Microfinance Efficiency: Trade-Offs and Complementarities between the Objectives of Microfinance Institutions and Their Performance Perspectives

Abstract

In the context of the multiple objectives of microfinance institutions (MFIs), this article tests two hypotheses. First, we argue that there is a trade-off between the social objectives of MFIs and their financial efficiency. Second, we assert complementarity between the external environment (credit information, property rights and financial development) and MFIs’ social efficiency. Using balanced panel data of 164 MFIs for the period 2004–2008 from the Microfinance Information Exchange market, both parametric and non-parametric efficiency estimation techniques are employed. The study shows that efficient MFIs, in the context of financial performance, fail to reach out to poorer clients. However, efficient MFIs, in the context of social performance, reach out to poorer clients. We also observe that bureaucracies in property registration and a lack of credit information adversely affect the social efficiency of MFIs. In view of the foregoing, the effective role of external institutions and the removal of information barriers are important for reducing poverty through microfinance intervention.