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Technical Efficiency of Microfinance Institutions: DEA Application

Technical Efficiency of Microfinance Institutions: DEA Application

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Microfinance Institutions (MFIs) focus on providing credit to the poor who are excluded from the conventional financial institutions, in order to reduce poverty and to help the poor with setting up their own income generating businesses. This is what is described in the microfinance literature as Outreach. As mere outreach is not a sufficient condition, MFIs need to operate in a financially sustainable manner. The business of microfinance, therefore, strikes a delicate balance between the financial sustainability and outreach. In order to increase their outreach and render service in a sustainable manner, these MFIs need to be operationally and financially efficient. Though the performance of these MFIs can be measured using conventional financial ratios, other more appropriate and realistic approaches could be used to assess the efficiency of these units. Hence, this book uses a non-parametric model called Data Envelopment Analysis (DEA) so as to measure the efficiency of MFIs. DEA is well-known and one of the most successful operational research techniques in efficiency measurement and has been widely employed in recent times.