Distinguishing efficiency from heterogeneity in microfinance institutions: the role of gender and competition

This study aims to re-examine the impact of specialization in lending to women and the degree of competition on the inefficiency of microfinance institutions (MFIs), in order to reconcile divergent empirical results within the West African Economic and Monetary Union and Economic and Monetary Community of Central Africa. One possible explanation for these contradictions is the distinction between unobserved heterogeneity and MFIs’ efficiency level which has not previously been accounted for. To test this idea, we apply the method developed by Wang and Ho (2010), which distinguishes heterogeneity from inefficiency. Specifically, we use the stochastic frontier approach to estimate a translog cost function for a sample of 122 MFIs operating in 12 countries over the period 2003–18. We decompose operational expenses into administrative, personnel, and depreciation expenses to estimate loan production technology. The results highlight that MFIs that specialize less in lending to women have higher cost efficiency and that competition is associated with decreased cost efficiency.