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

MicrofinanceMicrofinance 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 opportunitiesOpportunity to poor people in different countries around the world. The achievement of social goals does not preclude the search for financial efficiencyEfficiency, so demonstrating financial viability has become a priority for these institutions. The objective of this chapter is to analyze the evolution of MFIsMicrofinance institutions (Mfls)’ economic efficiencyEconomic 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)Stochastic frontier analysis (SFA) which allows us to estimate a translog frontier cost functionCost function with an unbalanced panel of 1,580 MFIs from different geographic regions for the period 2003–2018. The results reveal that MFIsMicrofinance institutions (Mfls)’ economic efficiencyEconomic 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 efficiencyEfficiency was not found. On the other hand, we have found that the proportion of borrowers in rural areas as well as village bankingVillage banking practices positively influence cost efficiencyEfficiency, whereas MFIsMicrofinance institutions (Mfls) with higher defaultDefault rates and larger scale are economicallyCost frontier less efficient.