The impact of scale of operation on financial performance in microfinance

Abstract

Due to the limitations of the extant literature on the impact of scale of operation on microfinance performance, this paper has been written in an effort to fill this major gap by conducting an empirical investigation into the link between scale of operation, sustainability and efficiency of microfinance institutions (MFIs). It introduces new evidence and possible explanations from an explicit perspective that might be relevant in the context of profit status, regulated status and legal status. First, large MFIs can achieve higher efficiency, profitability, sustainability and outreach (breadth and depth). Second, there is no trade-off between the breadth of outreach and efficiency. Third, larger loan sizes are associated with higher loan costs. Therefore, MFIs need to choose the optimal scale to achieve the greatest efficiency and profitability from economies of scale.