Technical Efficiency of Microfinance Institutions in India- A Stochastic Frontier Approach

Masood, Tariq and Ahmad, Mohd. Izhar (2010): Technical Efficiency of Microfinance Institutions in India- A Stochastic Frontier Approach.

Abstract

Study attempts to measure the efficiency level and its determinants of a sample of microfinance institutions operating in India by applying stochastic frontier approach for unbalanced panel of 40 microfinance institutions for the 2005-08. It has been found that mean efficiency level of microfinance institutions is quite low but it increases over the period of study. Age of microfinance institutions is positive determinant of efficiency level but size does not matter much. Higher outreach is associated with higher efficiency which negates the general perception of trade off between outreach and efficiency. Microfinance institutions operating in southern states are more efficient than their counterparts. It has been found that regulated microfinance institutions are less efficient.

• Item Type: MPRA Paper
• Language: English
• Keywords: Microfinance Institutions, Technical Efficiency, Stochastic Frontier Method, India
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C23 - Panel Data Models ; Spatio-temporal Models

References

Aigner, D.C., A.K. Lovell and P. Schmidt (1977). “Formulation and estimation of stochastic frontier production models”, Journal of Econometrics 6: 21–37.

Battese, G.E. and T.J. Coelli (1992). “Frontier production function, technical efficiency and panel data: With application to paddy farmers in India”, Journal of Productivity Analysis 3: 153-169.

—. (1995). “A model for technical inefficiency effects in a stochastic frontier production function for panel data”, Empirical Economics 20: 325–332.

Battese, G.E. and S.S. Broca (1997). “Functional forms of stochastic frontier production functions and models for technical inefficiency effects: A comparative study for wheat farmers in Pakistan”, Journal of Productivity Analysis 8: 395–414.

Berger, A.N. and D.B. Humphrey (1991). “The dominance of inefficiencies over scale and product mix economies in banking”, Journal of Monetary Economics 28: 117-148.

—. (1997). “Efficiency of financial institutions: International survey and directions for future research”, European Journal of Operational Research 98: 175-212.

Berger, A.N. and L.J. Mester (1997). “Inside the black box: What explains differences in the efficiencies of financial institutions?” Journal of Banking and Finance 21: 895-947.

Coelli, T.J. (1995). “A Monte Carlo analysis of the stochastic frontier production functions”, Journal of Productivity Analysis 6: 247-268.

—. (1996). “A guide to FRONTIER version 4.1: A computer program for stochastic frontier production and cost function estimation”, CEPA Working Papers No. 7/96. School of Economics, University of New England, Armidale.

Coelli, T.J. and G.E. Battese (1996). “Identification of factors which influence the technical inefficiency of Indian farmers”, Australian Journal of Agricultural Economics 40: 103-128.

Coelli, T.D., S.P. Rao and G.E. Battese (1998). An Introduction to Efficiency Analysis. Kluwer Academic Publishers.

—. (2003). An Introduction to Efficiency and Productivity Analysis. Kluwer Academic Publishers.

CGAP (2001). “Resource guide to microfinance assessments”. CGAP Focus Note no. 22. Washington D.C., Consultative Group to Assist the Poorest.

—. (2003). Microfinance Consensus Guidelines: Definitions of Selected Financial Terms, Ratios and Adjustments for Microfinance. 3rd edition. Washington D. C., Consultative Group to Assist the Poorest.

Fare, R. and C.A.K. Lovell (1978). “Measuring the technical efficiency of production”, Journal of Economic theory 19: 150-162.

Fare, R., S. Grosskopf and C.A.K. Lovell (1985). The Measurement of Efficiency of Production. Kluwer Academic Publishers.

Farrel, M.J. (1957). “Measurement of productive efficiency”, Journal of Royal Statistical Society 120: 253-82.

Hghiem, H.S. (2004). “Efficiency and effectiveness of microfinance in Vietnam: Evidence from MGD schemes in the north and central regions”. CEPA, School of Economics, UQ, Australia.

Hassan, M.K. and S. Benito (2009). “Efficiency analysis of microfinance institutions in developing countries”. Networks Financial Institute, Indiana State University Working Paper-12.

Hartarska, V. and D. Nadolnyak (2007). “Do regulated microfinance institutions achieve better sustainability and outreach? Cross-country evidence”, Applied Economics 39: 1207-1222.

Kalirajan, K.P. and J.C. Flinn, (1983). “The measurement of farm specific technical efficiency”, Pakistan Journal of Applied Economics 11: 167-180.

Kodde, D.A. and F.C. Palm (1986). “Wald criteria for jointly testing equality and inequality restrictions”, Econometrica 54: 1243–1248.

Kumbhakar, S.C. (1990). “Production frontiers, panel data, and time varying technical inefficiency”, Journal of Econometrics 46: 201-12.

Kumbhakar, S.C., S. Ghosh and J.T. McGuckin (1991). “A generalized production frontier approach for estimating determinants of inefficiency in US dairy farms”, Journal of Business and Economic Statistics 9: 279-286.

Lachaal, L., A. Chebil and B. Dhehibi (2004). “A panel data approach to the measurement of technical efficiency and it determinants: Some evidence from the Tunisian agro-food industry”, Agricultural Economics Review 5: 15-23.

Reifschneider, D. and R. Stevenson (1991). “Systematic Departure from the frontier: A framework for the analysis of firm inefficiency”, International Economic Review 32:715-723.

Schmidt, P. (1986). “Frontier production functions”, Econometric Reviews 4: 289-328.