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Practice what you preach: Microfinance business models and operational efficiency

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  • Millone M.M.
  • Bos J.W.B.

    (GSBE)

Abstract

The microfinance sector is an example of a sector in which firms with different business models coexist. Next to pure for-profit microfinance institutions MFIs, the sector has room for non-profit organizations, and includes social for-profit firms that aim to maximize a double bot- tom line and do well while doing good. We introduce a benchmarking approach that accommodates these three business models and allows us to estimate the efficiency of MFIs when they operate true to their busi- ness model, but also when they drift away from their original design. Using a simple model, we hypothesize that it is more difficult to operate efficiently when pursuing a double bottom line. Our empirical results for a large sample of MFIs are in line with this hypothesis pure for-profit and non-profit FMIs are more efficient than social for-profit MFIs. In addition, efficiency decreases for all MFIs when they move away from their original business model. Increasing the risk of the loan portfolio reduces efficiency and lending to woman increases efficiency. Finally, our finding that multiple lending to borrowers is efficiency-enhancing may help explain the mission drift in microfinance.

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  • Millone M.M. & Bos J.W.B., 2013. "Practice what you preach: Microfinance business models and operational efficiency," Research Memorandum 067, Maastricht University, Graduate School of Business and Economics (GSBE).
  • Handle: RePEc:unm:umagsb:2013067
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    Cited by:

    1. repec:bla:rdevec:v:21:y:2017:i:3:p:803-828 is not listed on IDEAS
    2. 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.
    3. repec:eee:wdevel:v:107:y:2018:i:c:p:176-188 is not listed on IDEAS
    4. François-Seck Fall & Akim Al-Mouksit & Harouna Wassongma, 2018. "DEA and SFA research on the efficiency of microfinance institutions: A meta-analysis," Post-Print hal-01794625, HAL.
    5. 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.
    6. repec:spr:comaot:v:23:y:2017:i:4:d:10.1007_s10588-016-9237-x is not listed on IDEAS
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    More about this item

    Keywords

    Econometrics; Banks; Depository Institutions; Micro Finance Institutions; Mortgages; Microeconomic Analyses of Economic Development; Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance;

    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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