Social and Financial Efficiency of Microfinance Institutions in Pakistan

Abstract

Targeting financially marginalized communities in an efficient way is the most desirable and possibly the most effective strategy for microfinance institutions (MFIs) to reduce incidences of absolute poverty, create self-employment opportunities, and improve socioeconomic wellbeing of the poor communities. This paper attempts to investigate social and financial efficiency of Pakistani microfinance institutions to bring forth optimal strategies for financing non-bankable poor in an efficient and self-sustainable way. The investigation of efficiency of the MFIs in Pakistan can help the major stakeholders of the industry in understanding the current scenario and to design optimal policy agenda for the future. The sample size of this study consists of all MFIs in Pakistan for the year 2013. The data about the MFIs has taken from ‘Mixmarket’ database. After specifying 19 different DEA models, with the help of three input and four output variables, representing various dimensions of MFIs such as cost structure, financial structure and organizational characteristics, the study reveals that MFIs efficiency is sensitive towards the selection of input and output variables, the choice of CCR and BCC models and the number of input and output variables in the model. The study further reveals that there is no single way to efficiency however; it majorly depends on the scale, age and types of MFIs. Microfinance banks perhaps are not appropriate financial institutions to extend microcredit to poorer community member and to achieve the goal of women empowerment through the extension of credit to women. As a rough estimate inefficient MFIs can focus on the optimal use of Asset (which is common among the socially efficient MFIs irrespective of their types and size) followed by operating cost and loan officers respectively.