Chapter 7: Efficiency and productivity analysis of microfinance institutions
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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.

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