Efficiency of microfinance institutions in sub – Saharan Africa: a stochastic frontier approach

Abstract

The push for microfinance institutions (MFIs) to achieve sustainability in recent years has made efficiency a prerequisite. Assessment of efficient operations of MFIs is vital for both policy and investment decision making and guaranteeing financial access to the poor. This study investigates the cost efficiency of MFIs operating in 10 Sub-Saharan Africa (SSA) countries over the period [2003][2004][2005][2006][2007][2008][2009][2010][2011][2012][2013] and the factors that drive efficiency. The authors considered the Cobb-Douglas stochastic cost frontier model with truncated normal distribution and time variant inefficiency were estimated. The results show that MFIs are cost inefficient in their intermediation role as they currently achieve a mean cost efficiency of 40.09 percent. The main determinants of MFIs efficiency are total assets, operating expense to assets ratio, average loan balance per saver, the percentage of the female borrower and borrower per staff member. The study recommends that practitioners and managers of MFIs should improve on productivity through technical training in portfolio quality management and offer diverse financial products and services innovatively at minimised cost.

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“…However, the negative coefficient indicates that increasing sustainability and serving poor borrowers may not become a conflicting goal for MFIs in Pakistan over time. The results showed consistency with , Abdulai and Tewari [2016], .…”

“…argued that women borrowers significantly and positively affected financial performance. Abdulai and Tewari [2016] stated that female borrowers, average loan size, operating expenses/total assets, borrowers per staff and total assets were the significant determinants of MFIs.…”

“…The importance of microfinance institutions (MFIs) has been acknowledged since they became part of the financial system in developing countries. Countries having larger MFIs experience lower poverty levels [Abdulai, Tewari, 2016]. MFIs serve as a tool of economic development aimed to benefit people with low income.…”

The Nexus of Competition Freedom and the Efficiency of Microfinance Institutions

“…This positive relationship implied better ROA of MFIs and a higher efficiency of MFIs. Another study conducted by Abdulai & Tewari (2016) used the Cobb-Douglas stochastic cost frontier model to investigate the determinants of MFIs' efficiency, with results indicating that ROA has no significant relationship with MFIs' efficiency. These findings suggest that cost efficiency may be attributed to the measurement of profitability in an unadjusted way.…”

Capital structure and financial sustainability of Microfinance Institutions (MFIs) in Rwanda

“…It goes without saying that the fundamental aim consists of availing commercialised capital and ensuring access to basic formal financial services for poor people. Moreover, monetary policies created a conducive environment for profit seeking by MFIs with the capability to attract commercial capital such as deposit, equity and loans from investors (Abdulai& Tewari, 2016;Mwongeli&Ariemba, 2018). Thus, it has become imperative for MFIs to remain sustainable and survive the forces of high competition and flourish in a changing environment.…”