Effecting Efficiency to Sustain MFIs: The Case of Cooperative Rural Banks

This paper analyzes the extent of MFI efficiency and factors that affect it, with special reference to Philippine’s cooperative rural banks (CRBs).

CRBs are a strategic segment of the financial system in the Philippines. They have diffused ownership structures that allow managers to engage in expense preference behaviour. Estimation of the cost efficiency of 50 CRBs from 1995-1999 indicates that:

• Costs were 10.25% higher than the most cost-efficient CRB;
• Economic environment, corporate governance, agency costs and risk exposure were the four factors that affected cost efficiency;
• CRBs that operated in a province with less banking density were less cost-efficient;
• Diffused ownership made CRBs more cost-inefficient;
• Ratio of deposits over credit was negatively correlated with cost efficiency;
• Higher proportion of fixed assets to total assets caused cost inefficiency;
• Sufficient financial margins to cover operational expenses tended to raise cost inefficiency of CRBs;
• Inefficient CRBs accepted higher credit risk than efficient ones;
• Government support significantly improved CRB cost efficiency.

The paper recommends close monitoring of CRBs by the Central Bank to improve efficiency.