Efficiency of Microfinance Institutions in Bangladesh

This study presents an empirical analysis of the cost efficiency of MFIs operating in Bangladesh. It intends to help donors, practitioners, and policymakers to understand which types of institutional features contribute to the efficiency of firms. The study states that microcredit sector in Bangladesh is heterogeneous and very little is known about the relative efficiency of MFIs and their determinants. It reports that although there are more than 4000 MFIs currently operating in Bangladesh, 90% of total lending in carried out by only ten MFIs. The study used stochastic frontier models to analyze the technical efficiency of MFIs.  Key findings include:

• Large MFIs seem to be operationally more ef?cient as their break even interest rate is lower than the small and medium MFIs;
• Smaller MFIs, in the process of survival and growth, learn to achieve efficiency;
• Situation of trade-off exists between depth of outreach (inverse of average loan balance per borrower) and cost efficiency.

The study concludes by stating that government agencies should formulate policies that foster the growth of small MFIs that are successful and facilitate an even playing ?eld between large and small MFIs.