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Changes in total factor productivity and efficiency of microfinance institutions in the developing world: A non-parametric approach

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  • Kar, Ashim Kumar
  • Rahman, Sanzidur

Abstract

Applying the Färe–Primont index, this paper computes the total factor productivity (TFP) index for microfinance institutions (MFIs) in terms of its six individual components: technical change, technical, scale and mix efficiency changes and residual scale and residual mix efficiency changes. We use panel data of 342 MFIs from 61 countries covering the period 2003–2013. Results show that MFIs are operating at a low level of productivity with an overall annual rate of decline in TFP of 1.7 percent. Although technical progress, technical efficiency change and mix efficiency change components of TFP have increased over the study period, overall, TFP actually declined over time due to declining scale efficiency, residual scale-efficiency and/or residual mix efficiency changes. We found variations in regional performance with Sub-Saharan Africa experiencing the highest decline in TFP despite improvements in technical and mix efficiency changes. In contrast, Eastern Europe, Central Asia and South Asian regions have experienced a growth in TFP. Policy implications of these results are that MFIs should continue to pursue technical progress and aim to improve technical, scale and mix efficiency components by reallocating resources optimally. As well, MFIs should operate at an optimal scale and derive economies of scope by changing input and output mixes.

Suggested Citation

  • Kar, Ashim Kumar & Rahman, Sanzidur, 2018. "Changes in total factor productivity and efficiency of microfinance institutions in the developing world: A non-parametric approach," Economic Analysis and Policy, Elsevier, vol. 60(C), pages 103-118.
  • Handle: RePEc:eee:ecanpo:v:60:y:2018:i:c:p:103-118
    DOI: 10.1016/j.eap.2018.09.012
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    References listed on IDEAS

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    Cited by:

    1. Li, Lin Yang & Hermes, Niels & Meesters, Aljar, 2019. "Convergence of the performance of microfinance institutions: A decomposition analysis," Economic Modelling, Elsevier, vol. 81(C), pages 308-324.
    2. Viet Nguyen, Thanh & Simioni, Michel & Le Van, Dao, 2019. "Assessment of TFP change at provincial level in Vietnam: New evidence using Färe–Primont productivity index," Economic Analysis and Policy, Elsevier, vol. 64(C), pages 329-345.
    3. George E. Halkos & Christina Bampatsou, 2019. "Economic growth and environmental degradation: a conditional nonparametric frontier analysis," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 21(2), pages 325-347, April.

    More about this item

    Keywords

    Microfinance institutions; Total factor productivity growth; Färe–Primont productivity index; Technical; Scale and mix efficiency changes; Cross-country panel data; Non-parametric approach;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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