Efficiency and Sustainability of Micro Finance Institutions in South Asia

Qayyum, Abdul and Ahmad, Munir (2006): Efficiency and Sustainability of Micro Finance Institutions in South Asia.

Abstract

The objective of this study has been to estimate the efficiency and sustainability of microfinance institution working in the South Asian countries such as Bangladesh, Pakistan and India. For the efficiency analysis we used non parametric Data Envelopment Analysis. We considered both inputs oriented and output oriented methods by assuming constant returns to scale and variable returns to scale technologies. While conducting DEA analysis using single country data we found that eight MFIs from Pakistan, six MFIs from Bangladesh and five MFIs from India are at the efficient frontier under variable returns to scale. The technical efficiency figures for Pakistan, Bangladesh and India are 0.395, 0.087, and 0.28, respectively, while average pure technical efficiencies for these countries respectively range between 0.713-0.823, 0.175-0.547 and 0.413-0.452. Three countries combine analysis revealed that there are two efficient MFIs under CRS and five efficient MFIs under VRS assumption in these countries. Out of these efficient MFIs three -Annesa, BARC and Grameen Bank, belong to Bangladesh, and two MFIs - Bodhana and Pushtikar, are from India. No MFI from Pakistan was found operating on the efficient frontier. The analysis further reveals that the inefficiencies of MFIs in Pakistan, India and Bangladesd are mainly of technical nature. The results have an important policy implication that in order to improve the efficiency of the MFIs there is need to enhance the managerial skills and improve technology. This could be done by imparting training. Since Grameen bank is the leading MFIs in the world we can adopt its model according to the country specific requirements. Particularly, the lagging countries like Pakistan and India require special training programmes in the field of microfinance management.

• Item Type: MPRA Paper
• Language: English
• Keywords: microfinance institution (MFI), efficiency, Data Envelopment Analysis, Bangladesh, Pakistan, India, South Asia
• Subjects: N - Economic History > N2 - Financial Markets and Institutions > N25 - Asia including Middle East; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Afriat, S. N. “Efficiency Estimation of production Functions.” International Economic Review 13(1972): 568-98.

Aigner, D. J. and S. F. Chu. “On Estimating the Industry Production Function.” American Economic Review 58(1968): 826-839.

Aigner, D., Lovell, C.A., Knox and Schimidt, P. (1977), “Formulation and Estimation of Frontier Production Function Models”, Journal of Econometrics, Vol. 6, pp. 21-37.

Akhigbe, Aigbe and McNulty, E. James (2003), “The Profit Efficiency of Small US Commercial Banks”, Journal of Banking and Finance, Vol. 27, pp. 307-325.

Akhtar, Muhammad Hanif (2003), “X-efficiency Analysis of Commercial Banks in Pakistan: A Preliminary Investigation”, a paper presented in Eighteenth Annual General Meeting & Conference of PSDE, Jan. 13-15, Islamabad.

Amineg S., Rai A. S., Ropa G. (2003). “Does Micro-credit Reach the Poor and Vulnerable? Evidence from Northern Bangladesh”. Journal of Development Economics, Vol. 70, pp. 59-82.

Avkiram, Neemi K. (2000), “Rising Productivity of Australian Trading Banks Under Deregulation 1986-1995, Journal of Economics and Finance, Vol. 24(2), pp. 127-140.

Banker, R. D. and Thrall, R. M. (1992), estimation of Returns to scale Using Data Envelopment Analysis, European Journal of Operational Research, 62, 74-84

Banker, R. D., A. Charnes and W. W. Cooper. “Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis.” Management Science 30(1984): 1078-92.

Barnes, C. (2001) Microfinance Program Clients and Impact: An Assessment of Zambuko Trust, Zimbabwe.

Barnes, C., Gary Gaile, and Richard Kimbombo (2001) Impact of Three Microfinance Programs in Uganda, USAID-AIMS paper (Washington, D.C.: Management of Systems International).

Barnes, Carolyn., Gary Gaile and Richard Kibombo et al. 2001. The Impact of Three Microfinance Programs in Uganda. http://www.mip.org/componen/aims /pubs/english/mission1a.htm

Bass, J., K. Henderson and Weidemann Associates, Inc. (2000) The Microfinance Experience With Savings Mobilization, Innovations in Microfinance, Technical Note No. 3, Microenterprises Best Practices Project. www.mip.org/pubs/mbp/word/tech_note_3.doc

Battese, G. E., Heshmati, A., and Hjalmarsson, (2000), “Efficiency of Labour Use in Swedish Banking Industry: A Stochastic Frontier Approach”, Empirical Economics, Vol. 25, pp. 623-640.

Battese, G. E., T. J. Coelli, and T. C. Colby (1989) “Estimation of Frontier Production Functions and the Efficiencies of Indian Farms Using panel Data From ICRISAT’S Village Level Studies.” Journal of Quantitative Economics, Vol. 5: 327-348.

Battese, G.E. and T. J. Coelli (1992) “Frontier Production Functions, Technical Efficiency and panel Data: With Application to Paddy Farmers in India.” The Journal of Productivity Analysis, Vol. 3: 153-169.

Berger, Allen and Humphrey, David B. (1997) “Efficiency of Financial Institutions: International Survey and Direction for Future Research”, European Journal of Operational Research, 98(2), pp. 175-212.

Charnes, A., Cooper, W.W. and Rhodes, W.E. (1978), “Measuring the Efficiency of Decision Making Units”, European Journal of Operational Research, Vol. 2, pp. 429-444.

Chowdhury, A.M.R. and A. Bhuiya (2001) "Do Poverty Alleviation Programmes Reduce Inequity in Health: Lessons from Bangladesh," in Poverty Inequity and Health, ed. D.

Leon and G. Walt (Oxford: Oxford University Press).

Chen, Martha A. and Donald Snodgrass (2001) Managing Resources, Activities, and Risk in Urban India: The Impact of SEWA Bank (Washington, D.C.: AIMS).

Coelli, T. A. (1998) “Guide to DEAP Version 2-1: A Data Envelopment Analysis (Computer) Program”, Working Paper 96/08, CEPA, UNE, Australia.

Dichter, T. (1999) Non-governmental organizations (NGOs) In Microfinance: Past, Present and Future - An Essay.

Dogan, Ergun and Fausten, K. Dietrich (2002), “Productivity and Technical Change in Malaysian Banking”, Department of Economics Discussion Paper No. 05/02, Monash University, Australia.

Fare R. and C.A.K. Lovell (1978), “Measuring the Technical Efficiency of Production”, Journal of Economic theory, Vol. 19, pp. 150-162.

Fare, R., S. Grosskpf and Lovell, C. A. K. (1985) “The Measurement of Efficiency of Production” Kluwer-Nijhoff Publishing, Boston,.

Fare, Rolf, Grosskopf, S. Norris, M. and Zhang, Zhongyang (1994b), “Productivity Growth, Technical Progress, and Efficiency Change in Industrialized Countries”, American Economic Review, 84, pp. 66-83.

Fare, Rolf; Grosskopf, Shawana, Lindgern, Bojern and Roos, Pontus (1994a), “Production Frontiers”, Cambridge University Press.

Farrel, Michael J. (1957) “Measurement of Productive Efficiency”, Journal of Royal Statistical Society, Series A, General, 120(3), pp. 253-82.

Forsund, F. R., (2001) Categorical Variables in DEA, International Centre for Economic Research (ICER), Working Paper,

Foster, A. (1995) “Prices, Credit Markets, and Child Growth in Low-income Areas,“ Economic Journal 105, No. 430: 551-570.

Gow, K. M. (2006) “How to Access Microfinance and Education through Technology, www.CGE-microfin\

Greene, W.H. Econometric Analysis. “Macmillon Publishing Co., New York, 1990.

Hardy and Patti (2001), “Bank Reforms and Bank Efficiency in Pakistan”, IMF Working Paper, WP/01/138, International Monetary Fund.

Hashemi, S.S. Schuler and I Riley (1996). “Rural Credit programs and Women’s Empowerment in Bangladesh”, World Development Vol. 24, No. 4, pp. 635-653.

Hghiem, H.S. (2004). “Efficiency and Effectiveness of Micro-finaice in Vietnam: Evidence from MGD Schemes in the North and Central Regions. CEPA, School of Economics, UQ, Australia.

Hossain, M. (1988) Credit for the Alleviation of Rural Poverty: The Grameen Bank in Bangladesh, Research Report No. 55 (Washington, D.C.: IFPRI).

Hulme, D. (1999) “Impact Assessment Methodologies for Micro-finance: Theory, Experience and Better Practice,” Finance and Development Research Program, Working Paper No. 1, IDPM, University of Manchester.

Jacoby, H. (1994) “Borrowing Constraints and Progress Through School: Evidence from Peru,” Review of Economics and Statistics 76, No.: 1 151-160.

Khandker S (2003). “Micro-finance and Poverty: Evidence Using Panel Data from Bangladesh”, World Bank Policy Research Paper 2945, World Bank, Washington.

Khandker S. (1998). “Fighting Poverty with Micro-credit: Experience from Bangladesh”. New York: Oxford University Press for the World Bank.

Khandker, S. (1998) Fighting Poverty with Microcredit: Experience in Bangladesh (New York: Oxford University Press, Inc.).

Leon, J. (2003). “Exploring the Determinants of Cost-efficiency and Micro-finance Institutions”. Universidad Anabuac, Maxico.

Littlefield E., J. Murduch and S. Hashemi (2003) Is Microfinance an Effective Strategy to Reach the Millennium Development Goals? CGAP

Lovell, C. A. K. (1993) “Production Frontiers and Productive Efficiency: An Introduction and Readers’ Guide.” The Measurement of Productive Efficiency Techniques and Applications, Edt. By H.O. Fried, C. A. K. Lovell and Schmidt. Oxford University Press, New York: 3-67.

Marcus, Rachel. Beth Porter and Caroline Harper. 1999. Money Matters: Understanding Microfinance. Save the Children. London.

McKernan, Signe-Mary (2002). “The Impact of Micro-credit Programs on Self-employment Profits: Do Non-credit Program Aspects Matter?”. The Review of Economic and Statistics 84(1): 93-115.

Meeusen, W., and J. Van den Broeck. “Efficiency Estimation from Cobb-douglas Production Function with Composed Error.” International Economics Review 18(1977): 435-44.

MkNelly, B. and C. Dunford (1999). Impact of Credit with Education on Mothers and Their Young Children's Nutrition: CRECER Credit with Education Program in Bolivia, Freedom from Hunger

MkNelly, B. and C. Dunford (1999). Impact of Credit with Education on Mothers and Their Young Children's Nutrition: CRECER Credit with Education Program in Bolivia, Freedom from Hunger Research Paper No. 5 (Davis, Calif.: Freedom from Hunger).

Morduch, J and B. Haley (2002) Analysis of the Effects of Microfinance on Poverty. Working Paper No. 1014, Wagner Graduate School of Public Service, New York University, New York, USA.

Morduch, J. (1998) “Does Micro-finance Really Help the Poor?” New Evidence from Flagship Programs in Bangladesh,” Harward University and Stanford University Manuscript

Morduch, J. and B. Haley (2002). “Analysis of the Effects of Micro-finance on Poverty Reduction.” New York: NYU Wagner Working Paper No. 1014.

Mustafa, S.I. A., et al, (1996) Beacon of Hope: An Impact Assessment of BRAC's Rural Development Programme (Dhaka, Bangladesh: BRAC, 1996).

Naved R (1994) ”Empowerment of Women: Listening to the Voices of Women” in The Bangladesh Development Studies “Special issue on Women, Development and Change”, Vol. Xxii, No. 2&3, pp. 121-155 pp. 155-179 edited by S. Amin, BIDS, Dhaka.

Nieto, B.G., C.S. Cinca and C.M. Molinero (2004) “Micro-finance Institutions and Efficiency”. Discussion Paper in Accounting and Finance. (Number AF04-20). Departmento de Contabilidady and Finanzas, University de Zaragoza.

Panjaitan-Drioadisuryo, D.M. Rositan, and Kathleen Cloud (1999) "Gender, Self-Employment, and Microcredit Programs: An Indonesian Case Study," Quarterly Review of Economics and Finance, Vol. 39

Pitt, M., and L. F. Lee (1981) “The Measurements and Sources of Technical Inefficiency in the Indonesian Weaving Industry.” The Journal of Development Economics, Vol. 9: 43-64.

Pitt, M., Shahidur R. Khandker, Omar Haider Chowdhury and Daniel Millimet. Credit Programs for the Poor and the Health Status of Children in Rural Bangladesh. International Economic Review, forthcoming.

Pitt, Mark M. and Shahidur R. Khandker (1996) Household and Intrahousehold Impact of the Grameen Bank and Similar Targeted Credit Programs in Bangladesh. Washington, DC: The World Bank, Discussion Paper No. 320.

Rashid, H and Matsaert, F., (2005) Microfinance and the Poor - An Overview of the Sector in Bangladesh

Remenyi, Joe and Benjamin Quinones Jr. (2000) Microfinance and Poverty Alleviation: Case Studies from Asia and the Pacific (New York: Pinter Publishers, Ltd.), 79: 131-34; 253-64.

Rhyne, Elisabeth (1998) “The Yin and Yan of Micro-finance: Reaching the Poor and Sustainability.” Micro Banking Bulletin, Vol. 2(1), pp. 608.

Richmond, J. (1974) “Estimating the Efficiency of Production.” International Economic Review, Vol.15: 515-521.

Rizvi, S. Fawad Ali (2001), “Post Liberalization Efficiency and Productivity of the Banking Sector in Pakistan.” The Pakistan Development Review, Vol. 40(4) Part II, pp. 605-632.

Schmidt, P. (1976) “On the Statistical Estimation of Parametric Frontier Production Functions.” The Review of Economics and Statistics, Vol.: 58238-239.

Schmidt, P. (1985-86) “Frontier Production Functions.” Econometric Reviews, Vol. 4: 289-328.

Schmidt, P. and R. C. Sickles (1984) “Production Frontiers and Panel Data” Journal of Business & Economic Statistics, Vol. 2: 367-374.

Seale, Jr., J. L. (1990) “Estimated Stochastic Frontier Systems with Unbalanced Panel Data: The Case of Floor Tile manufacturers in Egypt.” Journal of Applied Econometrics, Vol. 5: 59-74.

Seiford, L. M., and R. M. Thrall (1990) “Recent Developments in DEA: The Mathematical Programming Approach to Frontier Analysis.” Journal of Econometrics, Vol. 46: 67-38.

Shiu, A. (202). “Efficiency of Chinese Enterprises.” The Journal of Productivity Analysis, Vol. 8(3): pp. 255-267.

Simonwitz, A. (2002) Appraising the Poverty Outreach of Micro-finance: A Review of the CGAP Poverty Assessment Tool (PAT). Brighton, UK: Imp-Act, Institute of Development Studies, www.imp-act.org.

Timmer, P. (1970) One Measuring Technical Efficiency. Food Resources Institute Studies in Agricultural Economics, Trade, and Development, Vol. 9: 98-171.

Timmer, P. (1971) Using a Probabilistic Frontier Function to Measure Technical Efficiency.” Journal of Political Economy, Vol. 79: 776-794.

Tiwari, P and Fahad, S.M. (2004) Microfinance Institutions in India, CONCEPT PAPER Housing Development Finance Corporation Ramon House, 169 Backbay Reclamation, Mumbai 400 020

Topuz, J. C, Darrat, A. F. and Cshelor, R. M. (2005), Technical, Allocative and Scale Efficiencies of REITs: An Empirical Inquiry, Journal of Business Finance & accounting, 32(9)

Worthington, A.C. (1999). “Measuring Technical Efficiency in Australian Credit Unions” The Manchester School, Vo. 67, No.2

Zaman, Hassan (2000) Assessing the Poverty and Vulnerability Impact of Micro-Credit in Bangladesh: A Case Study of BRAC (Washington, D.C.: World Bank).