Scale economies and input price elasticities in microfinance institutions

Abstract

We evaluate the efficiency of microfinance institutions (MFIs) using a structural approach which also captures these institutions’ outreach and sustainability objectives. We estimate economies of scale and input price elasticities for lending-only and deposit-mobilizing MFIs using a large sample of high-quality panel data. The results confirm conjectures that improvements in efficiency can come from the growth or consolidations of MFIs, as we find substantial increasing returns to scale for all but profitability-focused deposit-mobilizing MFIs. Our results support the existence of a trade-off between outreach and sustainability. All inputs are inelastic substitutes, but we find differences in own-price elasticities in lending-only and deposit-mobilizing MFIs.