Economies of Scope of Lending and Mobilizing Deposits in Rural Microfinance Institutions: A Semiparametric Analysis

This paper presents evidence on scope economies using a large sample of MFIs.

MFIs are showing a renewed interest in savings mobilization, especially in rural areas. Economies of scope imply that expansion into the savings market can be more cost efficient if done by the same MFIs. The existence and magnitude of scope economies has not been investigated in microfinance although they have been investigated and justified in banking. The study:

• Estimates scope economies using data from MFIs with over 2700 annual observations from across the globe;
• Presents a generalized cost function that estimates scope economies and decomposes them into fixed and complementary cost components;
• Provides evidence on how MFIs could use alternative solutions to cut costs to produce deposits and loans;
• Presents evidence that MFIs may possess different degrees of scope economies based on location and rural population.

Study findings indicate that policies designed to improve MFIs performance and expand their services should be based on MFIs regional, organizational and environmental characteristics.