Efficiency Comparison Between Non-profit and Commercial Microfinance: Empirical Evidence from Akhuwat Microfinance and Grameen Bank Using Data Envelopment Analysis

The operational effectiveness of a microfinance institution (MFI) significantly impacts its sustainability. The aim of this research is to undertake an assessment of comparisons of the operational effectiveness of a nonprofit and commercial MFI. The aim is to extract valuable insights from the best practices employed by these institutions. To accomplish this goal, two prominent MFIs have been chosen for analysis. The first is Grameen Bank (Bangladesh), which serves as a representative of commercial micro-finance. The second is Akhuwat Microfinance in Pakistan, which represents nonprofit microfinance. This study employs a quantitative research methodology, specifically the Data Envelopment Analysis (DEA) technique. The DEA is a widely utilized non-parametric method employed in this research to assess the efficiency of both MFIs for the time frame between 2013 and 2019. Malmquist index assesses efficiency within the context of the DEA technique. The Malmquist efficiency measures can be broken down into two distinct indexes: efficiency change and technical change. The concept of efficiency change can be further subdivided into two sections: pure efficiency and scale efficiency. The two establishments’ annual reports provided the input-output data needed for the efficiency assessment. The results suggest that Akhuwat Microfinance demonstrated inefficiency for the duration of the study, with a waste of 38 percent of its inputs. Except for the year 2018, during which Akhuwat Microfinance achieved 100% efficiency. In contrast, the inefficiency rate of Grameen Bank was significantly lower, standing at a mere 3 percent. This essay is on the experiences of Grameen Bank and Akhuwat Microfinance, with a particular focus on the problems encountered in achieving operational efficiency within communities that lack the requisite skills and training to adapt to these emerging MFIs properly.