Assessing the financial and outreach efficiency of microfinance institutions: Do age and size matter?

Abstract

Using a two-stage data envelopment analysis (DEA) bootstrapped metafrontier approach, we investigate the effects of age and size on financial and social efficiency estimates of microfinance institutions (MFIs). In the first stage, we use a metafrontier model, combined with a DEA bootstrap procedure, to obtain statistically robust and comparable efficiencies for MFIs operating in different geographic regions. In the second stage, we employ a bootstrap method to account for the impact of exogenous factors on both dimensions of efficiency. The results show that in most cases, the average efficiency scores are too low regardless of the reference frontier, indicating that most MFIs are financially and socially inefficient. From the second stage analysis, we find that although older MFIs perform better than younger ones in terms of achieving financial objectives, they are relatively inefficient in achieving outreach objectives. We also document that MFI size matters: larger MFIs tend to have higher financial and social efficiency, which is attributed to the presence of higher-scale economies.