Essays in efficiency and productivity analysis of microfinance institutions

This dissertation consists of three essays, each exploring MFIs’ efficiency and productivity dynamics in presence of environment impacts. The first essay examines technical efficiency and its determinants of 36 microfinance institutions in Sri Lanka using a two-stage double bootstrap approach. Efficiency levels are explored in terms of MFIs’ dual objectives of financial sustainability and outreach. In the first stage, a bootstrap Data Envelopment Analysis (DEA) procedure is used to correct the bias and construct confidential intervals for the efficiency estimates. Then in the second stage, bias-corrected efficiency estimates are regressed on a set of environmental variables using a bootstrap regression approach. The results of the first stage analysis confirm the existence of financial and social inefficiency for the majority of MFIs in Sri Lanka. The second stage analysis suggests that such inefficiency is determined by a number of MFI characteristics such as its age, its organizational type (i.e. run as an Non-governmental Organization or not), its capitalization level, and its profitability. The second essay uses a non-parametric Malmquist method to investigate the changes in productivity of 20 Kenyan microfinance institutions over the period 2009-2012. Productivity change is decomposed into indices of technological change, pure efficiency change and scale efficiency change. A bootstrap procedure is employed to construct confidence intervals for the Malmquist indices. This procedure makes it possible to investigate whether such changes are significant in a statistical sense. Additionally, a second-stage bootstrap procedure is employed to ascertain the sources of productivity change measures. Results show that productivity growths are primarily attributable to technical improvements at an average of 7%. Moreover, second stage results suggest that matured MFIs tend to have a lower productivity compared to the younger counterparts. In the third essay, focus is shifted to investigate the relationship between efficiency and corporate governance in MFIs. Using a two-stage bootstrap procedure for a sample of 36 Sri Lankan MFIs, it explores the effect of several governance models (i.e. board size, proportion of women on the board, duality and presence/ absence of a female chief executive officer) on sustainability and outreach dimensions of efficiency estimates. Results suggest that financial efficiency improves with a small board and higher proportion of women on the board. Results also show that MFIs in which the same individual holds CEO and chairman of the board and MFIs in which a woman holds the position of CEO are less efficient in terms of reaching the lower strata of the rural poor.