Cost Efficiency and Outreach of Microfinance Institutions in Ethiopia: Do they Contrast with Financial Cooperatives

This paper analyzes the imposition of financial sustainability requirements on the outreach of Ethiopian MFIs. It also assesses whether the way ownership of MFIs is organized and practiced has any effect on the costs of microfinance delivery. The research is based on the stochastic frontier approach (SFA) method applied on data from a disaggregated sample of 107 Ethiopian MFIs. The approach helps estimate cost and efficiency scores for comparing efficient use of available resources by organizational design and also to correlate outreach indicators with cost efficiency estimated at a microfinance level. The paper suggests that outreach to the poor and financial sustainability, as measured by cost efficiency, are contradictory objectives. It also indicates that financial cooperatives are better in cost containment as compared to specialized MFIs. The paper covers the following sections in detail:

• Evolution and the major players in the microfinance industry in Ethiopia;
• Description of the data used in the study, definition of variables (total costs and outputs, input prices, and cost in/efficiency correlates), and results from the summary statistics;
• Explanation of the SFA method;
• Discussion of the results and a summary of the main findings.