Social and Financial Performance of Microfinance Institutions: A Multi-stage Data Envelopment Analysis Application

Abstract

Microfinance institutions (MFIs) provide, by definition, financial services to people excluded from the traditional banking system, often the poor. Unlike managers of traditional banking institutions, managers of MFIs are required to watch both the social performance (SP) and financial performance (FP) of their institutions. The assessment of these two dimensions of an MFI’s performance has been a subject of various studies. Since the early 1990s, different authors have addressed the assessment of SP and FP either separately or simultaneously (for instance, Yaron, 1992; Preston and O’Bannon, 1997; Navajas et al., 1998, Paxton, 2002; Shreiner and Woller, 2003; Gutiérrez-Nieto et al., 2007; Polanco, 2005; Cull et al., 2007; Gueyié et al., 2010; Nzongang et al., 2010 and Hermes et al., 2011). A recurring concern of these studies was to find a robust, but easy to use means of assessing both SP and FP. The use of traditional banking techniques such as ratio analysis, parametric methods, regression and so on, can prove inadequate (Gueyié et al., 2010; Nzongang et al., 2010). These authors have presented Data Envelopment Analysis (DEA) as a valuable methodology for the assessment of MFIs’ performance. Their goal was to enrich the toolbox of managers of MFIs with a new technique that can provide guidance for decision-making.