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Exploring the determinants of the productivity of microfinance institutions in India

  • Twaha, Koire
  • Rashid, Abdul

This paper attempts to investigate the determinants of productivity in microfinance institutions (MFIs) in India using the Empirical Bayesian technique. To do this, we utilize an unbalanced panel data set covering the period 2005-2011 with 292 observations from 64 institutions.Based on theoretical grounds, three broad factors are specified: institutional characteristics, outreach, and efficiency. We find convincing evidence that institutional characteristics and outreach have both positive and negative effects on the productivity of MFIs, depending of the proxy used in the analysis. However,the efficiency of MFIs affects the productivity negatively. Specifically, we find that the age of the institution positively influences the productivity by 6.1581 points, while number of offices and number of personnel negatively affect it by 26.41% and 8.77%, respectively. Of the outreach variables, numbers of active borrowers positively influence productivity by 0.04%, whereas, average loan size appears to have an inverse relationship with productivity. We further find that cost per loan – a proxy for efficiency, has a negative and statistically significant impact of 1.9604 points on the productivity of MFIs. Overall, our investigation suggests that there is a need to build client confidence, pursue innovative credit delivery techniques in reaching out to the poor and achieving high levels of productivity.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 45715.

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Date of creation: 15 Dec 2012
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Handle: RePEc:pra:mprapa:45715
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  1. Berger, Allen N. & Humphrey, David B., 1997. "Efficiency of financial institutions: International survey and directions for future research," European Journal of Operational Research, Elsevier, vol. 98(2), pages 175-212, April.
  2. Kent Matthews & Nina Zhang, 2009. "Bank Productivity in China 1997-2007: An Exercise in Measurement," Working Papers 252009, Hong Kong Institute for Monetary Research.
  3. Ben Bassem, 2008. "Efficiency of Microfinance Institutions in the Mediterranean: An Application of DEA," Transition Studies Review, Springer, vol. 15(2), pages 343-354, September.
  4. Koop, Gary, 1999. "Bayesian Analysis, Computation and Communication Software," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(6), pages 677-89, Nov.-Dec..
  5. Alin Marius Andries, 2011. "The Determinants of Bank Efficiency and Productivity Growth in the Central and Eastern European Banking Systems," Eastern European Economics, M.E. Sharpe, Inc., vol. 49(6), pages 38-59, November.
  6. Conning, Jonathan, 1999. "Outreach, sustainability and leverage in monitored and peer-monitored lending," Journal of Development Economics, Elsevier, vol. 60(1), pages 51-77, October.
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