Scope Economies of Lending and Collecting Deposits in Microfinance Institutions

This paper investigates economies of scope in microfinance.

The study uses a semi-parametric smooth coefficient model to estimate scope economies using data from 880 MFIs from 93 countries. It estimates two versions of the cost function. One is a typical cost function where outputs are measured by the volume of loans and savings. The second version is modified to include MFI outreach, and measures outputs by the number of active borrowers and savers. A comparison of the two versions indicates substantial scope economies in microfinance. Findings include:

• Scope economies in microfinance are entirely due to shared fixed costs;
• MFIs do not profitably use information they collect from savers to improve their lending products;
• Scope economies are largest in rural banks and cooperatives and lowest in banks;
• Very few MFIs in Eastern Europe and Central Asia offer savings although they can realize large potential scope economies.

Finally, although on average the traditional cost function approach underestimates scope economies, it would overestimate them for MFIs in Africa and Asia, as well as for NGOs and non-bank financial institutions.