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The impact of scale of operation on financial performance in microfinance

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Abstract

Due to the limitations of the extant literature on the impact of scale of operation on microfinance performance, this paper has been written in an effort to fill this major gap by conducting an empirical investigation into the link between scale of operation, sustainability and efficiency of microfinance institutions (MFIs). It introduces new evidence and possible explanations from an explicit perspective that might be relevant in the context of profit status, regulated status and legal status. First, large MFIs can achieve higher efficiency, profitability, sustainability and outreach (breadth and depth). Second, there is no trade-off between the breadth of outreach and efficiency. Third, larger loan sizes are associated with higher loan costs. Therefore, MFIs need to choose the optimal scale to achieve the greatest efficiency and profitability from economies of scale.

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Notes

  1. Because of the lack of the data it is impossible to establish a good data set. Any conclusions from the proceeding analysis will somewhat limited. This has been the nature of MFI analysis: limited data followed by limited conclusions.

  2. There exist many organizations which do not have a license to provide microfinance.

  3. There are two types of GMM: first-difference and system GMM. The first first-difference GMM uses first-differenced equations with suitable lagged levels as instruments. The system GMM augments the former by additional equations in levels with lagged first-differences as instruments.

  4. Commercial funds are at 75 % or above of the market rate (WWB 2003).

  5. It was first posited by Bator (1959) and developed from the approaches of Smith (1776) and Sidgwick (1885).

  6. OSS measures operating revenue as a percentage of operating and financial expenses, including loan loss provision expense. It includes all the cash costs of running a MFI, depreciation and the loan loss reserve.

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Authors and Affiliations

  1. Faculty of Finance, Banking University HCMC, Ho Chi Minh City, Vietnam

    Trong Vi Ngo & Anh Hoang Ly

  2. Bournemouth University, Dorset, UK

    Andrew W. Mullineux

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  1. Trong Vi Ngo
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  2. Andrew W. Mullineux
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Correspondence to Trong Vi Ngo.

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Ngo, T.V., Mullineux, A.W. & Ly, A.H. The impact of scale of operation on financial performance in microfinance. Eurasian Econ Rev 4, 177–198 (2014). https://doi.org/10.1007/s40822-014-0011-4

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