A Study on the Efficiency of Microfinance Institutions in Bangladesh

Abstract

With the innovation and rapid expansion of the new concept “Microfinance”, researchers, policymakers and donors at the recent time have found it very essential to observe how efficiently Microfinance Institutions are operating in economy. If the MFIs are not able to achieve efficiency, they would not be able to sustain in the long run being lagging behind in achieving their social objective. This PhD report focuses on the issue in respect of MFIs in Bangladesh. This is the first paper that applies both parametric and non-parametric models to measure cost efficiency on a large sample size including 146 MFIs in Bangladesh over 2016-2020. Along with efficiency estimates, the paper analyzes the effect of outreach variables on the level of efficiency. This enlightens the current concern regarding the trade-off between sustainability and efficiency of microfinance institutions. My research finds that the MFIs in Bangladesh are on an average 78% efficient indicating that these institutions have scope to reduce their cost by around 22% to produce the same output level. Also, it is found that outreach is being compromised to achieve efficiency as MFIs are more interested to provide larger loan amounts to the comparatively well-off poor in the society. However, the MFIs in Bangladesh are able to achieve efficiency by concentrating credit disbursement to the women borrowers as women borrowers are more active in utilizing the loan amount and thus creating sufficient earning sources to repay the loan. Moreover, the economies of scale is found in the sector indicating that MFIs here have opportunity to serve the poor at lower cost and thus attain better outreach by expanding their size. Thus, the my thesis will facilitate the MFIs to direct their resources properly and achieve efficiency, policymakers to decide how this sector can be utilized to achieve social welfare as well as donors to decide to which MFIs they want to steer their fund.