How the method for delivering loans impacts on the economic efficiency of microfinance institutions
| Published date | 01 March 2024 |
| Author | José L. Fernández Sánchez,María D. Odriozola,Elisa Baraibar‐Diez |
| Date | 01 March 2024 |
| DOI | http://doi.org/10.1111/1758-5899.13312 |
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Global Policy. 2024;15(Suppl. 1):92–102.wileyonlinelibrary.com/journal/gpol
1 | INTRODUCTION
Microfinance institutions (MFIs), commonly known as
‘banks for the poor’, are designed to serve low-income
persons excluded from the traditional financial system
who need to have access to a variety of basic finan-
cial products and services at a reasonable price or
conditions (Azad etal.,2016; Daher & Le Saout,2013;
Tchakoute-Tchuigoua,2010). Since mainstream finan-
cial institutions do not allow poor households access
to their services because of those households' poor
economic status or credit worthiness, MFIs serve as
important providers of credit to po or and near-poor bor-
rowers excluded from the traditional banking system
allowing their financial inclusion (Azad et al., 2016).
Consequently, MFIs can play a significant role in
programmes to alleviate poverty and promote eco-
nomic opportunity in nations around the world (Caudill
etal.,2009; Tchakoute-Tchuigoua,2010).
The core business of MFIs is to develop methods
that can enable them to extend financial services to
the hitherto un-bankable and excluded from traditional
banking activities (Abdulai & Tewari,2017; El Hachami
etal.,2019). To achieve financial self-sufficiency, reach
as many customers as possible, and be sustainable in
the long-run, MFIs must employ practices that improve
their economic efficiency. In recent years, many MFIs
have prioritised economic effici ency and cost reduction
in their management practices because they have suf-
fered a reduction in subsidies (Fall etal.,2018; Nourani
etal.,2021). How to deliver lending is an important issue
for it, so that the microfinance movement try to exploit
new contractual structures and organisational forms
that reduce the riskiness and cost s of making small and
uncollateralised loans (Morduch, 2000). Community
or group-lending methods are financial innovations
to improve MFIs' social efficiency, but also their eco-
nomic efficiency, versus the traditional lending system
based on individual analysis and personal collateral.
One attribute of community or group lending is that
possess a comparative advantage over the traditional
system in collecting information about the borrowers
RESEARCH ARTICLE
How the method for delivering loans impacts on the
economic efficiency of micronance institutions
José L.FernándezSánchez | María D.Odriozola | ElisaBaraibar-Diez
Received: 29 Oc tober 2023
|
Rev ised: 29 November 2023
|
Ac cepted: 6 November 2023
DO I: 10 .1111/17 58- 589 9.13 312
This is an open ac cess article under t he terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which perm its use and distributi on in
any medium, provi ded the original work is p roperly cited, the use i s non-commercial a nd no modifications o r adaptations are made.
© 2024 The Authors. G lobal Policy published by D urham University and Jo hn Wiley & Sons Ltd.
Faculty of Econo mics and Business
Administrati on, Universidad de Canta bria,
Santander, Spain
Correspondence
José L. Fernánd ez Sánchez, Faculty of
Economics and Business Administration,
Universidad de C antabria, Avda. de los
Castros 56, 39005 Santander, Spain.
Email: jluis.fernandez@unican.es
Funding information
Jean Monnet Mo dule in EU Finance
and Institutions: New Social and
Environmental Challenges, Grant/Award
Number: 620132-EPP-1-2020-1-ES-
EPPJMO-MODULE
Abstract
The aim of this research has been to analyse how the method em ployed for lend-
ing can affect the cost effic iency of microfinance institutions (MFIs) since innova-
tions for lending have been introduced in the sector in the last years and there
are not empirical studies to analyse the actual impact of it. The improvement
of MFIs' cost efficiency is very impor tant for these institutions to achieve their
financial self-sufficiency and be sustainable in the long run. The data employed
in this analysis have been an unbalanced panel composed of a sample of 1017
MFIs for the 2008–2018 period and collected from the microfinance information
exchange (MIX) database. Our results also show that community or group-lend-
ing methods, as village banking and solidarity groups, have a positive effect on
the MFIs’ cost efficiency versus traditional methods based on individual lending.
In addition, we have found that MFIs with a higher proportion of borrowers in
rural areas are more cost efficient than institutions with more borrowers in urban
areas, although community or group-lending methods have a larger positive ef-
fect on MFIs’ cost efficiency in urban than in rural areas.
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