Efficiency Drivers of MFIs: The Role of Age

This paper analyzes the role that age of individual MFIs and maturity of the industry play in efficiency improvements. Findings indicate that MFI efficiency is strongly related to age. Age-related benefits are observed in terms of economies of scale, improved cost structure and streamlined processes due to better information and understanding of clients.Efficiency gains are also likely as the industry matures and MFIs learn from each other, network and benefit from market-wide learning. Study findings include:

• MFIs make no significant additional efficiency gains from economies of scale once they grow beyond 2,000 customers;
• Young MFIs double average loan sizes over a three-year period, whereas mature MFIs increase loan sizes by roughly 25 percent during the same period;
• Older MFIs extend follow-up loans to existing customers, which is cheaper than acquiring new customers;
• MFIs shorten assessment process and improve efficiency as information about customers increases.

Efficiency improvements could be understated as MFIs have been spending an increasing portion of operating expenses on non-credit activities. Finally, it is important to assess the potential to reduce operating costs, which represent the biggest cost block for MFIs.