Microfinance in Sub-Saharan Africa: social efficiency, financial efficiency and institutional factors

There are two natural efficiency measures associated with microfinance banking: social efficiency, measuring to what extent the micro-capital becomes accessible to the smallest entrepreneurs with no previous access to external funding, and financial efficiency, measuring the sustainability of the microfinance business and its attractiveness for investors providing the funds. We study the relationship between the two objectives (which might be incompatible in some cases) on a panel of 579 microfinance institutions across 36 Sub-Saharan African countries in period 2004–2017, covering the Big Crisis, and identify determinants of both types of efficiency. The main analytic tool is data envelopment analysis. We also study further relations between the microfinance sector and institutional factors of the corresponding economy, such as the presence of the World Bank programs or mandatory caps on interest rates. The main findings are as follows. Microfinance institutions focusing on lending to small and medium enterprises demonstrate a higher level of efficiency (both social and financial). Gender focus of the lending institutions also has a significant influence on the efficiency. The presence of the private credit bureau on a market is associated with significantly higher efficiency levels in both social and financial aspects. Public credit registers, however, are not associated with a positive efficiency trend. The presence of general microfinance legislation shows no significant influence, however the mandatory interest rate cap seems to affect the performance. In general, the research indicated no strong evidence of mutual exclusiveness of the social and financial objectives.