Technical efficiency and its determinants in microfinance institutions in India: a firm level analysis

Soteriou A., Zenios S.A.

We develop a framework for combining strategic benchmarking with efficiency benchmarking of the services offered by bank branches. In particular, a cascade of efficiency benchmarking models is developed guided by the service-profit chain. Three models—based on the nonparametric technique of Data Envelopment Analysis—are developed in order to implement the framework in a practical setting: (i) an operational efficiency model, (ii) a service quality efficiency model, and (iii) a profitability efficiency model. The use of the models is illustrated using data from the branches of a commercial bank. Empirical results indicate that we gain superior insights by analyzing simultaneously the design of operations together with the quality of the provided services and profitability, rather than by benchmarking these three dimensions separately. Relationships are also established between operational efficiency and profitability, and between operational efficiency and service quality.

Banker R.D., Charnes A., Cooper W.W.

In management contexts, mathematical programming is usually used to evaluate a collection of possible alternative courses of action en route to selecting one which is best. In this capacity, mathematical programming serves as a planning aid to management. Data Envelopment Analysis reverses this role and employs mathematical programming to obtain ex post facto evaluations of the relative efficiency of management accomplishments, however they may have been planned or executed. Mathematical programming is thereby extended for use as a tool for control and evaluation of past accomplishments as well as a tool to aid in planning future activities. The CCR ratio form introduced by Charnes, Cooper and Rhodes, as part of their Data Envelopment Analysis approach, comprehends both technical and scale inefficiencies via the optimal value of the ratio form, as obtained directly from the data without requiring a priori specification of weights and/or explicit delineation of assumed functional forms of relations between inputs and outputs. A separation into technical and scale efficiencies is accomplished by the methods developed in this paper without altering the latter conditions for use of DEA directly on observational data. Technical inefficiencies are identified with failures to achieve best possible output levels and/or usage of excessive amounts of inputs. Methods for identifying and correcting the magnitudes of these inefficiencies, as supplied in prior work, are illustrated. In the present paper, a new separate variable is introduced which makes it possible to determine whether operations were conducted in regions of increasing, constant or decreasing returns to scale (in multiple input and multiple output situations). The results are discussed and related not only to classical (single output) economics but also to more modern versions of economics which are identified with “contestable market theories.”

Topuz J.C., Darrat A.F., Shelor R.M.

Abstract:  This paper empirically explores various efficiency aspects of Real Estate Investment Trusts (REITs) in light of their remarkable growth in the 1990s. We find clear evidence of considerable technical inefficiency in REITs, though not much indication for allocative or scale inefficiency. The results also suggest that an increasing number of REITs has been operating under diseconomies of scale since the late 1990s primarily due to the recent wave of consolidation and merger activities. As creatures of the US tax code, REIT's have undergone several changes to their operating status, and our results suggest that the prevalent regulatory environment appears too onerous for the industry and may have contributed to the REITs’ poor efficiency performance. In particular, further cuts or total elimination of the dividend restriction on REITs could provide much needed relief and stability in the US real estate market.

Casu B., Molyneux P.

This paper investigates whether there has been an improvement in and convergence of productive efficiency across European banking markets since the creation of the Single Internal Market. Using efficiency measures derived from DEA estimation, the determinants of European bank efficiency are evaluated using the Tobit regression model approach. The established literature on modelling the determinants of bank efficiency is then extended by recognizing the problem of the inherent dependency of DEA efficiency scores when used in regression analysis. To overcome the dependency problem, a bootstrapping technique is applied. Overall, the results suggest that since the EU's Single Market Programme there has been a small improvement in bank efficiency levels, although there is little evidence to suggest that these have converged. The results also suggest that inference on the determinants of bank efficiency drawn from non-bootstrapped regression analysis may be biased and misleading.

Isik I., Kabir Hassan M.

In January 1980, a new liberal economic policy was adopted in Turkey to promote financial market development and increase the efficiency and productivity of the financial sector by fostering competition among banks. As a result of this policy, the Turkish banking system witnessed a series of legal, structural and institutional changes throughout the 1980s. To enhance their competitive viability, Turkish banks responded by streamlining their operations and investing in new technology. Utilizing a DEA-type Malmquist Total Factor Productivity Change Index, we examine productivity growth, efficiency change, and technical progress in Turkish commercial banks during the deregulation of financial markets in Turkey. We found that all forms of Turkish banks, although in different magnitudes, have recorded significant productivity gains driven mostly by efficiency increases rather than technical progress. Efficiency increases, however, were mostly owing to improved resource management practices rather than improved scales. Our results also indicate that private banks began to close their performance gap with public banks in the new environment.

Morduch J.

Leading advocates for microfinance have put forward an enticing “win-win” proposition: microfinance institutions that follow the principles of good banking will also be those that alleviate the most poverty. This vision forms the core of widely-circulated “best practices,” but as a general proposition the vision is fully supported neither by logic nor by the available empirical evidence. Recognizing the limits to the win-win proposition is an important step toward reaching a more constructive dialogue between microfinance advocates that privilege financial development and those that privilege social impacts.

Worthington A.C.

Credit unions are small, co-operative, not-for-profit institutions; facts which usually distinguish them from other financial intermediaries. Whilst respecting the unique organisational and institutional features of credit unions, the present study also accepts the need for rigorous efficiency assessment. Using a sample of 233 Australian credit unions the study uses nonparametric techniques to measure efficiency, followed by parametric techniques to attribute variation in efficiency. The results indicate that a large number of credit unions are best-practice efficient, and any efficiencies found appear to flow from X-inefficiencies, rather than from the selection of an inappropriate scale of operations. All other things beings equal, credit unions formed on the basis of a community bond, with a large asset base, and an orientation towards commercial loans, will be relatively more efficient.

Berger A.N., Mester L.J.

Over the past several years, substantial research effort has gone into measuring the efficiency of financial institutions. Many studies have found that inefficiencies are quite large, on the order of 20% or more of total banking industry costs and about half of the industry's potential profits. There is no consensus on the sources of the differences in measured efficiency. this paper examines several possible sources, including differences in efficiency concept, measurement method, and a number of bank, market, and regulatory characteristics. We review the existing literature and provide new evidence using data on US banks over the period 1990–1995.

Athanassopoulos A.D.

In this paper we concentrate on the assessment of the productive efficiency of bank branches. Bank branch operations are characterised by the effort made by management to pursue the banks' corporate objectives. The tangible part of this effort can be assessed by the operating efficiency of the branch while the intangible part is encapsulated by the quality of the provided services. The assessment of branch efficiency is pursued using data envelopment analysis methods enhanced by the value judgements of individual branch managers. This development gives insights on issues related to the appropriateness of branch input mix. The effort effectiveness is estimated by embodying three quality dimensions on the operating efficiency of bank branches. Empirical results are discussed from a sample of sixty eight commercial bank branches in Greece.

Berger A.N., Humphrey D.B.

This paper surveys 130 studies that apply frontier efficiency analysis to financial institutions in 21 countries. The primary goals are to summarize and critically review empirical estimates of financial institution efficiency and to attempt to arrive at a consensus view. We find that the various efficiency methods do not necessarily yield consistent results and suggest some ways that these methods might be improved to bring about findings that are more consistent, accurate, and useful. Secondary goals are to address the implications of efficiency results for financial institutions in the areas of government policy, research, and managerial performance. Areas needing additional research are also outlined.

Chaves R.A., Gonzalez-Vega C.

The success (outreach and sustainability) of eight rural financial intermediation systems in Indonesia, in profitably reaching large numbers of small individual clients, is explained in terms of organizational design. Networks of semiautonomous units use local information and contract enforcement mechanisms to lower transaction costs. Reflecting basic concerns with institutional and financial viability, elements of mechanism design have included compatible incentives such as performance-based compensations (profit sharing, collection fees), efficiency wages (equivalent to quasi-equity), and system monitoring; managerial discretion over transactions conducted at market terms, policies to protect portfolio value, and no dependency-creating subsidies are important. Interventions have been appropriate for the problem at hand.

Berger A.N., Hancock D., Humphrey D.B.

Both input and output inefficiencies are derived from a profit function for US banks. These inefficiencies are decomposed into allocative and technical components in a new way using shadow prices. About half of all potential variable profits are estimated to be lost to inefficiency. Most inefficiencies are from deficient output revenues, rather than excessive input costs. Larger banks are found to be more efficient than smaller banks, which may offset scale diseconomies found elsewhere. Tests of a new concept, ‘optimal scope economies’, suggest that joint production is optimal for most banks, but that specialization is optimal for others.

Banker R.D., Thrall R.M.

Generalization of the measure of returns-to-scale from a single number to an interval permits extension of the concept to DEA data domains with multiple inputs and multiple outputs. The key new approach is a partition of the optimal frontier into three parts corresponding, respectively to increasing, constant, and decreasing returns to scale. These parts are characterized in terms of optimal primal solutions, and optimal dual solutions for both the original Charnes, Cooper, Rhodes model (1978) and the later Banker, Charnes, Cooper model (1984) and relying on concepts developed by R.D. Banker (1984) and R.M. Thrall (1988).

Vassiloglou M., Giokas D.

Elyasiani E., Mehdian S.M.

The purpose of this paper is to derive the efficiency measures and the rate of technological change for a sample of large U.S. commercial banks by employing a nonparametric technique. This technique is used to construct a multiproduct production frontier relative to which the efficiency measures of the banks in the sample are calculated and the displacement of which over time provides a measure of the rate of technological change. The empirical results indicate that the relevant frontier shifted inward between 1980 and 1985 reflecting a high pace of technological advancement achieved by the banks in the sample. The pace varied significantly across the banks with some banks even regressing over time.

Ahmed M. S., Nazar A., Kareem S.A.

The digital revolution has changed how money moves in India, thanks to changes in how people act, government plans, and new technology. This flow has not only revolutionized Indian commerce, but has also spurred greater financial inclusion and digitalization nationwide. However, sustainable growth in digital financial transfers hinges on upgrading infrastructure, enhancing security, and continuous education efforts. The COVID-19 pandemic has accelerated the adoption of digital transactions globally, emphasizing their vital role in the modern economy. These challenges pose risks to the expansion of India's digital financial sector and could widen socioeconomic disparities. To solve these issues, everyone involved needs to work together, therefore the study will look at how digital commerce has changed in India, why digital money is important, what helps it grow, the problems it faces, how it can spread globally, and what's ahead. By handling these things well, India can use digital money to help everyone succeed.

Fall F.S., Tchakoute Tchuigoua H., Vanhems A., Simar L.

• We study the impact of gender effect on microfinance social efficiency. • We use a conditional directional free disposal hull approach as its robust version of order- α to estimation the efficiencies. • We apply a local linear regression and a wild double bootstrap procedure to test the significance of Gender. • We check for the robustness of our findings on various subsamples. • Our findings reinforce the importance of the role played by women in microfinance social efficiency. The main objective of this study is to assess the impact of gender on microfinance social efficiency. Our methodology is based on nonparametric techniques to estimate the gender effect. We use a conditional directional free disposal hull (FDH) approach as well as its robust version of order- α ; we study the effect of the heterogeneity factor on the difference of conditional and non conditional inefficiencies as well as on the inefficiency level using a local linear regression and we test the significance of its effect using a wild double bootstrap procedure. Using a cross-country sample of 680 microfinance institutes (MFIs) in 2011 from six main regions of the world, our findings suggest that gender diversity has globally a positive impact on the microfinance social efficiency. However, the nature of the effect depends on the considered heterogeneity factor and we find that the boardroom gender diversity effect is linear, whereas the effect of the percentage of women loan officers is non linear (U-shaped on the difference of inefficiencies and inverted U-shaped on the inefficiency levels). We assess the robustness of our findings on various subsamples (global or regional scale, and also depending on the considered profit oriented status). Our findings reinforce the importance of the role played by women in MFI social efficiency.

Hadžiahmetović N.

Abstract The main aim of this paper is to explore the factors determining Microfinance institutions (MFIs) self-sufficiency. The data on selected variables for this research were obtained from the public MIX Market Database and cover the year of 2017. The empirical model is constructed with application of a Principal Component Analysis (PCA) and Logistic regression analysis. Sample is consisted of 342 MFIs from all around the world, with 21 independent variables grouped into eight factors/components, and OSS (operational self-sufficiency) as dependent variable. The obtained results suggest that higher revenue and MFIs profitability combined with decrease of credit risk lead to higher probability of MFI to be self-sufficient. These results also confirm widespread belief that MFIs will not be able to achieve their social goals without achieving sustainable profitability. In addition, results also confirm importance of MFIs core mission as with increase in outreach, probability of MFIs achieving self-sustainability also increases.

Mor S., Gupta G.

ANH D.L., GAN C.

This study estimates the profitability and marketability efficiencies’ scores and determinants of 114 Singapore listed manufacturing firms from 2007 to 2018 by adopting bootstrapped two-stage data envelopment analysis (DEA) as well as one- and two-part fractional regression models. The study reveals that the average marketability efficiency of Singapore listed manufacturing firms (0.881) is lower than the average profitability efficiency (0.970) during the study period. Further, the results show that the length of listing, headcount, institutional ownership, leverage ratio and high-technology production statistically affect the profitability and marketability efficiencies of Singapore listed manufacturing firms.

M S.M., Vilvanathan L.

PurposeThe study aims to focus on data envelopment analysis for assessing the microfinance institutions (MFIs) efficiency over the footings of its undesirable output, i.e. non-performing loans (NPLs). The attention is not only to evaluate the efficiency but also to identify the variable wise inefficiencies incorporating the quality of the portfolio.Design/methodology/approachThe paper assessed MFI efficiency using three different methods of treatment of undesirable output to portray the significant difference. It also has used an advanced methodological model, i.e. weighted Russell directional distance model (WRDDM), under the non-radial assumption that allowed us to find the variable-wise inefficiency contribution. The study also investigated the efficiency differences concerning ownership, including all sizes of MFIs.FindingsThe study findings evidence the fall in efficiency score as NPL integrated, and it is found to be statistically significant. In the context of inefficiency assessment, among all input and output variables, total employees and operating expenses, portfolio quality inefficiencies are the leading causes of MFI inefficiencies. Undesirable output inefficiency accounts for almost one-third part of the total inefficiencies and remaining due to input inefficiencies. It is significant to draw attention that there is no improvement in undesirable output inefficiency. By contrast, input inefficiencies retained gains for two years and gradually showed a decreasing trend throughout 2015–2017.Research limitations/implicationsThe authors have used balanced panel data of 72 Indian MFIs for five years' period from 2013–2017 whose complete data were available in the Microfinance Information Exchange.Practical implicationsThe paper has focused on identifying the inefficiencies that are needed to be focused on to attain efficiency. It could provide vital information to the managers, policymakers in identifying the causes of inefficiencies, which is crucial to improve for long-term sustainability. It will be a roadmap for benchmarking, strategy building and policy-making processes.Social implicationsThe findings of the study help in finding the benchmarking information for the inefficient decision-making units to identify the target units that need particular attention to focus. These practices could give a positive outcome, not only for institutions but also for the MFI clients.Originality/valueThe study provides an insight in to variable-wise inefficiency measurement using advanced model WRDDM in Indian context MFIs.

Chauhan S.

Microfinance institutions (MFIs) provides savings, credit, insurance and remittance facilities to more impoverished people without any collateral. MFIs have twin goals: social outreach and financial sustainability. Outreach refers to how many people are served by MFIs while the capacity of MFIs to serve longer is financial sustainability. The social and financial performance of MFIs is the most debatable issue in the Indian microfinance industry. Social efficiency indicates MFIs’ willingness to support a higher number of poorer consumers while financial efficiency indicates how long financial services can be offered to the poor by institutions. The success of these organizations is very critical for the continuity of funding support for donor agencies and the government. Using data envelopment analysis (DEA) techniques this paper calculates the efficiency of Indian NGO–MFIs. The research also uses Tobit regression to estimate the factors of the efficiency of MFIs. The data is taken from the Microfinance Information Exchange for the period 2009 to 2015. Results indicate that NGO–MFIs are financially more efficient than social ones. Regression findings show that the critical variable for the financial and social efficiency of NGO–MFIs is operational self-sufficiency (OSS). Very few empirical studies are available in the Indian context that discuss the efficiency of Indian NGO–MFIs. The present paper provides standards for performance measures of NGO–MFIs operating in India to assist in improving the performance and growth of microfinance firms.

Ashta A., Mor S.

The concept of reverse innovation can be defined on a spectrum ranging from narrow to broad. We look at the broad concept, which indicates that an innovation travels successfully from a developing country to a developed country. A few authors have indicated that microcredit is a reverse innovation. However, credit by itself is not an innovation, nor is lending to the poor. The essential feature of modern-day microcredit in developing countries is that it acts as a social innovation, using group lending, being primarily directed towards women and creating financially stable institutions. We do not find evidence that any of these features have been adopted by a developed country’s microfinance institutions (MFIs) in a sustainable manner. We consider that only the use of the words ‘microfinance’ and 'microcredit' have been adopted by developed countries to further the corporate image, and researchers should be aware that ‘microfinance’ holds different connotations in different regions.

Nourani M., Malim N.A., Mia M.A.

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...

Fall F., Akim A., Wassongma H.

Microfinance has played a key role in the fight against exclusion and the promotion of entrepreneurship in developing countries. An important question today is how to increase the reach and profitability of microfinance, in a context where subsidies are withdrawing to promote the viability and sustainability of microfinance institutions (MFIs). Efficiency analysis has found favor in this context and has attracted growing interest among professionals, partners, and researchers. Abundant empirical work has been conducted over the last ten years on this subject, in very different contexts and with different methodologies. The purpose of this article is to provide a meta-regression analysis on parametric and nonparametric estimations of Mean Technical Efficiency (MTE) in microfinance, using a data set of 262 observations from 38 studies. The results show that, in the microfinance industry, MTE scores have increased over time. However, with an MTE rate of approximately 61.1%, there is room for improving efficiency. MFIs use more resources than necessary for the results achieved in terms of outreach and revenue generated. Our results show heterogeneity of MTE according to the methodological approach of the studies. Studies with a larger number of variables (inputs and outputs) produced higher MTE scores than did those with a smaller number of variables. Studies using the variable returns to scale assumption resulted in higher MTE scores than those using constant returns to scale. In addition, those with a production approach had higher MTEs than did those using the intermediation approach, while studies of a large number of MFIs had lower scores than did those involving a small sample size. Moreover, research estimating social efficiency generated lower MTEs compared to those estimating financial efficiency. Studies using data from African MFIs obtained lower MTEs than did those on MFIs in Latin America and MENA, which confirms the poor performance of African microfinance.

Mia M.A.

This chapter aims to evaluate productivity and determinants of productivity in microfinanceMicrofinance institutions (MFIs) to support the ongoing debate on sustainabilitySustainability in the microfinance industry. Hence, the longitudinal data of 169 MFIs, covering the period from 2009 to 2014, were collected from the Microcredit Regulatory Authority annual reports in BangladeshBangladesh . This study used the two-stage semi-parametric approach. In the first stage, the Malmquist Productivity Index (nonparametric) was employed and it was found that the microfinance industry in Bangladesh observed an average of 3.6% productivity progress per annum, with a declining trend towards the end of the study period. In the second stage, the regression analysis (parametric) showed that institutional characteristics, macroeconomic factors and external sources of funds significantly affect productvity of MFIs. Findings and policy implications are further discussed.

Basharat B., Hudon M., Nawaz A.

Pricing is a central strategic decision for all companies, and is particularly sensitive for social enterprises with both financial and social objectives. High interest rates in microfinance are a topic of intense debate. Using an original database of 291 MFIs, this paper provides empirical evidence of the impact the efficiency of an MFI has on its microcredit interest rate. We use the non-parametric Data Envelopment Analysis (DEA) framework to calculate efficiency and differentiate financial and social efficiency. The results show that financial efficiency has a positive impact on interest rates, with more financially efficient MFIs having lower interest rates, while social efficiency has no impact on microcredit interest rates.