FIRM-SPECIFIC DETERMINANTS OF TECHNICAL EFFICIENCY IN MICROFINANCE INSTITUTIONS

Abstract

In this study, I investigate the firm-specific determinants of technical efficiency in Microfinance Institutions (MFIs). By using stochastic frontier analysis as proposed by Battese & Coelli (1995), I draw from past research three key elements of MFIs – client outreach, ownership structure and institutional age – to examine whether the differences in technical efficiency of MFIs relative to their best production possibility frontier can be explained by these factors. The results show that technical efficiency can be enhanced through extending client outreach, measured by average loan balance and the percentage of female borrowers. Moreover, non-shareholder and experienced MFIs are more technically efficient. This study could prove useful to policy makers and microfinance practitioners in searching solutions to improve efficiency among MFIs while concerning the potential efficiency-outreach trade-off.