EFFICIENCY DYNAMICS OF MICROFINANCE INSTITUTIONS: A DATA ENVELOPMENT APPROACH

Abstract

The efforts have been in the study to assess the effectiveness of 30 Microfinance Institutions (MFIs) in four areas using Data Envelopment Analysis (DEA) through returns to scale (RTS), scale efficiency (SE), pure technical efficiency (PTE) and overall technical efficiency (OTE). The findings describe that majority of MFIs experience varied degrees of inefficiency, while only one-third run at maximum efficiency. Several MFIs in the inefficient group exhibit great management skills, however they also have scale inefficiencies, which suggests that production efficiency has decreased as a result of expansion beyond ideal size. More than half of the DMUs have dual inefficiencies, which are connected to both technology and scale. This suggests that operational design, governance and resource allocation are structurally flawed. The prevalence of diminishing returns to scale (DRS) highlights the structural concerns of uneven growth tactics. The policy implications include comparing successful MFIs to best-practice models, encouraging strategic restructuring to align operations with productive scales and supporting capacity-building programs. Regulators are advised to develop frameworks that promote sustainable growth while maintaining efficacy. The findings demonstrate the importance of sector-wide learning, efficiency tracking and balanced growth in enhancing MFIs' long-term sustainability and impact.