Production and Intermediation Efficiency of Microfinance Institutions in Tanzania

Abstract

This study aims at evaluating technical efficiency of microfinance institutions operating in Tanzania, as both the producer of loans to poor clients and as intermediary institutions for the poor clients. The study used unbalanced panel data for three years 2009-2011 with a sample of 29 Microfinance institutions. The findings of the study indicate higher average technical efficiency under production efficiency and lower technical efficiency under intermediation efficiency. The average technical efficiency scores were 0.7796, 07731 and 0.8586 under production efficiency and 0.05, 0.1321, 0.2531 under intermediation efficiency for the three years respectively. Most of inefficiencies in MFIs were a result of inappropriate allocation of inputs or operating at inappropriate scale as the average efficiency scores were high under pure technical efficiency as compared to scale efficiency while most of the inefficient firms were operating under decreasing return to scale. The results by status show that NGOs and NBFIs were the best performers in both production and intermediation efficiency contrary to most of the empirical findings. The study recommends that MFIs in Tanzania should reduce their operating cost, increase their revenues and improve their resource allocation in order to improve their intermediation efficiency since it present their main objective which is outreach to the poor and low income household.

Keywords: Production Efficiency, Intermediation Efficiency, Microfinance Institutions