The Measurement and Determinants of Economic Efficiency of Microfinance Institutions in Ghana: A Stochastic Frontier Approach

Identifying practices that cause economic inefficiencies in the microfinance sector
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Microfinance institutions have become central players in socio-economic development especially in developing countries. This paper investigates empirically the economic efficiency of microfinance institutions in Ghana using a Cobb-Douglas Stochastic frontier model.

A total of 135 MFIs were sampled for the period from 2007-2010. The underpinning assumption is that there is a possibility for economies of scale in lending if only firms improve strategies of mobilizing savings and provide good quality service to their clients. The estimated results showed an overall average economic efficiency of 56.29%; indicating a high degree of inefficiency in the economic behavior of the units in the industry.

The study further exposed that age and savings indicators of outreach and productivity, and cost per borrower were significant determinants of economic efficiency. It is therefore recommended that practitioners improve upon technical training programs, operate diversified savings products to improve on portfolio quality and ensure sustainability; and also heighten the extent of social commitment to both staff and clients.

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By Oteng-Abayie, E., Amanor, K. & Frimpong, J.