Pursuing efficiency: a data envelopment analysis of MFIs in Latin America

ABSTRACT

This article analyses the overall profitability efficiency (PE) of Microfinance Institutions (MFIs) in Latin America. The PE of each MFI in the study is broken down into two components: pure technical efficiency and scale efficiency. One data envelopment model is used to analyse each component. Each MFI was labelled as either a bank, cooperative and credit union, nonbanking financial institution or non-governmental organization, and then the analysis was performed on each separate group. The results suggest that, on average, banks are the most efficient MFIs; while NGOs are, on average, the least efficient MFIs. On average, all 4 groups are more pure technically efficient than scale efficient. Banks, nongovernmental organizations, nonbanking financial institutions, cooperatives and credit unions all seem to have problems with scale efficiency. Many MFIs seem to be operating on the increasing returns to scale frontier and are in a more favourable position for expansion.

KEYWORDS:

• Efficiency
• Nonparametric Estimation
• Microfinance Institutions
• Data Envelopment Analysis
• Decision Making Units
• Latin America

JEL CLASSIFICATION:

• O54
• O29
• G21

Disclosure statement

No potential conflict of interest was reported by the author.