Research & Analysis

Efficiency Drivers of MFIs: The Role of Age

Microfinance institutions (MFIs) are becoming more efficient. Operating expenses are the most important cost component of MFIs. Institutional efficiency is generally measured by dividing operating expenses by the size of the loan portfolio. An MFI is usually regarded as having become more efficient when it lowers this indicator.

Data clearly show that every single cohort of MFIs has been able to continually improve efficiency over time. This development is very good news for the microfinance industry as a whole. It may be even likely that efficiency improvements are systematically understated because, over the past years, many MFIs have spent an increasing proportion of operating expenses on noncredit activities like savings services, insurance, and money transfers. Thus, the actual improvement in credit efficiency would be even greater than what these numbers tell.

One big question for the future of the sector is how low can costs go before they level off. In profitable MFIs, operating costs account for roughly half of interest yields (Rosenberg, 2009), and thereby they represent the biggest cost block. Whether there is much potential for reduction of operating costs remains to be seen.