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Efficiency Drivers of Microfinance Institutions (MFIs): The Case of Operating Costs

The main goal of this paper is to explore potential drivers of costs including MFI characteristics, country infrastructure (both physical and institutional), prices and availability of inputs, doing business environment and macroeconomic variables. This research is based on a sample of 1,003 MFIs in 84 countries reporting data to the Microfinance Information Exchange, Inc. (MIX), mainly in the period 1999-2006. These MFIs represent 44 million borrowers with 21 billion USD in loan portfolio in 2006. Based on the analysis of MFIs characteristics, we found that the three main drivers of operating expense ratio (OER) are relative loan sizes, ages and scale. However, we are surprised by how quickly reductions in cost disappear after MFIs grow beyond 2,000 borrowers. For example, one of the conclusions of the paper is that in the predicted relationship between relative loan size and OER is statistically significant, strong, but decreasing for larger loan sizes as expected. In particular, an increase in the relative loan size from 10 to 20 percent of GNI per capita is expected to reduce OER over 7 percentage points, but a increase in relative loan size from 30 to 40 percent (just around the median) is expected to reduce OER just around 3 percentage points.