A Production Approach to Performance of Banks with Microfinance Operations

Abstract

Banking institutions, nowadays, serve as intermediaries of funds to a variety of clients, including the micro enterprisers. This study analyzes and measures the performance of rural and thrift banks with microfinance operations in the Philippines, using combined measures of data envelopment analysis and traditional financial performance indicators. Data envelopment analysis (DEA) method is employed to measure the productive efficiency of these banks under the production approach. The variable returns to scale is also used, with the assumption that not all banks are operating at optimal scale over the long-run period. DEA findings reveal that sample banks performed below the production frontier. The average technical efficiency score of these banks is 66.09% and additional 33.91% is needed to reach the production frontier. Overall, thrift banks are found to be more productively efficient than rural banks as depository banks. The authors have also found a strong relationship between financial performance measures and bank's productive efficiency. For thrift banks, sustainability, ROE and ROA measures showed a statistically significant positive correlation to the banks' productive efficiency while a negative relationship was observed in rural banks. Lastly, the authors can suggest that both DEA's productive efficiency and financial performance measures are consistently and strongly correlated when evaluating the overall performance of banks with microfinance operations.