Global Microscope on the Microfinance Business Environment (hereafter, “the Microscope”), that summarizes the quality of the business environment as it pertains specifically to the microfinance industry.

The 2011 Microscope summarizes information from surveys that were conducted by the Economist Intelligence Unit (EIU) of microfinance experts in each country in an index comprised of two broad categories. The first, _Regulatory Framework and Practices_ , has five subcomponents: regulation and supervision of microfinance portfolios; formation of regulated and supervised microcredit institutions; formation and operations of non-regulated microcredit institutions; regulatory and supervisory capacity for microfinance; and the regulatory framework for deposit taking.<sup>2</sup> The second broad category, the _Supporting Institutional Framework for Microfinance_ , also summarizes expert survey responses in five areas: microfinance institutions’ accounting transparency; microfinance client protection as it relates to transparency in pricing; client protection as it relates to resolution of disputes between microfinance borrowers and lenders; the effectiveness and reliability of credit bureaus for microfinance; and the quality of policies and practices for financial transactions through agents. The overall index also makes adjustments for political shocks and tensions that could affect microfinance operations and for general political stability.<sup>3</sup> To provide additional context for the revised Microscope, the 2011 report provides information from the Microfinance Information Exchange (the MIX) on the average financial performance, overall penetration measures, proxies for outreach to the poor, deposit levels, and measures of efficiency for microfinance institutions in each country. That report also marked the beginning of an analytical effort to empirically validate the revised index by linking it (and its subcomponents) to the microfinance outcomes reported by the MIX and other sources. In the analysis that follows, we control for a number of factors that could also affect microfinance penetration measures (and other MIX outcomes) including macroeconomic variables such as GDP growth and inflation and non-performance characteristics of microfinance institutions in each country such as their age, legal status (non-profit, for profit), organizational type (bank, non-bank formal financial institution, NGO), and preferred lending methodology (individual liability, group liability, or village banking).<sup>4</sup>

> 2 See, Economist Intelligence Unit, “Global Microscope on the Microfinance Business Environment 2011” for fuller description of the survey methodology and questions and Appendix A of this document for the format of questions used in the survey that enter this analysis.

> 3 The 2011 Microscope represents a major reorganization of previous versions. Not only have the sub-components and their groupings changed, but a major effort was made to adapt the questions specifically to the microfinance context. For example, the components related to the institutional framework were changed from previous versions to make sure that questions asked respondents about institutional development (e.g., accounting standards, client protection) only as it pertained to microfinance institutions.

> 4 We are very grateful to Blaine Stephens of the MIX and Scott Gaul (formerly of the MIX) for help in obtaining the data and advice on its use.

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