Efficiency drivers in microfinance institutions

Abstract

This study attempts to identify drivers for efficiency in Micro Finance Institutions (MFIs) and determine their effect on the overall cost-efficiency of MFIs. The study used cross sectional data of 377 MFIs from 74 countries. Multivariate regression analysis was applied in order to find the results. Operational expense to portfolio, operational expense to assets and cost per credit client were used as efficiency measurements, 13 hypotheses were proposed and 17 variables were studied. Our results revealed that all except for two variables had a significant effect on one or more of the efficiency measurements. Credit officer productivity, cost per employee, loan outstanding average and credit officer ratio had a strong significant effect on all measurements. Our findings suggest that MFIs should increase their credit officer productivity and decrease the personnel expenses per employee in order to increase the overall cost-efficiency. Moreover, the MFIs should put more of their staff into income generating activities. Our findings also indicate that the MFIs should focus on more costefficient operations to avoid increased average loan amount and mission drift. Performance pay had no significant effect on the MFIs overall efficiency, which indicates that the MFIs incentive schemes motivate other performance measures than cost-efficiency. Modified incentives schemes should be considered to improve the cost-efficiency of MFIs.