Microfinance expansion and its effects on cost efficiency

Although the scalability of microfinance has gained much attention in recent times, questions about its effects remain largely unanswered. Within the rationale for scalability, resides the inherent notion that a microfinance institution could make up for its loan-size disadvantage by disbursing enough small loans that would potentially translate in scale economies and thus cost efficiency gains. We test this assertion in the presence of “uncontrolled growth”—the surge in microfinance lending during the boom years of 2004–2008. In a nutshell, are cost efficiencies evident during rapid microfinance expansion? We find that aggressive microfinance growth consistently results in cost inefficiencies.