Mission Efficiency Analysis of For-Profit Microfinance Institutions with Categorical Output Variables

Abstract

The primary objective of microfinance institutions (MFIs) is to provide financial services to low-income clients and underprivileged women. As such, evaluating the efficiency of MFIs should take into account categorical output factors such as outreach and financial intermediation, rather than using the same metrics applied to traditional banks and credit unions. However, under adverse economic situations, one can expect the phenomenon of mission drift of for-profit MFIs such as microfinance banks and credit unions. When a mission drift occurs, MFIs intend to entertain wealthier clients to maximize profits, crowding out the poor ones. This paper empirically examines if such a phenomenon was observed during the global financial crisis period in Latin America and the Caribbean region using categorical Data Envelopment Analysis (DEA) data that have not been considered for the analysis of MFI efficiency. In addition, we conducted two-limit Tobit regression to find significant factors for MFI efficiency. We confirm that for-profit MFIs did not experience mission drift during the adverse economic situation while country, disclosure requirements, institutions’ age, and scale affected the efficiency of the for-profit MFIs. This indicates that for-profit MFIs in Latin America and the Caribbean region performed well in terms of their missions for micro-finance such as outreach, financial intermediation, as well as profit. The financially underprivileged faced a lack of household and business capital under the economic crisis. Based on the results, we conclude that support policies for younger and non-traditional MFIs to help the socially disadvantaged should be actively established for their sustainability in adverse economic situations.