Efficiency Analysis of South Asian Microfinance Institutions: Implications for Sustainability

Abstract

Microfinance Institutions provide loans and other services to those poor clients who are deprived from having access to the financial markets due to collateral. They claim to have a dual goal; achieving financial self sustainability and social goal. In recent years increased competition in South Asian Microfinance sector has made some of the socially oriented microfinance institutions to transform to profit oriented institutions. Till now no such study in South Asia has been conducted to examine the impact of profit orientation upon technical efficiency. The present study investigates the efficiency of Microfinance Institutions and check the sustainability of efficient firms. For measuring efficiency estimates, 3 inputs are used that are Assets, Personnel, and operating expense whereas 4 outputs are taken that are No. of women borrowers, No. of loans outstanding, Gross loan portfolio and returns on assets. Performance indicators, location dummies and few explanatory variables are considered to measure the impact on efficiency of these institutions. A large sample of 170 firms from South Asia has been considered for the analysis for the time period of 2008-2009. The selected sample contained 72 MFIs working as profit organizations and 98 MFIs as non-profit organizations. SFA results indicate that there is a more gap to fill for improving the efficiency of the firms whether working as profit or as non profit. DEA results gave fully efficient MFIs. MFIs are shifting rapidly from non-profit operations to profit orientation. Our results on average have shown that non-profit organizations are more efficient. This is because of their size (measured by assets) and experience in their field. 13 MFIs are found to be sustainable out of 28 efficient MFIs. The sustainable MFIs do not depend on donor agencies to run their operations, which show their long term availability in the market. It is harder to measure social performance. It is said that a strong financial performance paves the way for the social mission to succeed as well. The other conclusion is that social objectives cannot be achieved if the MFI does not meet its financial goals or at least to function effectively. Transformed MFIs today are trying to work on their double bottom line and communicate their social mission once again publicly