Evaluating financial and social efficiency of microfinance institutions in Afghanistan: A two stage data envelopment analysis

Abstract

Introduction Although Afghanistan witnessed exponential growth in its economy since 2002, it remains one of the world’s poorest countrie. It was ranked 169 out of 187 countries in the Human Development Index in 2013, and it is estimated that 36 percent of its population lives below the national poverty line. The country’s financial sector is largely underserved, with only 9 percent of adults holding an account at a formal financial institution and 7 percent having a loan. On the other hand, microfinance is found to be a promising means of poverty alleviation and economic development as such. In this paper, we have attempted to evaluate the financial and social performance of MFIs in Afghanistan using a two stage Data Envelop Approach (DEA). In the existing literature DEA is applied under both production and intermediation approach assuming either CRS or VRS assumptions. Bassem (2008) by analyzing the performance of MFIs in the Mediterranean zone applying DEA found that a few Non-Bank Financial Institutions (NBFIs) should reduce the size of their operation but some NGOs are required to increase the extent of their operations to operate more efficiently. Haq et al., (2010) evaluated the cost efficiency microfinance institutions across Africa, Asia and the Latin America using DEA. They found that NGOs are the most efficient MFIs specifically under production approach. Kipesha (2012) examined the performance of MFIs in five East African countries by employing DEA. Input oriented production approach under both assumptions of CRS and VRS have been used. The result of the study implies that main source of efficiency is TE and it further implies that banks are more efficient than nonbank MFIs. Jayamaha (2012) analyzed the efficiency of small financial institutions (SFIs) in Sri Lanka using DEA. The study reveals that there is difference in efficiency scores by geographical locations and the size and the efficiency are positively correlated. Singh et. al. (2013) studied the efficiency of MFIs in India by undertaking a two stage DEA approach using both intermediation and production approach. The study concluded that two MFIs are efficient under CRS and three MFIs under VRS and there is a regional variation in efficiency score too. Ahmad et.al (2014) evaluated the efficiency of MFIs in south Asia including 14 MFIs from Afghanistan. The study implies that Non-Bank Financial Institutions (NBFI) and credit union of large size should cut down the size of their activity in order to improve efficiency. NGO should increase the size of operation whereas rural bank should increase accessibility and loan size for the clients in pursuit of attainment of dual objectives.