A review of the microfinance literature has revealed the fact that despite the large number of potential advantages, the use of DEA for performance evaluation of MFIs has been restricted to a relatively limited number of studies. An overview of the a few main studies that have used DEA for analysing the performance of MFIs is provided hereafter.
One of the initial DEA based studies for performance evaluation of MFIs was undertaken by Qayyum and Ahmad (2006). This study compares performance of MFIs from three countries; Pakistan, India and Bangladesh, based on data from the MIX Market website23. This study is quite thorough in terms of various discussions related to model specification and discussion of results. However, inclusion of a single output (loans disbursed) implies that this study has completely ignored the financial performance of selected MFIs, focusing instead on social performance alone.
Another noteworthy study in this area has been conducted by Gutiérrez-Nieto et al. (2007) that also uses data from the Mix Market website for 30 MFIs from Latin American region. Gutiérrez-Nieto et al. (2007) obtain DEA scores for all possible combinations of input and output variables. The scores obtained are then used to conduct principal component analysis. Choice of the variables for this study relies on the framework developed by Yaron (1994) for rural financial institutions. The study focusses on specification search methodology and a discussion of statistical analysis.
23 MIX Market website is maintained by Microfinance Information Exchange that is a non-profit organization. This website provides data on financial and social performance indicators, for a large number of MFIs across the world.
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A study conducted by Bassem (2008) uses MIX Market data for analyzing the performance of 35 Mediterranean MFIs. A major drawback of this study relates to the inadequate and often confusing language used while providing explanation of model specification and results’ discussion. Consequently, it becomes rather difficult to
understand the exact meaning of whatever information is intended to be communicated. In addition, a need for more rigorous literature review is also felt.
Gutiérrez-Nieto et al. (2009) have conducted another DEA based study on 89 MFIs, for which data has been obtained from the MIX Market website. This study looks at both the financial and the social performance of MFIs, through a single model. In this study, a new index of poverty reach is proposed for capturing the social dimension of MFIs’ performance, in addition to the more commonly used indictor of female clients.
While the aforementioned studies have been able to provide useful information related to the performance of MFIs, certain problems related to these studies can be identified. The first problem with the current DEA based studies in microfinance is that almost all of these studies have used data available from the MIX Market. Although, MIX Market website is reported to be one of the biggest sources of data; use of this data may involve certain issues, having repercussions for the resulting performance evaluations. For example, the institutions whose data is reported on this website are restricted to be specialized institutions; with at least 90 % of their activity focusing on microfinancing. This implies exclusion of any multi-purpose institutions, for which microfinance does not represent 90% of their activity; even if these institutions are making significant contribution towards development of microfinance sector of any country. A good example of this can be found in the form of the Rural Support Programme of Pakistan, which is not represented on MIX Market website, despite the fact that this MFI is an influential player in the microfinance sector of Pakistan. Therefore, the institutions that
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are not represented on MIX Market website are excluded from all those analyses that rely on this website for data. As a result, MIX Market website may be unable to capture the full spectrum of the actual microfinance activity.
Another problem observed for the MIX Market data is the fact that institutions represented on this website are those that voluntarily decide to submit their data. Such voluntary reporting has the potential to introduce self-selection bias, in addition to casting doubt on the reliability of the data obtained from MIX Market24 (Assefa et al., 2013). It is also observed that institutions whose data is reported on this website tend to be among the best performers. This carries certain implications for the performance evaluation of MFIs, as data gathered from MIX Market website may be unable to capture the whole range of MFIs’ performance, instead focusing on the best performers only (Lapenu and Zeller, 2001).
Yet another problem observed for existing DEA based studies in the area of MFIs’ performance evaluation is that most of these studies have used cross country data. While the prospect of getting data from several countries seems attractive in terms of making international comparison; there exist a number of significant differences, related to the working of MFIs in various parts of the world that should be given special consideration when conducting cross country studies (Milana and Ashta, 2012). Cross country data is reported to face problem of heterogeneity due to differences in accounting practices, tax and regulatory advantages, economic environment, labour market conditions, and relative growth of various national economies (Baumann, 2005). It is also reported that due to different environments, it may be easier (or harder) for MFIs located in different countries to achieve their performance targets (Ahlin et al., 2011). Moreover, the level of financial inclusion varies considerably across different
24
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countries and regions, leading to differences in loan sizes, repayment structures and product portfolios of MFIs working in different areas. The possibility of such difference overshadowing the actual performance differences in institutions situated in different countries requires caution in interpreting results of cross country studies (Benston, 1994).
A final limitation observed for most of the studies reviewed, is the general lack of necessary details about various DEA model specification issues. Due to such lack of discussion about major considerations and justification for selection of appropriate returns to scale assumptions, underlying orientation and other model specification issues; these studies leave considerable gaps in developing understanding about how to evaluate performance of MFIs through DEA technique.
To the best of our knowledge, so far no one has attempted to explore the full potential of DEA technique within a microfinance context. The current study thus aims to fill this gap in literature, by developing a comprehensive DEA based framework for analysing MFIs’ performance; both from outreach and sustainability perspectives25
. Moreover, the study also demonstrates application of a novel approach, known as the trade-off approach26; as a means of improving standard DEA models by making them better informed, as well as increasing their discriminatory power.
25 The proposed framework is discussed in Chapter 4.
26 A review of the DEA methodology, along with a detailed explanation of the trade-off approach, is provided in Chapter 3.
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