Microfinance institutions: Assessments of profitability, operational-self sufficiency, cost efficiency and outreach

No poverty reduction policy has created more controversy than provision of credit to the poor. Provision of credit to the poor is often viewed as a way to help the poor help themselves out of poverty, but debate continues to grow as to why there needs to be intervention in rural credit markets; how to intervene efficiently to deliver credit to the poor; and to whom credit should be delivered in poor rural areas.;Chapter 2 addresses the first question regarding why intervention in the rural credit market could improve welfare, and it provides a theoretical analysis of the welfare consequences of an indirect lending approach. Numerical examples based on a welfare analysis of the poor under a cheap credit policy are provided and explained. Chapter 3 analyzes how the breadth and depth of outreach interact with the operational self-sustainability (OSS) and profitability of microfinance institutions (MFIs) using a panel dataset of 715 MFIs from 95 countries from 1998 to 2006. The number of borrowers is employed as a proxy for breadth, while the number of women borrowers and the number of loans under ;Chapter 4 examines the cost efficiency of MFIs using a panel dataset of 701 MFIs from 93 countries. Two combinations of input and output variables and three potential correlates of inefficiency are employed by utilizing a simultaneous estimation based on the stochastic frontier approach (SFA) proposed by Battese and Coelli (1995). The estimated results indicate that a higher average loan balance per borrower is associated with higher cost efficiency while a high write-off ratio contributes to higher cost inefficiency for MFIs. The estimated results further reveal that the most cost-inefficient MFIs in Asia are in India. Ghana has the most cost-inefficient MFIs among the six African countries considered, while Columbia has the most cost-inefficient institutions in South America.