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A Cost Function Approach to MFI Efficiency: The Role of Subsidy and Social Output Measures

In: Promoting Microfinance

Author

Listed:
  • Valentina Hartarska
  • Denis Nadolnyak
  • Shen Xuan

Abstract

Microfinance institutions (MFIs) strive to reach many poor clients while remaining financially sustainable. Most MFIs have quasi-equity owners who expect the organization to be financially self-sufficient, but do not necessarily expect competitive return on their equity. This chapter analyses the efficiency in MFIs by developing a model to identify the optimal MFI size that takes into account the outreach and the sustainability aspects of MFI performance. Moreover, we assess how results vary when we account for the cost of capital subsidy, measured by the opportunity cost of equity. Since MFIs across the world operate in diverse environments, we also estimate optimal MFI size by region and control for a number of internal and external characteristics. By identifying the optimal size of an MFI based on its location and other characteristics, this research could help donors understand the role of size in MFIs’ performance and help practitioners cut costs and achieve their social mission.

Suggested Citation

  • Valentina Hartarska & Denis Nadolnyak & Shen Xuan, 2013. "A Cost Function Approach to MFI Efficiency: The Role of Subsidy and Social Output Measures," Palgrave Macmillan Books, in: Ronny Manos & Jean-Pierre Gueyié & Jacob Yaron (ed.), Promoting Microfinance, chapter 7, pages 132-147, Palgrave Macmillan.
  • Handle: RePEc:pal:palchp:978-1-137-03491-5_7
    DOI: 10.1057/9781137034915_7
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    Cited by:

    1. Md Aslam Mia & Lucia Dalla Pellegrina & Cheng Zhang & Sunil Sangwan, 2022. "Efficiency Wage and Productivity in the Indian Microfinance Industry: A Panel Evidence," IIM Kozhikode Society & Management Review, , vol. 11(2), pages 235-252, July.

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