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Practice What You Preach: Microfinance Business Models and Operational Efficiency

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  • Bos, Jaap W.B.
  • Millone, Matteo

Abstract

The microfinance sector has room for pure for-profit microfinance institutions (MFIs), non-profit organizations, and “social” for-profit firms that aim to pursue a double bottom line. Depending on their business model, these institutions target different types of borrowers, change the size of their loans and adjust their loan pricing. We introduce a simple approach that accommodates a wide range of business models and allows us to estimate the operational efficiency of MFIs. Our empirical results show that MFIs with a high depth of outreach are most efficient, resulting in higher levels of outreach and profits for the same input mix.

Suggested Citation

  • Bos, Jaap W.B. & Millone, Matteo, 2015. "Practice What You Preach: Microfinance Business Models and Operational Efficiency," World Development, Elsevier, vol. 70(C), pages 28-42.
  • Handle: RePEc:eee:wdevel:v:70:y:2015:i:c:p:28-42
    DOI: 10.1016/j.worlddev.2014.12.018
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    Cited by:

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    2. Delaram Najmaei Lonbani & Bram De Rock, 2020. "The performance of microfinance institutions: An analysis of the local and legal constraints," Working Papers CEB 20-011, ULB -- Universite Libre de Bruxelles.
    3. Sefa Awaworyi Churchill, 2020. "Microfinance financial sustainability and outreach: is there a trade-off?," Empirical Economics, Springer, vol. 59(3), pages 1329-1350, September.
    4. Md Aslam Mia & V. G. R. Chandran, 2016. "Measuring Financial and Social Outreach Productivity of Microfinance Institutions in Bangladesh," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 127(2), pages 505-527, June.
    5. Arp, Frithjof & Ardisa, Alvin & Ardisa, Alviani, 2017. "Microfinance for poverty alleviation: Do transnational initiatives overlook fundamental questions of competition and intermediation?," EconStor Open Access Articles, ZBW - Leibniz Information Centre for Economics, pages 103-117.
    6. Manojit Chattopadhyay & Subrata Kumar Mitra, 2017. "Applicability and effectiveness of classifications models for achieving the twin objectives of growth and outreach of microfinance institutions," Computational and Mathematical Organization Theory, Springer, vol. 23(4), pages 451-474, December.
    7. Sadia Farooq, 2018. "Performance Evaluation of Microfinance Providers Using Data Envelopment Analysis: The Profitability Perspective," Journal of Management Sciences, Geist Science, Iqra University, Faculty of Business Administration, vol. 5(1), pages 111-123, March.
    8. Manojit Chattopadhyay & Subrata Kumar Mitra, 0. "Applicability and effectiveness of classifications models for achieving the twin objectives of growth and outreach of microfinance institutions," Computational and Mathematical Organization Theory, Springer, vol. 0, pages 1-24.
    9. Fall, François & Akim, Al-mouksit & Wassongma, Harouna, 2018. "DEA and SFA research on the efficiency of microfinance institutions: A meta-analysis," World Development, Elsevier, vol. 107(C), pages 176-188.
    10. Niels Hermes & Marek Hudon, 2018. "Determinants Of The Performance Of Microfinance Institutions: A Systematic Review," Journal of Economic Surveys, Wiley Blackwell, vol. 32(5), pages 1483-1513, December.
    11. Anastasia Cozarenco & Valentina Hartarska & Ariane Szafarz, 2019. "Too Many Cooks Spoil the Broth: The Conflicting Impacts of Subsidies and Deposits on the Cost-Efficiency of Microfinance Institutions," Working Papers CEB 19-001, ULB -- Universite Libre de Bruxelles.
    12. Girma Jirata Duguma & Jiqin Han, 2018. "Effect of Deposit Mobilization on the Financial Sustainability of Rural Saving and Credit Cooperatives: Evidence from Ethiopia," Sustainability, MDPI, Open Access Journal, vol. 10(10), pages 1-23, September.
    13. Kwadwo Afriyie & John Kuumuori Ganle & Alexander Yao Segbefia & Pauline Kamau & Grace Wamue-Ngare, 2020. "Contextual Factors Which Affect the Success of Microcredit Programs Among Women in Ghana," Journal of Developing Societies, , vol. 36(2), pages 229-254, June.
    14. Adriana Ramírez Rocha & L. Arturo Bernal Ponce & Mauricio Cervantes Zepeda, 2019. "Differences in the interest rates of microfinance institutions in some emerging markets economies: An HLM approach/Diferencias en las tasas de interés entre instituciones financieras de algunas econom," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 34(2), pages 275-307.
    15. Hermes, Cornelis & Hudon, M., 2018. "Determinants of the Performance of Microfinance Institutions: A Systematic Review," Research Report 2018008, University of Groningen, Research Institute SOM (Systems, Organisations and Management).

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    More about this item

    Keywords

    microfinance; output distance function; outreach; efficiency; global;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics

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