Efficiency of microfinance institutions in sub – Saharan Africa: a stochastic frontier approach

Abstract

The push for microfinance institutions (MFIs) to achieve sustainability in recent years has made efficiency a prerequisite. Assessment of efficient operations of MFIs is vital for both policy and investment decision making and guaranteeing financial access to the poor. This study investigates the cost efficiency of MFIs operating in 10 Sub-Saharan Africa (SSA) countries over the period 2003-2013 and the factors that drive efficiency. The authors considered the Cobb-Douglas stochastic cost frontier model with truncated normal distribution and time variant inefficiency were estimated. The results show that MFIs are cost inefficient in their intermediation role as they currently achieve a mean cost efficiency of 40.09 percent. The main determinants of MFIs efficiency are total assets, operating expense to assets ratio, average loan balance per saver, the percentage of the female borrower and borrower per staff member. The study recommends that practitioners and managers of MFIs should improve on productivity through technical training in portfolio quality management and offer diverse financial products and services innovatively at minimised cost.

Keywords: Efficiency, Microfinance Institutions, Stochastic Frontier Analysis, Sub-Saharan Africa