The aim of this research has been to analyse how the method employed for lending can affect the cost efficiency of microfinance institutions (MFIs) since innovations for lending have been introduced in the sector in the last years and there are not empirical studies to analyse the actual impact of it. The improvement of MFIs' cost efficiency is very important for these institutions to achieve their financial self-sufficiency and be sustainable in the long run. The data employed in this analysis have been an unbalanced panel composed of a sample of 1017 MFIs for the 2008–2018 period and collected from the microfinance information exchange (MIX) database. Our results also show that community or group-lending methods, as village banking and solidarity groups, have a positive effect on the MFIs’ cost efficiency versus traditional methods based on individual lending. In addition, we have found that MFIs with a higher proportion of borrowers in rural areas are more cost efficient than institutions with more borrowers in urban areas, although community or group-lending methods have a larger positive effect on MFIs’ cost efficiency in urban than in rural areas.
Policy Implications
- Community or group-lending methods are effective methods for MFIs to control their costs and be more efficient.
- There is not a significant difference in cost efficiency when the method of village banking or solidarity group is employed.
- MFIs operating in rural areas are more cost efficient than operating in urban areas regardless of the lending method.
- It would be very important for the economic sustainability of these institutions to increase the use of community or group-lending methods in urban areas.
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