microfinance penetration figures to the index, there are relatively few observations available for the regressions. In terms of validating the Microscope, it is therefore encouraging that there are significant relationships between penetration and the index across multiple estimation techniques and after controlling for additional factors that are likely to affect penetration. Also, the general insignificance of the components of the Microscope related to the _Regulatory Framework and Practices_ (hereafter RFP) at the country level should not be taken to indicate that those parts of the index are not useful for describing variation in microfinance outcomes. In fact, in the next section, we use detailed MFI-level data to show that the RFP index (and its subcomponents) can explain substantial variation in financial performance, portfolio quality, and outreach profiles across institutions.

# **2. The Microscope and MFIs’ Financial Performance and Outreach**

While it would be desirable to link changes in the Microscope index to changes in MFI performance, such time series data are not currently available. To the extent that the Microscope is repeated over a reasonably long time horizon (say five years) this may become possible, but for now the revised index is available for only a single year, 2011. In recent years, however, the quality of the data produced by the _Microfinance Information Exchange_ (the MIX) at the MFIlevel has steadily improved so that the institutions that hold the vast majority of microfinance assets in many (or most) countries now report to the MIX. This makes it possible to test whether the business environment for microfinance as described by the Microscope affects different types of MFIs in different ways. For example, an environment conducive to the formation and operations of non-regulated MFIs is likely to have greater relevance for NGO microfinance institutions than for regulated commercial banks that provide microfinance services. With respect to the _Supporting Institutional Framework for Microfinance_ , credit bureaus and effective dispute resolution mechanisms could be more relevant for MFIs that make loans based on individual liability (such as commercial banks) than for MFIs that extend group liability loans (which are more likely to be NGOs). Here we consider separately how the business environment is likely to affect the financial performance of MFIs and their outreach to the disadvantaged.

# **_a. Outreach_**

Equation 2 links measures of outreach for MFI _j_ in country _i_ to characteristics of that MFI, country level control variables, and to the Microscope. Measurement of outreach to poorer population segments (i.e., _depth_ of outreach) is more difficult than for breadth of outreach in terms of the number of clients served. It is not a surprise, therefore, that variables such as the size and growth of MFI loan portfolios and growth in the number of MFI clients have provided the easiest path to study outreach. Two readily available, though admittedly imperfect, indicators of depth of outreach are average loan size as a percentage of per capita GDP and the share of total loans directed toward women. In the literature, smaller loan sizes and greater lending to women 7