How does regulation affect microfinance institutitons? Insights from the 2012-2014 regulatory strengthening in Benin ?

Although regulation has developed dramatically since microfinance emerged, the literature is still
questioning how it affects microfinance institutions. Some studies argue that regulation can support
both financial and social performance, whereas others highlight that it favors the commercial mindset
of microfinance institutions, and still others do not detect any direct effect. In this paper, we study the
introduction of a stricter microfinance regulatory framework in Benin in 2012-2014. Using graphical
analyses, hypothesis tests, and an event study, we analyze the evolution of financial performance, social
outreach, and market dynamics indicators. Our findings suggest that, following the regulatory
strengthening, sustainability deteriorated, and funding costs dropped. The analysis also suggests that
regulation contributed neither to the improvement social outreach, nor to the diversification of the
market, although these were among the objectives of the regulatory framework.