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

Microfinance is a high touch, high cost business. As a business model, its greatest challenge is to lower operating costs in order to reduce the cost of service borne by borrowers. An analysis of the cost structure of profitable MFIs (microfinance institutions) reporting to the Microfinance Information Exchange, Inc. (MIX) confirms this assertion: in 2006 operating expenses (both personnel and administrative) represented 62 percent of charges to borrowers, financial expenses 23 percent, profits 10 percent, and losses from defaults five percent. Since operating expenses are the main component of interest rates, identifying their drivers and quantifying them constitute the first steps in finding ways to improve efficiency of microfinance institutions worldwide.

This original paper has two main goals. One 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. The second goal is to explore the read more…