The Economic Efficiency of Microfinance Institutions: Evolution Over Time and Explicative Factors

Microfinance institutions (MFIs) play a vital role in extending credit to poorer borrowers who are marginalized by the traditional banking system, contributing significantly to reducing poverty and providing economic opportunities to poor people in different countries around the world. The achievement of social goals does not preclude the search for financial efficiency, so demonstrating financial viability has become a priority for these institutions. The objective of this chapter is to analyze the evolution of MFIs’ economic efficiency over time and to explore the effect of different factors on it. The methodology that we have employed is the stochastic frontier analysis (SFA) which allows us to estimate a translog frontier cost function with an unbalanced panel of 1,580 MFIs from different geographic regions for the period 2003–2018. The results reveal that MFIs’ economic efficiency, on average, decreased during the period in all geographic regions, with a lower decrease in the South Asia and Middle East & and North Africa regions. Any relationship between MFIs’ experience and cost efficiency was not found. On the other hand, we have found that the proportion of borrowers in rural areas as well as village banking practices positively influence cost efficiency, whereas MFIs with higher default rates and larger scale are economically less efficient.