Outreach and Efficiency of Microfinance Institutions

Date Published: 
Jun 2008
Hermes, N., Lensink, R. & Meesters, A.

Analyzing the trade-off between outreach to the poor and efficiency

This paper uses stochastic frontier analysis (SFA) to examine whether there is a trade-off between MFI outreach to the poor and efficiency. It examines implications of shifting focus towards increased financial sustainability and efficiency for MFI outreach. Commercialization of microfinance may attract increased commercial funds, which may contribute to supporting the outreach goal of MFIs. Yet, focusing on financial sustainability and efficiency may adversely affect lending to the poor. Lending money to the poor, especially the very poor and the rural poor, can be costly, leading to conflicting outreach and sustainability goals. The paper discusses literature on the relationship between financial sustainability, efficiency and outreach of MFIs. For the SFA analysis, the study uses data on 435 MFIs obtained from MixMarketTM. Main findings include:

  • Outreach is negatively related to MFI efficiency;
  • MFIs that have lower average loan balances, which is a measure of outreach depth, are less efficient;
  • MFIs that have more women borrowers are less efficient;
  • Commercialization may induce a stronger emphasis on efficiency;
  • Efficiency improvement may only be achieved if MFIs focus less on the poor.