An analysis of efficiency and productivity change in microfinance institutions in the European Union : a DEA-MPI approach

Abstract

Purpose: Over the last few decades, microfinance institutions (MFIs) have been essential towards filling certain gaps in the financial sector, specifically in providing credit to low-income individuals who cannot gain credit access from conventional financial institutions. Ultimately, this reduces poverty and enhances the sustainability of society. However, in order to be able to fulfil this function, MFIs should themselves be financially sustainable, as evidenced from their recent shift in their main social objective towards commercialization and more market-based financial services. The main purpose of this study is to examine the sustainability of MFIs under the dual objective approach; that is, (i) whether they had enough outreach to serve their customers, and (ii) whether they are financially strong enough to cover their operating costs. Design/Methodology/Approach: We applied a non-parametric approach and the Data Envelopment Analysis Program (DEAP), with the aid of the Malmquist Productivity Index (MPI) and were able to examine a number of productivity and efficiency changes of MFIs that occurred during the sampling period between 2013 and 2017. This exercise involved decomposing several significant components, which include technical efficiency, technological efficiency, pure efficiency and scale efficiency. Findings: To be able to perform these dual objectives successfully in the long run, MFIs need to improve cost-effectiveness and productivity. This is where the need for efficiency and productivity analyses arises. Practical Implications/Originality/Value: This study is intended to fill a gap in literature arising from a lack of studies that analyze efficiency and productivity changes occurring within MFIs in the European Union region. Such an analysis should ultimately help MFIs to be sustainable in the long term.