Advancing microfinance performance: a multi-perspective study on productivity dynamics, efficiency and green microfinance

Microfinance is an innovative approach of providing diverse range of financial services to the non-bankable society. As hybrid organisations with double bottom line objectives of meeting social needs and maintaining financial sustainability, Micro Finance Institutions (MFIs) can be classified within financial and developmental sector. This leads to a convolution in evaluating the performance of MFIs. More precisely, the social and financial objectives of MFIs can be complementary, substitute or unrelated. To capture this complexity, scholars progressively apply new techniques of performance evaluation. More recently, Data Envelopment Analysis (DEA) has gained a specific attention amongst microfinance scholars since it can construct a benchmark of best practices (most efficient MFIs) using multiple variables that enables researchers to portray the multi-faceted nature of MFIs operational performance. Application of DEA has helped microfinance policy makers and practitioner make more tactical managerial decisions. Especially recently, the need for more effective resource allocation has surged due to the reduction of donors’ funds, changes in microfinance regulation systems and increase of competition. By applying advanced DEA methods and a further delve into their interpretation, this thesis aims to provide strategic insight onto the evaluation of MFIs operational performance using novel DEA methods, multidimensional perspective and with the consideration of most recent advances in microfinance, which are categorised into advance in three groups of 1) the application of new technologies, 2) globalisation and regulatory transformations and 3) the movement towards green microfinancing. For this purpose, this thesis has addressed three sets of questions on the evaluation of MFIs multidimensional performance in the form of three journal articles.

In the first paper, we apply bootstrap DEA-Malmquist Index to analyse the productivity dynamics of 372 MFIs across six regions during 2010-2015. The main contribution of this paper is that relying on our utmost unbiased method, microfinance decision makers can compare the productivity growth, efficiency improvement and technological advances of MFIs across different regions, in both financial and social aspect of performance. This enables microfinance policy makers make more strategic policies in terms of resource reallocation or technological implication, customised to their profit or social orientation and locational constraints. This is done by extending bootstrap approach to DEA-Malmquist Index that empowers us to compare the dynamics of microfinance across the world and free from sample size bias that prevented past studies from conducting similar regional analyses. Also, this study is the first that in the global scale, measure the social and financial productivity growth of MFIs, decompose the technological and efficiency sources of productivity growth, and examine the macroeconomic and MFI-specific determinants of productivity change.

In the second paper, we employ bootstrap meta frontier DEA to a sample of 462 MFIs across five regions in 2015 to shed light onto the locational and legal heterogeneity amongst MFIs. This paper contributes to the body of microfinance knowledge and practice through the application of bootstrap technique that provides an unbiased and accurate insights into the efficiency of MFIs relative to their locational and legal peers. More precisely, we offer a new understanding on the impact of locational and legal barriers on the efficiency of MFIs to empower microfinance scholars in managing their scarce resources considering both their capacities and capabilities.

The main novelty of this paper is analysing the legal status heterogeneity along with the locational heterogeneity by using bootstrap meta frontier DEA. In this way, we provide a further insight into the level of access to best production possibilities that MFIs in different regions and with different legal status have. Therefore, we demonstrate that comparisons between MFIs’ regional and legal aspects should involve the consideration of heterogeneity in the production function sourced in legal and locational barriers. In the third paper, we address one of the most prevalent constraints in studying the efficiency of green microfinancing, which is small number of MFIs that practice and report data on their green activities. This is done by applying bootstrap DEA to overcome the sensitivity bias of small sample size. We analyse the impact of efficiency on the environmental activities of 49 Indian MFIs during 2010-2015. Our study is one of the very few studies in the field of green microfinance. More importantly, we add to the body of research by examining both current and future impact of social and financial efficiencies on the level of environmental integration of MFIs, so that any lagged effect is captured. This paper has practical implication not only for green MFIs, also for MFIs that are yet to implement triple bottom line objective by understanding the current and future impact of green microfinancing on their social and financial stand.