How Efficiently are the Ethiopian MFIs Extending Financial Services to the Poor? A Comparison with the Commercial Banks

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Addis Ababa University


This study investigates how efficiently the MFIs are extending the frontier of financial intermediation by comparing their cost efficiency with that of the commercial banks using an unbalanced panel data of 21 firms (14 MFIs and 7 commercial banks) in Ethiopia over the period 2001-2008. The study used both non-structural and structural approaches to efficiency measurement. The non-structural approach is based on the interest rate margin analysis, while the structural approach utilizes the stochastic frontier technique to estimate the cost efficiency of the MFIs and commercial banks. Both approaches resulted in same finding that the intermediation efficiency of the Ethiopian MFIs is by far less than that of the conventional commercial banks. Especially, the result from the stochastic frontier estimation (in which the heterogeneities in the working environments have been controlled for) indicates that the Ethiopian MFIs are, on average, 29.8 percent less cost efficient than the commercial banks. Hence, the efficiency gap is not attributed to differences in the working environments between the two groups. However, the study indicates that some of the MFIs such as ACSI, SFPI and DECSI have cost efficiency scores comparable to the commercial banks. Despite this wide gap, the study notes that there is a more or less fast tendency for convergence between the cost efficiency of the two groups. Age of firm, branch networks, average loan size, average deposit size, risk-taking tendency, the share of commercial funds in the total outstanding loans and flexibility in lending scheme are found to enhance cost efficiency of the financial intermediaries, while firm size and market concentration are found to adversely affect cost efficiency. Lastly, the study recommends that the firms should introduce flexibility in their lending scheme (especially for the commercial banks), should avoid excessive risk-aversion, and focus on commercial funds as a major source of loanable fund. Also, the regulators should work towards creating a more competitive market and keeping regulations dynamic enough to make them in line with changing socio-economic settings to enhance the cost efficiency of the financial intermediaries in Ethiopia.



Efficiently are the Ethiopian