This chapter’s objective is to introduce the reader to the main aspects of productivity and efficiency analysis of microfinance institutions (MFIs) and to identify the agenda for future research. We start with a few basic definitions. Productivity and efficiency analyses fall within the broader field of performance evaluation of MFIs. Productivity analysis and the related widely used productivity measures are concerned with the rate of output for a certain amount of input. More formal modeling of the production process in microfinance defines efficient production as the result of profit maximization or of the dual cost minimization subject to technological and resource constraints. Thus, such analysis aims to identify the maximum output(s) that can be produced from a given set of inputs or the minimum input mix used to produce a given level of output. Efficiency analysis extends productivity analysis by constructing an efficient production or cost frontier for a group of firms or an industry against which individual MFIs can be compared using either data envelopment (DEA) or stochastic frontier (SFA) analysis.1 We start by describing the two main approaches to productivity and efficiency analysis of MFIs, the non-structural and structural approaches.
Valentina Hartarska and Denis Nadolnyak
Steven B. Caudill, Daniel M. Gropper, Valentina Hartarska and Franklin G. Mixon
There have been numerous studies examining the relationship between economic freedom and economic growth. At the same time, there have been relatively few studies examining production or cost relationships for microfinance institutions, largely due to the lack of adequate data. The goal of this chapter is to combine these two strands of literature. In particular, we examine the impact of improvements in economic freedom on microfinance efficiency for microfinance institutions in Europe and Central Asia using a translog cost function. We find that increased microfinance efficiency is associated with improvements in economic freedom and that those countries experiencing large changes in economic freedom experience significant improvements in microfinance efficiency.