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

Abstract

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