worlddev.2009.10.016>.

Cull, R., Demirguc-Kunt, A. and Morduch, J. (2014) ‘Banks and microbanks’, Journal of Financial Services Research 46(1): 1–54 <https://dx.doi:10.1007/s10693-013-0177-z>.

de Soto, H. (1989) The Other Path: The Invisible Revolution in the Third World, Harper and Row, New York.

de Soto, H. (2000) The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, Basic Books, New York.

Elliot, K. (1997) ‘Corruption as an international policy problem: overview and recommendations’, in K. Elliot (ed.), Corruption and the Global Economy, pp. 175–233, Institute for International Economics, Washington, DC.

Fisman, R. and Svensson, J. (2007) ‘Are corruption and taxation really harmful to growth?’ Journal of Development Economics 83: 63–75 <https://doi.org/10.1016/j.jdeveco.2005.09.009>.

Gerxhani, K. (2004) ‘Informal sector in developed and less developed countries: a literature survey’, Public Choice 120(3): 267–300 <https://doi.org/10.1023/B:PUCH.0000044287.88147.5e>.

Goldfajn, I. and Rigobon, R. (2000) ‘Hard currency and financial development’, PUC-Rio, Working Paper 438, Department of Economics, Rio de Janeiro.

Greene, W. (2016) Econometric Analysis, Pearson, New York.

Hartarska, V. and Nadolnyak, D. (2007) ‘Do regulated microfinance institutions achieve better sustainability and lending? Cross-country evidence’, Applied Economics 39(10): 1207–22 <https://doi.org/10.1080/00036840500461840>.

Hermes, N. and Meesters, A. (2011) ‘The performance of microfinance institutions: do macro conditions matter?’ in B. Armendariz and M. Labie (eds), The Handbook of Microfinance, pp. 173–202, World Scientific Publishing, Singapore.

Holcombe, R.G. and Boudreaux, C.J. (2015) ‘Regulation and corruption’, Public Choice 164(1): 75–85 <https://doi.org/10.1007/s11127-015-0263-x>.

Honohan, P. (2004) ‘Financial sector policy and the poor: selected findings and issues’, World Bank Working Paper 43, World Bank, Washington, DC <https://doi.org/10.1007/s11127-015-0263-x>.

Hubka, A. and Zaidi, R. (2005) Impact of Government Regulation on Microfinance, World Bank, Washington, DC <https://openknowledge.worldbank.org/handle/10986/9133> [accessed 30 June 2021].

Independent Evaluation Group (2019) World Bank Group Support for Small and Medium Enterprises : A Synthesis of Evaluative Findings, World Bank, Washington, DC.

Kenny, C. (2007) ‘Construction, corruption and developing countries’, World Bank Policy Research Working Paper 4271 [online], World Bank, Washington, DC <https://openknowledge.worldbank.org/handle/10986/7451> [accessed 30 June 2021].

Krauss, A., Lontzek, L, Meyer, J. and Frommelt, M. (2012) ‘Lack of access or crowded market? Towards a better understanding of microfinance market penetration’ CMF Working Paper Series 01-2012, University of Zurich, Department for Banking and Finance, Zurich, Switzerland <https://doi.org/10.2139/ssrn.2587014>.

Lash, N. and Batavia, B. (2013) ‘Government economic intervention and corruption’, The Journal of Developing Areas 47(12): 1–15.

Manzetti, L. and Blake, C. (1996) ‘Market reforms and corruption in Latin America: new means for old ways’, Review of International Political Economy 3(4): 662–97 <https://doi.org/10.1080/09692299608434376>.

MIX Market (2013) 2012 Asia Regional Snapshot [online] <https://www.findevgateway.org/sites/default/files/publications/2019/2012%20Asia%20Regional%20Snapshot_0.pdf> [accessed 11 August 2021].

Patel, U. and Srivastava, P. (1996) ‘Macroeconomic policy and output comovement: the formal and informal sectors in India’, World Development 24(12): 915–23 <https://doi.org/10.1016/S0305-750X(96)00078-2>.

Paulson, A. and Townsend, R. (2004) ‘Entrepreneurship and financial constraints in Thailand’, Journal of Corporate Finance 10(2): 229–62.

Rhyne, E. (2001) Mainstreaming Microfinance: How Lending to the Poor Began, Grew and Came of Age in Bolivia, Kumarian Press, Hartford, CT.

Schumpeter, J. (1934) The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle, Harvard University, Cambridge, MA.

Vanroose, A. (2008) ‘What macro factors make microfinance institutions reach out?’ Savings and Development 32(3): 153–74.

Vanroose, A. and D’Espallier, B. (2009) ‘Microfinance and financial sector development’, CEB Working Paper Series 09-040, Universite Libre de Bruxelles, Brussels.

Waller, G. and Woodworth, W. (2001) ‘Microcredit as a grass-roots policy for international development’, Policy Studies Journal 29(2): 267–82 <https://doi.org/10.1111/j.1541-0072.2001.tb02091>.

World Bank (2011) Doing Business 2012: Doing Business in a More Transparent World [online], World Bank, Washington, DC <https://doi.org/10.1596/978-0-8213-7960-8>.

World Bank (2015) Doing Business 2015: Going Beyond Efficiency [online], World Bank, Washington, DC <https://doi.org/10.1596/978-1-4648-0351-2>.