Abstract
The push for microfinance institutions (MFIs) to achieve sustainability in recent years has made efficiency a prerequisite. Assessment of efficient operations of MFIs is vital for both policy and investment decision making and guaranteeing financial access to the poor. This study investigates the cost efficiency of MFIs operating in 10 Sub-Saharan Africa (SSA) countries over the period 2003-2013 and the factors that drive efficiency. The authors considered the Cobb-Douglas stochastic cost frontier model with truncated normal distribution and time variant inefficiency were estimated. The results show that MFIs are cost inefficient in their intermediation role as they currently achieve a mean cost efficiency of 40.09 percent. The main determinants of MFIs efficiency are total assets, operating expense to assets ratio, average loan balance per saver, the percentage of the female borrower and borrower per staff member. The study recommends that practitioners and managers of MFIs should improve on productivity through technical training in portfolio quality management and offer diverse financial products and services innovatively at minimised cost. Keywords: Efficiency, Microfinance Institutions, Stochastic Frontier Analysis, Sub-Saharan Africa
Highlights
The role of microfinance institutions (MFIs) in economic development has long been recognised though it only became part of the financial system in most developing countries in the early 1990s
Model [2] captures the effects of size and profitability on MFI efficiency
The empirical evidence shows that untimely recovery of loans drives MFI inefficiency
Summary
The role of microfinance institutions (MFIs) in economic development has long been recognised though it only became part of the financial system in most developing countries in the early 1990s. Countries with larger microfinance sectors experience lower levels of poverty (Imai, Gaiha, Thapa & Gupta, 2012), and yet efficient assessment of the operations of these institutions remains very low in Africa where development aid is proportionately large (Honohan, 2008). The microfinance industry has come under scrutiny following numerous studies that tend to show limited impacts of microfinance on development outcomes (Bataman, 2011; Bhatt & Tang, 2001). Bhatt & Tang (2001) found that most microfinance programmes had difficulty in sustaining their operations in the absence of grants, external funding, and subsidies, signifying inefficiency in their operations. As Conning (1999) noted, subsidies may keep inefficient institutions alive, but only in the short term
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