Efficiency of Microfinance Institutions in East Africa: A Data Envelopment Analysis

Abstract

This study evaluates the efficiency of Microfinance institutions operating in East African using non parametric approach (Data Envelopment Analysis).  The study used production approach to estimate efficiency scores of 35 MFIs under both constant and variable returns to scale. The results show that, MFIs in East Africa have higher efficiency scores in average. The average technical efficiency scores were 0.706 (2009), 0.798 (2010) and 0.852 under constant return to scale and 0.823, 0.892 and 0.891 under variable return to scale for three years respectively. The average efficiency trend was found to be positive with low efficiency scores in 2009 and high scores in 2011. The numbers of MFIs at efficient frontier line under both returns to scale were 5, 8 and 11 in 2009 to 2011respectively. The findings also show that, on average the banks and non bank financial Institutions were more relatively efficient compared to NGOs and Cooperatives while the country efficiency averages show that, Kenya and Rwanda had higher average efficiency scores for three years under constant return to scale while Tanzania and Uganda have higher average efficiency scores under variable return to scale. The study recommends that, MFIs in the area should improve their efficiency by better allocation of input resources used and reduction of the amount of waste, since most of the inefficiency was found to be technical in nature.

Keywords: Microfinance Institutions in East Africa, Efficiency, Data Envelopment Analysis (DEA)