Measuring the Efficiency of the Microfinance Institutions - An MPI Index Approach

Abstract

The aim of this study is to look at how Total Factor Productivity (TFP) has undergone a change in the Ethiopian microfinance institutions (MFIs), as well as the change in TFP's components, namely efficiency change and technical change. In addition to this, the study investigates the differences in levels of productivity that can be seen across the various organizational ownership forms and size categories of MFIs. In addition, a comparison of the results prior to and during covid 19.

The researcher gathered data from the secondary sources to undertake the study for 25 microfinance institutions as DMU for the fiscal years 2017–2021. Regarding this, four inputs and three output variables were used to analyze the effectiveness of the institutions. Such include: Branch locations, employee wages, operational expenses, total assets, revenue from interest and fees, total loan portfolio, and debtors. The researchers have followed the data by using DEAP software to evaluate the quantitative aspects.

The results reveal that according to the Malmquist index average, Somali, Nisir, Adeday, and SFPI microfinance institutions experienced the greatest improvement in productivity. Positive shift in productivity from an ownership structure point of view, three MFIs, viz., Somali, Dire, and Harar, were government-affiliated and seven were private MFIs.  During study period, five MFIs in the large size category (Dire, SFPI, Wasassa, Somali, Adeday), three MFIs (Harar, Nisir, and Kendil) were the medium size category, and two MFIs (Digaf and Lefeyeda were from the small size category) experienced positive TFP growth, which was largely attributable to efficiency change. Twelve of twenty-five MFIs saw a decline in technical efficiency. To sum up, the majority of private MFIs have positive Total Factor Productivity and are in the category of large-scale MFIs. In contrast, small-scale private and large-scale government MFIs decreased overall productivity change as a result of technical efficiency. Therefore, Ethiopian Microfinance Institutions experienced negative TFP growth on average due to the lowering of the frontier, this decline in TFP growth is primarily attributable to negative technical efficiency change.

The research's practical implications is that the Ethiopian MFIs have to make the delivery of the financial system more efficient and dynamic, MFIs must adopt new technologies such as internet banking, mobile banking, ATMs, online payment systems, online loan application and collection systems, digital finance services, agent banking service (Hello cash), and other technological advancements.

To compare national productivity, we propose that this pattern of variable inputs and outputs be applied to the institutions examined in this study. In any case, this methodology is quite valuable as a quantitative and reliable method for measuring productivity and its analysis, and its implementation would produce positive results.

Keywords: Total Factor Productivity, DEAP, efficiency change, technical change, MFI, Ethiopia, productivity, Malmquist Productivity Index