Total Factor Productivity Change of Ethiopian Microfinance Institutions (MFIs): A Malmquist Productivity Index Approach (MPI)

Abstract

By employing the Malmquist productivity index this study attempts to examine the total factor productivity change in the Ethiopian micro finance institutions (MFIs) using a balanced panel dataset of 114 observations from 19 micro finance institutions over the period 2004-2009. The selection of inputs and outputs for the study is based on the dual objectives of MFIs viz outreach and sustainability framework which is in line with the prior study of (Gutierrez et al 2007, 2009). Consequently, we specify two inputs and three outputs; the number of employees, and operating expenses are specified as inputs whereas the outputs are interests and fee income, gross loan portfolio, and number of loans outstanding (number). The result of the study indicated that over the period the malmquist productivity change experienced by the micro finance industry as a whole has averaged 3.8 % annually. With the exception of the year 2004-2005 (slight decline in productivity, which was 0.2 percent) the micro finance industry has reported productivity progress in the study period(i.e productivity rose of 5.5 percent, 5.8 percent,0.3 percent and 7.7 percent in the years 2005-2006, 2006-2007, 2007-2008 and 2008-2009 respectively. It is apparent from the analysis that the main source of total factor productivity (TFP) growth for the MFIs was attributed to the technical efficiency change(10.1 percent increase) as the result depicted that 16 out of 19 MFIs ( about 84 %) has shown improvement in technical efficiency changes. In contrast, only 5 out of 19 (26.3%) MFIs have shown improvement in technological change but still the industry as a whole has exhibited a decline in technological change (5.8 percent decrease over the period) and suggested that there has been a deterioration in the performance of the best practicing micro finance institutions. Further the result showed that pure technical efficiency increased by 8.9 percent while scale efficiency contributed on average 1.1 percent increase and hence suggested that during the study period the Ethiopian MFIs have experienced mainly an increment of pure technical efficiency( improvement in management practices) rather than an improvement in optimum size(scale efficiency change). Generally, an important implication for the Ethiopian micro finance industry is that they need to pursue a technological progress in order to meet the dual objectives of reaching many poor people and financial sustainability.

Key words: Productivity Change, Malmquist Productivity Index, Ethiopian MFIs,