The Cost Structure of Microfinance Institutions in Eastern Europe and Central Asia

Lending methodologies of MFIs to ascertain cost efficiency
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This paper presents the first systematic statistical examination of the performance of MFIs operating in Eastern Europe and Central Asia. It explores the following in detail:

  • Description of MFIs;
  • Microfinance in the ECA Region;
  • Model: The translog (transcendental logarithmic) form is used for all the cost estimations;
  • Data: The data used in the study have been provided by the Microfinance Center for CEE and NIS;
  • Estimation results: Several models are estimated to uncover aspects of MFI operations.

The document further estimates:

  • A cost function for MFIs in the region from 1999-2004.
  • Three models, each based on different measures of output:
    • The first formulation uses the number of loans as an output measure;
    • The second uses volume of loans as an output measure;
    • The final formulation includes both number and volume of loans as outputs.

Finally, the paper considers the results as a whole and lists the following findings:

  • The mere presence of subsidies is associated with increased costs;
  • MFIs become more efficient over time when number of loans is the measure of output;
  • The cost of providing group loans and loans to women is lower and that MFIs heavily engaged in these activities have lower costs;
  • When output is measured as volume of loans, those MFIs involved in the provision of group loans and loans to women have higher than average costs.

About this Publication

By Hartarska, V., Caudill, S.B. & Gropper, D.M.