In competency Aspects of Microfinance Industry: Via SFA approach

Abstract

Microfinance is a well known terminology used for microcredit and financial services for financially deprived community. Through informal, semi-formal and formal ways different institutions has been providing these services. Expenditure of the industry is considered to be high because of its inherent structure, dealing with small loans and having high risk of recovery. Therefore, expected inefficiency is greater than its profit. There are several factors and reason. Through this study, we analyzed few factors which have a positive or negative relation with the inefficiency of Microfinance in Pakistan. Stochastic frontier analysis (SFA) is used for weighing up a relationship between inefficiency and its determinants. It is seen that the average efficiency of this sector is low, on average the highest technical efficiency score is 87 only. Age and number of clients have a negative relationship with inefficiency whereas for other variable's relationship is conditional on Microfinance Institutions (MFIs) working status. The number of women borrowers and average loan balance has been incorporated in the study to analyze the focus of MFIs, either on mission drift or achievement. We found that microfinance banks (MFBs) are drifting away, however, Non Government Organizations (NGOs) and Rural Support Programs (RSPs) are fulfilling their social mission efficiently. We did not find a strong evidence of mission drift in the industry because microfinance banks considered their social mission on second priority. Hence, if MFBs are drifting away from their social services, it is not unexpected.

Social and financial efficiency: Institutional characteristics of the partner organizations of Pakistan Poverty Alleviation Fund

“…Results obtained in this study are generally in line with the previous research, for instance [10,16,25,26,28,36,68]. The age of the PO has a positive and statistically significant impact on their super-efficiency in two out of the three estimated specifications.…”

“…Similarly, the efficiency of the POs is also positively and significantly affected by the personnel. Recent empirical research, such as Riaz and Gopal [36], has generally reported similar findings concerning the performance determinants of Pakistan based MFIs.…”

“…In the third group, those studies, for example [11][12][13]36], are included in which the financial efficiency of the MFIs in Pakistan was measured but not social efficiency. These studies reported that most Pakistani MFIs are producing below the financially efficient frontier, using various financial performance measures.…”

“…These studies reported that most Pakistani MFIs are producing below the financially efficient frontier, using various financial performance measures. For instance, Financial Margin & Gross Loan Portfolios were used by Riaz & Gopal [36], Gross Loan Portfolio and Number of Active borrowers by Ahmed et al [11], Financial and Operational Income by Farooq [12], and Depositors per Staff and Average Loan Balance per Female Borrower were used by Khan et al [13] to measure PLOS ONE financial efficiency. Further, financial efficiency scores are reported to be improving over time [11].…”

A Simultaneous Stochastic Frontier Model with Dependent Error Components and Dependent Composite Errors: An Application to Chinese Banking Industry

“…Simulate values of the parameters. The coefficients α 0 , α 1 , β 0 , and β 1 were generated from uniformly distributed random numbers on the interval [5,10], the standard deviations of inefficiency terms σ w1 and σ w2 were generated from uniform random numbers on the interval [2,3], and the standard deviations of noise terms σ v1 and σ v2 were simulated from uniform random numbers on the interval [0.5, 1]. The dependence between v 1 and w 1 , v 2 and w 2 , and ε 1i and ε 2i were modeled by Gaussian copulas, where the copula parameters ρ 1 , ρ 2 , and ρ 12 were simulated from uniform random numbers on the interval [0.7, 0.95].…”