Abstract
Distributing loan using group lending method is one of the unique features in microfinance, as it utilises peer monitoring and dynamic incentive to lower credit risks in extending collateral-free loan to the poor. However, many microfinance institutions (MFIs) eventually perceive it to be costly and restricting loan growth thereby resorted to individual lending method to enhance profitability. On the other hand, village banking method was developed to boost outreach and to create self-sustaining village microbanks. We thus seek to empirically observe the loan method – efficiency relationship and to examine the best loan method regionally; focusing on not-for-profit MFIs that are widely regarded as best microfinance provider. Non-oriented Data Envelopment Analysis with regional meta-frontier approach is used for efficiency assessment of 628 MFIs from 87 countries in 6 regions, followed by Tobit regression. We also investigated factors affecting efficiencies such as borrowings, total donation, cost per borrower (CPB), portfolio at risk (PAR), interest rates, MFI age, regulation status, and legal format. The results support our argument that appropriate performance analysis should best be performed on regional basis separately as we find different results for different region.
Highlights
Over the last few decades, microfinance has provided financial access to the poor households who would otherwise be left out of by traditional financial infrastructures
Whilst mean overall and financial efficiency in all regional meta-frontiers are generally above 60%, with almost all DMUs exhibit first quartile (Q1) scores higher than 50%, we find that the lowest financial efficiency in Africa, Europe & Central Asia (EECA), Latin America & the Caribbean (LAC), and South Asia (SA) to be below 10% – the lowest being in Africa of 0.24%
We conclude that the concept of “best loan method” for not-for-profit MFIs cannot be generalised for all frontiers
Summary
Over the last few decades, microfinance has provided financial access to the poor households who would otherwise be left out of by traditional financial infrastructures Whilst most of these ‘unbankables’ (Simanowitz & Walter, 2002) demand small loans which are infeasible for mainstream banking industry to serve given the transaction costs incurred (Armendariz de Aghion & Morduch, 2005), financial access is still denied to the rest albeit having collateral (Johnston & Morduch, 2008). Miyashita (2000) and Cull, Demirguc-Kunt, and Morduch (2007) stress on the importance of MFI strategy formulation and credit design to manage this trade-off
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