Recent years have witnessed a concerted effort to measure the quality of the environment for business and investment, and assess its implications for economic growth. Perhaps the most well-known example, the World Bank’s Ease of Doing Business index focuses on the complexity of business regulations and the strength of property rights protections. This index is a composite of information on the ease of performing specific business activities including starting a business, dealing with construction permits, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency (Doing Business, 2012).

This and similar indexes have been shown to be strongly associated with economic outcomes. Djankov, La Porta, Lopez-de-Silanes, and Shleifer (2002) find that burdensome regulations governing business entry are associated with higher levels of corruption and a larger unofficial economy. Ciccone and Papaioannou (2007) confirm that longer periods to register a new business are significantly negatively associated with business entry. Similarly, using a large database of European firms, Klapper, Laeven, and Rajan (2006) find that more streamlined business entry regulations contribute to more rapid creation of new firms, and effects are most pronounced in industries that naturally have a high rate of entry.

Moreover, regulatory and procedural reforms have improved the quality of the business environment as measured by these indexes. For example, since 2003, 17 countries (including Belgium, Ireland, Mauritius, and Norway) have introduced electronic registration, which has shortened the average reported time to start a business from 40 days to 14. In addition, because it substantially reduces contact between entrepreneurs and government officials, online registration improves transparency and reduces opportunities for corrupt behavior such as demands for bribes. Ultimately, the quality of the business environment impacts economic growth. Using measures of business regulations in 135 countries from 1993 to 2002, Djankov, McLiesh, and Ramalho (2006) show that an improvement in the business environment from the worst quartile of their sample to the best is associated with an increase in annual growth of 2.3 percentage points.

In principle, aspects of the business environment are also likely to affect microfinance and its clients (who are largely in the informal sector), though not necessarily in the same ways that it has been shown to affect firms in the formal economy. By 2011, the microfinance industry was serving over 200 million clients worldwide and had $73 billion in loans outstanding.<sup>1</sup> As the industry has grown and flourished, so too has academic interest in it, though studies have tended to focus on the mechanics of micro-lending (e.g., group liability lending) and the impact of micro-banking services on clients and their households. Less attention has been paid to the macro impacts of microfinance on developing economies or the environments (macroeconomic, institutional, regulatory, and financial) in which microfinance institutions (“MFIs”) are most likely to flourish. In this paper, we therefore describe and attempt to validate a new tool, the

> 1 _Microfinance Banana Skins Survey 2012_ , Centre for the Study of Financial Innovation.

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