Cost Efficiency and Outreach of Microfinance Institutions in Ethiopia: Do They Contrast with Financial Cooperatives?

Abstract

Using a stochastic frontier approach, we analyse the imposition of financial sustainability requirement on the traditional social mission of microfinance – outreach to the poor. We also address whether the way ownership is organised and practiced affects the costs of microfinance delivery. Based on a disaggregated 107 sample microfinance providers in Ethiopia, the results suggest that outreach to the poor and achieving financial sustainability (as measured by cost efficiency) are contradictory objectives. Microfinance providers that are closer to the best practicing cost frontier are those with higher average loan sizes and lower proportion of women borrowers. The results also indicate that financial cooperatives are better in cost containment compared to specialised microfinance institutions.

Keywords: Microfinance, financial cooperatives, cost efficiency, outreach, trade-off, Ethiopia

JEL Classification: Q12, Q13, Q16