Assessing the Cost Efficiency of Microfinance Institutions in Ghana: An Application of Stochastic Frontier Approach

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The aim of this study was therefore to assess the economic efficiency of microfinance institutions using the case of Ghana from 2007 to 2010. The use of the Stochastic Frontier Approach was employed as the main research technique to estimate efficiency. In all, 73 MFIs were sampled across the industry upon whose financial data, a Cobb-Douglas cost frontier and cost efficiency ratios were first estimated. The units were rated on levels of good financial performers, and worst financial performers. The study obtained an overall mean for economic efficiency to be 58.40% with most units having efficiency ratios falling between 51-60%. Although, efficiency scores were low, the displayed results showed an incremental increase in annual efficiency scores; indicating an improvement in technology in the financial sector. Also, it was found that the age of the microfinance institution is a significant determining factor of efficiency in Ghana due to the presence of a positive learning curve. The main conclusion extracted from the analysis was that MFIs in Ghana are operating below their optimal scale capacity as none of the sampled units was either economically or technically efficient. However, there was an evidence of a good scope of outreach. It is recommended that MFIs must invest resources and adequate time into the training of staff and clients before new programmes, credit schemes and policies are implemented.
A thesis submitted to the Department of Economics, Kwame Nkrumah University of Science and Technology in partial fulfillment of the requirements for the degree of MASTER OF ARTS Faculty of Social Sciences, College of Art and Social Sciences.