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How Efficient Are the Ethiopian Microfinance Institutions in Extending Financial Services to the Poor? A Comparison with the Commercial Banks

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  • Hundanol Atnafu Kebede
  • Wassie Berhanu

Abstract

This article investigates the efficiency of microfinance institutions (MFIs) in extending financial services to the poor by comparing their cost efficiency with that of commercial banks (CBs). Using an unbalanced panel data of fourteen MFIs and seven CBs for 2001–08 in Ethiopia, a stochastic frontier model is estimated in which heterogeneities (in the working environments and nature of businesses) between MFIs and CBs are controlled for in the cost function. The result indicates that the MFIs are, on average, 33.5% less efficient compared with the CBs mainly due to their smaller size, focus on outreach and reliance on non-commercial sources of funds such as donations. In fact, the largest MFIs are found to have cost efficiency scores that are comparable with that of the most efficient banks. Despite the wide efficiency gap, there is a strong evidence of convergence. Copyright 2013 , Oxford University Press.

Suggested Citation

  • Hundanol Atnafu Kebede & Wassie Berhanu, 2013. "How Efficient Are the Ethiopian Microfinance Institutions in Extending Financial Services to the Poor? A Comparison with the Commercial Banks," Journal of African Economies, Centre for the Study of African Economies, vol. 22(1), pages 112-135, January.
    • Handle: RePEc:oup:jafrec:v:22:y:2013:i:1:p:112-135
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    File URL: http://hdl.handle.net/10.1093/jae/ejs012
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    Cited by:

    1. Solomon Bizuayehu Wassie & Hitoshi Kusakari & Masahiro Sumimoto, 2019. "Performance of Microfinance Institutions in Ethiopia: Integrating Financial and Social Metrics," Social Sciences, MDPI, vol. 8(4), pages 1-13, April.
    2. Carlos Pestana Barros & Emanuel Reis Leão & Nkanga Pedro João Macanda & Zorro Mendes, 2016. "A Bayesian Efficiency Analysis of Angolan Banks," South African Journal of Economics, Economic Society of South Africa, vol. 84(3), pages 484-498, September.
    3. Wanke, Peter & Maredza, Andrew & Gupta, Rangan, 2017. "Merger and acquisitions in South African banking: A network DEA model," Research in International Business and Finance, Elsevier, vol. 41(C), pages 362-376.
    4. Barros, C.P. & Emrouznejad, Ali, 2016. "Assessing productive efficiency of banks using integrated Fuzzy-DEA and bootstrapping: A case of Mozambican banksAuthor-Name: Wanke, Peter," European Journal of Operational Research, Elsevier, vol. 249(1), pages 378-389.

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