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Determinants of Total Factor Productivity in Microfinance Institutions: Evidence from Bangladesh

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Microfinance for Entrepreneurial Development

Abstract

This chapter aims to evaluate productivity and determinants of productivity in microfinance institutions (MFIs) to support the ongoing debate on sustainability in the microfinance industry. Hence, the longitudinal data of 169 MFIs, covering the period from 2009 to 2014, were collected from the Microcredit Regulatory Authority annual reports in Bangladesh . This study used the two-stage semi-parametric approach. In the first stage, the Malmquist Productivity Index (nonparametric) was employed and it was found that the microfinance industry in Bangladesh observed an average of 3.6% productivity progress per annum, with a declining trend towards the end of the study period. In the second stage, the regression analysis (parametric) showed that institutional characteristics, macroeconomic factors and external sources of funds significantly affect productvity of MFIs. Findings and policy implications are further discussed.

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Acknowledgements

The author is very grateful to his supervisor Assoc. Prof. Dr. VGR Chandran and Dr. Lee Hwok-Aun for their helpful guidance in the process of completing this manuscript. The author also appreciates feedback from the anonymous reviewer and Dr. Yizhe Dong. Informal academic discussions with Zhang Cheng (Dana), Hasanul Banna and Sohel Rana are very much appreciated. The author is currently serving as a research intern at South Asia Regional Department (SARD), Asian Development Bank, Philippines. All remaining errors are my own.

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Appendix A: Determinants of Total Factor Productivity (TFP)

Appendix A: Determinants of Total Factor Productivity (TFP)

 

Fixed Effect Model

Fixed Effect Model

Truncated Regression

Truncated Regression

Institutional Characteristics

   

LNAGE

0.0287

0.0044

0.0055

0.0056

 

(0.0163)

(0.0131)

(0.0103)

(0.0103)

LNAGE2

 

−0.0041*

 

0.0001

  

(0.0016)

 

(0.0021)

ROA

0.0113***

0.0114***

0.0078***

0.0078***

 

(0.0018)

(0.0017)

(0.0012)

(0.0012)

LNBRANCH

−0.1007**

−0.1023**

−0.0070*

−0.0071*

 

(0.0314)

(0.0305)

(0.0036)

(0.0037)

LOC

a

a

−0.0160

−0.0160

   

(0.0105)

(0.0105)

Macroeconomic Factors and Regulatory Variables

  

INF

0.0033

0.0044

0.0017

0.0017

 

(0.0050)

(0.0050)

(0.0060)

(0.0060)

GDPGR

0.0346**

0.0322*

0.0369*

0.0369*

 

(0.0131)

(0.0129)

(0.0210)

(0.0211)

WGI

−0.2301***

−0.2165***

−0.2335**

−0.2335**

 

(0.0248)

(0.0277)

(0.1176)

(0.1176)

INTCP

-0.0367**

−0.0290**

−0.0460**

−0.0460**

 

(0.0113)

(0.0099)

(0.0198)

(0.0198)

External Sources of Funds

   

PKSF

0.0018**

0.0018**

0.0006***

0.0006***

 

(0.0005)

(0.0005)

(0.0002)

(0.0002)

GOVT

−0.0007

−0.0008

0.0011

0.0011

 

(0.0017)

(0.0016)

(0.0011)

(0.0011)

DON

0.0026

0.0028

0.0001

0.0001

 

(0.0028)

(0.0028)

(0.0009)

(0.0009)

MFIB

0.0003

0.0004

<-0.0001

<−0.0001

 

(0.0024)

(0.0024)

(0.0012)

(0.0013)

BANK

0.0015**

0.0015**

0.0013**

0.0013**

 

(0.0005)

(0.0005)

(0.0006)

(0.0006)

Constant

0.6951***

0.7900***

0.5924***

0.5921***

 

(0.1028)

(0.0875)

(0.1213)

(0.1224)

N

1009

1009

1009

1009

R 2

0.0975

0.0824

  

F

107***

28***

  

Wald Chi 2

  

90.40***

90.46***

# of Replications

  

2000

2000

  1. Source Author’s. Standard errors in parentheses * p < 0.10, ** p < 0.05, *** p < 0.01
  2. Note aFixed effect model does not take into the account of time-invariant factors. Note: AGE is demeaned when estimating LNAGE2. Dependent variable also winsorized at 1% and 99%
  3. The fixed effect model is estimated based on the approach of Hoechle (2007)

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Mia, M.A. (2017). Determinants of Total Factor Productivity in Microfinance Institutions: Evidence from Bangladesh. In: Cumming, D., Dong, Y., Hou, W., Sen, B. (eds) Microfinance for Entrepreneurial Development. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-62111-1_10

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  • DOI: https://doi.org/10.1007/978-3-319-62111-1_10

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