A Cost Function Approach to MFI Efficiency: The Role of Subsidy and Social Output Measures

Valentina Hartarska (), Denis Nadolnyak and Shen Xuan

Chapter 7 in Promoting Microfinance, 2013, pp 132-147 from Palgrave Macmillan

Abstract: Abstract Microfinance institutions (MFIs) strive to reach many poor clients while remaining financially sustainable. Most MFIs have quasi-equity owners who expect the organization to be financially self-sufficient, but do not necessarily expect competitive return on their equity. This chapter analyses the efficiency in MFIs by developing a model to identify the optimal MFI size that takes into account the outreach and the sustainability aspects of MFI performance. Moreover, we assess how results vary when we account for the cost of capital subsidy, measured by the opportunity cost of equity. Since MFIs across the world operate in diverse environments, we also estimate optimal MFI size by region and control for a number of internal and external characteristics. By identifying the optimal size of an MFI based on its location and other characteristics, this research could help donors understand the role of size in MFIs’ performance and help practitioners cut costs and achieve their social mission.

Keywords: Data Envelopment Analysis; Input Price; Loan Portfolio; Scope Economy; Microfinance Institution (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-1-137-03491-5_7

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DOI: 10.1057/9781137034915_7

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