Revisiting efficiency of microfinance institutions (MFIs): an application of network data envelopment analysis

In order to achieve financial inclusion objectives of Sustainable Development Goals (SDGs) and provide continuous financial support to the unbanked population, microfinance institutions (MFIs) must attain efficiency in their operations. Hence, the main purpose of this study is to examine various efficiencies of MFIs based on their goals and operational mechanisms. By utilizing a unique production process and network data envelopment analysis (NDEA) technique, we estimated three different types of efficiencies (operational, financial and outreach) of 90 MFIs from 2013 to 2018. It was discovered that the overall efficiency of the MFIs was not up to the required standard and it became even worse when the financial and social outreach efficiencies were considered. However, operational efficiency (ability to generate intermediaries) was relatively better and remained high among the regulated MFIs. On the contrary, the financial and social outreach efficiencies were found to be better among the unregulated MFIs. Moreover, our results also highlight the divergence in efficiency between regions, legal status and regulatory environment; with projection analysis suggesting a simultaneous reduction in input, and an increase in output of inefficient MFIs to facilitate their attainment of efficiency. Policy implications are subsequently discussed

Gender pay gap in the microfinance industry: a global perspective

We use a database composed of 2,545 Microfinance Institutions (MFIs) worldwide for the period 2008-18 to explore the effect of a larger share of women's workforce on both staff wages and overall monetary compensation within MFIs. MFIs are different from other industries, as they are traditionally women-centered, i.e. they have a significant share of women employees at every level of the corporate hierarchy and mostly serve women clients. Applying both traditional estimation methodology and techniques aimed at accounting for possible endogeneity among the main variables, we find that a higher proportion of women on staff significantly increases the average expense per worker (which also includes the incentive components of remuneration) while the effects are considerably smoothed (or not significant) on the base salary. This leads us to conclude that, unlike what is seen in other sectors of the economy, MFIs do not pay women less. Yet, significant positive effects of women in the workforce, especially on average overall monetary compensation, suggest that women are likely to exploit their superior skills and/or gender affinity advantages with customers of the same gender to enhance MFIs' efficiency and profitability, thereby achieving higher incentive compensation, mostly in the form of bonuses and other benefits

How Productive Are the Microfinance Institutions in Bangladesh? An Application of Malmquist Productivity Index

The poverty reduction and financial inclusion of Sustainable Development Goals (SDG) by 2030 can be significantly facilitated by the microfinance industry. However, it is pertinent to assess the sustainability of microfinance institutions (MFIs) in serving this purpose. The estimation of productivity of MFIs in Bangladesh gives a glimpse of their ability to fulfil the dual objectives of financial sustainability and social outreach. Hence, this study aims to measure the productivity of MFIs in Bangladesh using secondary data obtained from the Microfinance Information Exchange (MIX) market. The study employs Malmquist Productivity Index (MPI), which is an extension of the Data Envelopment Analysis (DEA) to estimate the overall, social and financial productivities of 26 MFIs in Bangladesh during the period from 2009 to 2018. In general, this study revealed that majority of the MFIs’ overall productivity score varies between 0.9 and 1.20. Moreover, we observed that the social and financial productivities of MFIs in Bangladesh progressed during the entire study period, except for the years 2011 and 2017. This development may be attributed to the average growth in catch-up and technological effect witnessed during the study period. The study has also applied sensitivity analysis by changing the output to evaluate the robustness of the overall productivity results; consequently, the new estimates followed a similar pattern (mostly) and further corroborate the outcomes of this study

Development of Islamic microfinance: a sustainable poverty reduction approach

Purpose – Though microfinance has been working for many years as a tool to eradicate poverty from its root, most of the least developed and developing countries are yet to significantly alleviate it from the society. The purpose of this paper is to focus on Shariah-based microfinance products in the context of sustainable poverty alleviation approach and provide them financial benefits to enhance their livelihoods. Design/methodology/approach – Here, this qualitative study critically analyzes the basics of the sustainable Islamic microfinance to exterminate the level of poverty. Findings – Islamic microfinance is a more ethical practice than the traditional motives of profit maximization, and it encourages extending the time of repayment if the debtors are in hardship. In some case, it suggests to give charity if the creditor has capability. Research limitations/implications – Most importantly, research scholars and experts have already criticized the concept of conventional microfinance on the basis of various points, especially for its high rate of interest. Social implications – Islamic microfinance is provided with a view to fulfill two tools simultaneously, i.e., social and financial inclusion. In this case, credits and Zakah can be given to the extreme poor people for satisfying basic needs. In terms of social responsibility, Islam encourages the people to be soft in case of collecting the lending money. Originality/value – The study discoursed that sustainable Islamic Microfinance (IM) may be a promising future option to draw the attention of the religiously sensitive people toward the Shariah-based microfinance which can, in turn, mitigate the poverty level

Market structure, mission drift and productivity towards a sustainable microfinance industry in Bangladesh / Md. Aslam Mia

Microfinance is a preferred development tool in most developing countries, and remains important to Bangladesh, the country where the sector is most established. With approximately half of the Bangladesh population is unbanked and one third below the income poverty line, microfinance serves as an important policy instrument in the country’s vision of attaining middle-income status by 2021. Hence, it is imperative for the microfinance industry to be effective, efficient and sustainable. This study identifies three important objectives – market structure, mission drift, and productivity – crucial to microfinance in the contemporary world. First, this study aims to investigate the market structure (concentration and competition) in order to understand functioning and the operations of the microfinance. Second, in recent years, financial interests have increasingly influenced microfinance institutions (MFIs), with financial gain overshadowing service to the poor. Hence, this study examines the incidence and explanations for commercial interests to interfere with the social mission of MFIs. Third, the long-run ability of MFIs to meet the financial needs of the poor is contingent on their economic viability. Thus, the productivity of MFIs and its determinants is assessed in this study. A balanced panel data set from 169 MFIs during the period of 2009 to 2014 which was compiled from annual reports by the Microcredit Regulatory Authority, Bangladesh is used for this purpose. Since the three objectives are independent of each other, different types of estimation strategies are employed based on convention and reported separately in different chapters. Based on the concentration ratio and the Herfindahl and Hirschman Index (structural approach), this study finds that the microfinance industry is moderately concentrated and currently transitioning to an unconcentrated market. The Lerner index (non-structural approach) confirmed that the competition level is relatively high and likely to follow an inverted U-shape during the study period. Results from the static and dynamic panel analysis, revealed that increased focus on commercial interest or profit motive leads to mission drift. Mission drift is also likely to happen when more commercial funds are injected into MFIs, as well as when MFIs are vulnerable to the macroeconomic and regulatory environment influences. The non-parametric Malmquist Productivity Index indicates that the microfinance industry in Bangladesh observed productivity progress, with a declining trend towards the end of the study period. Further decomposition results revealed that technical efficiency has enhanced overall productivity, while technological change has deteriorated. One policy implication that can be drawn from the evidence is to encourage MFIs participation in innovation activities, so that the stimulation of technological change can improve the overall productivity. The second stage parametric test revealed that GDP growth has a positive effect on productivity and technological progress, whereas an interest rate cap significantly deteriorates the productivity and technological progress of MFIs. Therefore, the policy makers and regulatory authority should consider macroeconomic and regulatory environment when designing policy prescriptions to promote sustainability in the microfinance industry

Evolution of market concentration and competition in the microfinance industry of Bangladesh

Purpose: The purpose of this paper is to measure and track the evolution of market concentration and competition in the microfinance industry in Bangladesh by employing both the structural and non-structural measurement techniques. Design/methodology/approach: By using a unique panel data set generated from the microcredit regulatory authority (MRA) annual reports, the sample includes 169 microfinance institutions (MFIs) and covers the period 2009-2014. The authors employed the Herfindahl-Hirschman index (HHI) and concentration ratio (CR) (largest 3, 8 and 20 MFIs) as structural measurement techniques and the Lerner index as a non-structural measurement technique. In addition, four different market indicators are used as representatives of deposit and credit markets to better explain the evolution of market concentration. Findings: The results of HHI indicate that the sector is moderately concentrated and currently transitioning to an unconcentrated market. However, based on CR, the industry is still dominated by a few large MFIs. The Lerner index (non-structural approach) also confirmed that the level of competition is relatively high and likely to follow an inverted U-shape during the study period. Practical implications: The findings of this study will enhance our understanding of the market structure in the Bangladesh’s microfinance industry so as to inform important policy prescriptions. The results also provide impetus to the relatively young MRA to nurture competition in the market; simultaneously, the findings prompt management of the MFIs to cope with a competitive market environment. Originality/value: This study is one of the first of its kind that includes a large data sample of microfinance market for a single country by employing both structural and non-structural measurement approaches

What affects portfolio yield of microfinance institutions? Evidence from Bangladesh

Despite the success and rapid growth of the microfinance industry worldwide, there has been very little sign of any abatement of the high interest rates. High interest rates in microfinance rescind consumer benefits and limit the outreach of microfinance institutions (MFIs). Hence, the aim of this study is to identify the determinants of portfolio yield by examining a longitudinal data of 169 MFIs from Bangladesh. The data are collected from the annual reports of the Microcredit Regulatory Authority (MRA) and cover the period from 2009 and 2014. Based on empirical results, the study found that sources of funds are optimally used in the microfinance industry in Bangladesh. Among other institutional characteristics and macroeconomic factors, only operating cost and inflation were found to be positively significant to portfolio yield, supporting the conventional views. Policy implications are further discussed

Female participation and financial performance of microfinance institutions: evidence from transition economies

We find that female board members and female clients positively contribute to the financial performance of MFIs. The literature motivates these outcomes by womens’ better organizational and monitoring techniques, and more responsible use of loans, respectively. Instead, our analysis shows that female managers and loan officers may regress financial performance to some extent, possibly because they face cultural limitations and safety obstacles, resulting in less persuasive and effective than men, especially in the process of collecting arrears payment