Empirical Analysis on Microfinance Institutions in Developing Countries

This thesis contains three empirical essays which aim to contribute to economic research in the field of microfinance. Specifically, the first of these essays, presented in Chapter 2, examines the effect of commercialisation on efficiency of microfinance institutions (MFIs) in Sub-Saharan Africa using Data Envelopment Analysis and truncated regression model. The analysis is performed on 273 MFIs in Sub-Saharan Africa for the period 2005 - 2011. It is shown that commercialisation has a positive effect on efficiency of MFIs. In the light of this finding, we uphold the view that commercialisation can bring some benefits to the microfinance industry. Chapter 3 reports the investigations of whether productivity growth in the microfinance industry are passed to microcredit clients in the form of lower interest rates, and whether the effect depends on the extent of competition in the industry, using a balanced panel data on 175 MFIs worldwide over the period 2005 - 2012. The study finds that the effect of productivity growth in reducing microcredit interest rates is greater for high levels of competition than for low levels of competition. Thus, the evidence suggests that microcredit clients can benefit from productivity growth in the form of lower interest rates as the microfinance industry increasingly becomes competitive. We therefore argue that productivity growth and competition should be encouraged in the microfinance industry. The third essay, presented in Chapter 4 considers the possibility of mission drift in microfinance; a situation whereby MFIs move away from targeting the poor towards better-off clients. Using two different measures of poverty, the chapter examines whether the location choices of MFIs in Uganda are consistent with the objective of extending financial services to the extreme poor; and whether the pattern observed varies across different types of MFIs. The analysis is conducted on 118 MFIs over the period 2009 - 2013, by adopting a static count data model and dynamic regression approach. The results point towards an interesting picture that is important to take into account in the debate on mission drift. We show that the location of branches of MFIs is initially correlated negatively with poverty, but this correlation disappears over time; suggesting that MFIs have a greater incentive to target richer districts during earlier years, but poorer districts tend to catch-up with time. Again, we show that Commercial Bank MFIs are more likely to increase their presence in poorer districts than do other types of MFIs. These results suggest that full-fledged commercially oriented MFIs can have a strong positive response to targeting poorer districts. The implication of these findings is that commercial microfinance could be pursued as a strategy to reach the unbanked segment of the world's poor population. Taken together the analysis presented in each of these three chapters appears to indicate that, contrary to the writing of some popular commentators, the cause of economic development may have little to fear and much to gain from the entrance of commercial MFIs. While this conclusion may surprise many development professional, it should not surprise the development economist that the very forces of competition appear to drive these findings. While it is quite possible that the MFI revolution could not have been set lose by the commercial sector, it certainly does appear that the market which they established is now a viable and flourishing area to do business. Just as importantly, fears that commercial lenders might not target the poorest, or could charge exploitative rates of interest, may have been overstated.