Financial Inclusion, Deepening and Efficiency in Microfinance Programs: Evidence from Bangladesh

The economic literature provides evidence that growth is associated with positive performance of the financial sector. This aspect is particularly important for developing countries. This study aims to investigate whether, in an environment of growing competition and regulation, the maintenance of their social mission may have led microfinance institutions (MFIs) to compromise their performance, in terms of efficient production of credit services. To this purpose, we use a two-stage approach to analyze the relationship between outreach and efficiency of MFIs in Bangladesh. In the first stage, a dynamic data envelopment analysis is exploited to measure the efficiency of MFIs from 2009 to 2014. The results show that most of the MFIs are operationally inefficient over the period, suggesting a considerable potential for future improvement. In the second stage, the study examines the potential trade-off between MFIs’ commitment to financial inclusion and depth of outreach on the one hand and efficiency on the other hand, using a double bootstrapping methodology that helps in limiting the problems arising from the endogenous nature of the measures of outreach with respect to efficiency. The results show that financial inclusion is positively associated with MFIs’ efficiency, whereas the relationship between deepening and efficiency turns up negative, providing partial evidence in support of ‘mission drift’ in the Bangladesh microfinance industry. This may be indicative of the fact that MFIs with stronger commercial objectives have expanded their business and their margins of efficiency to compete with other intermediaries. In contrast, the MFIs with a more intense social strategy may have suffered a decrease in their operating efficiency in order to maintain their social mission. Policy implications point towards a greater degree of awareness on the part of the regulatory authorities of the consequences of imposing constraints on the operating mechanisms of the microfinance industry, such as interest rate caps. We also suggest that rules disciplining competition should not be uniform, but rather tailored to specific outreach indicators.