Which Microfinance Institutions Are Becoming More Cost Effective with Time? Evidence from a Mixture Model

TLDR

Microfinance institutions play a key role in many developing countries, yet differences in operating environments, subsidies, and organizational form mean that increasing cost effectiveness may not apply to all MFIs. The authors estimate a mixture model that shows roughly half of MFIs reduce costs over time while the other half do not. Using data from Eastern Europe and Central Asia, the study finds that MFIs generally lower costs over time, with roughly half benefiting from cost reductions while the other half do not, and that larger MFIs offering deposits and those receiving lower subsidies are more cost‑effective over time.

Abstract

Microfinance institutions (MFIs) play a key role in many developing countries. Utilizing data from Eastern Europe and Central Asia, MFIs are found to generally operate with lower costs the longer they are in operation. Given the differences in operating environments, subsidies, and organizational form, this finding of increasing cost effectiveness may not aptly characterize all MFIs. Estimation of a mixture model reveals that roughly half of the MFIs are able to operate with reduced costs over time, while half do not. Among other things, we find that larger MFIs offering deposits and those receiving lower subsidies operate more cost effectively over time.