Revisiting efficiency of microfinance institutions (MFIs): an application of network data envelopment analysis

Abstract

In order to achieve financial inclusion objectives of Sustainable Development Goals (SDGs) and provide continuous financial support to the unbanked population, microfinance institutions (MFIs) must attain efficiency in their operations. Hence, the main purpose of this study is to examine various efficiencies of MFIs based on their goals and operational mechanisms. By utilizing a unique production process and network data envelopment analysis (NDEA) technique, we estimated three different types of efficiencies (operational, financial and outreach) of 90 MFIs from 2013 to 2018. It was discovered that the overall efficiency of the MFIs was not up to the required standard and it became even worse when the financial and social outreach efficiencies were considered. However, operational efficiency (ability to generate intermediaries) was relatively better and remained high among the regulated MFIs. On the contrary, the financial and social outreach efficiencies were found to be better among the unregulated MFIs. Moreover, our results also highlight the divergence in efficiency between regions, legal status and regulatory environment; with projection analysis suggesting a simultaneous reduction in input, and an increase in output of inefficient MFIs to facilitate their attainment of efficiency. Policy implications are subsequently discussed.

Keywords:

• Operational efficiency
• financial sustainability
• social outreach
• microfinance
• MFIs
• network DEA

JEL CLASSIFICATIONS::

• D24
• G21
• L31
• N20
• O16

Acknowledgements

We are very much indebted to the two anonymous reviewers for their comments and suggestions on the earlier version of the manuscript, as their comments and suggestions have substantially improved the quality of the article. We also appreciate Dr. Zhang Cheng (Dana) for providing us several STATA codes to process raw data. The earlier draft of this article has been accepted for presentation in the ‘Frontiers in Development Policy’ conference organized by the KDI School of Public Policy and Management, Sejong City, Republic of Korea in September, 2020. We thank Mr. Mudathir Adewole for his excellent English editing support.

Disclosure statement

The authors declare no potential conflicts of interest related to the study.

Notes

1 https://datacatalog.worldbank.org/dataset/mix-market

2 For brevity, the efficiency scores and potential improvements of individual MFIs are not displayed and will be available upon request.

Additional information

Funding

The article is part of the third and corresponding author’s research grant (Grant no: 304.PMGT.6316559) at Universiti Sains Malaysia, Penang, Malaysia. The authors also appreciate Universiti Sains Malaysia for covering the article processing charge (APC).