Financial Development and the Efficiency of Microfinance Institutions

29 Pages Posted: 4 May 2009

See all articles by Niels Hermes

Niels Hermes

University of Groningen - Faculty of Economics and Business

Robert Lensink

University of Groningen - Department of Economics, Econometrics and Finance; Wageningen UR - Development Economics Group

Aljar Meesters

University of Groningen - Faculty of Economics and Business

Date Written: March 2009

Abstract

This paper investigates whether the country-level financial environment in which microfinance institutions (MFIs) have to work affects their operations. In particular, we argue that the efficiency of MFIs is determined by the extent to which financial markets of countries are developed. On the one hand, well-developed financial markets provide an environment in which MFIs are able to flourish and increase their efficiency. On the other hand, however, well-developed financial markets may also substitute for MFIs, which reduces demands for their services, thus potentially reducing their efficiency. Given the fact that the relationship may go both ways, we empirically investigate the direction of the relationship between measures of financial development and measures of MFI efficiency, using data for 435 MFIs over the period 1997-2007.

Keywords: microfinance, financial development, SFA

JEL Classification: G21, O16, I39, C49

Suggested Citation

Hermes, Niels and Lensink, Robert and Meesters, Aljar, Financial Development and the Efficiency of Microfinance Institutions (March 2009). Available at SSRN: https://ssrn.com/abstract=1396202 or http://dx.doi.org/10.2139/ssrn.1396202

Niels Hermes (Contact Author)

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

Robert Lensink

University of Groningen - Department of Economics, Econometrics and Finance ( email )

P.O. Box 800
9700 AH Groningen
Netherlands

Wageningen UR - Development Economics Group ( email )

Hollandseweg 1
WAGENINGEN, 6706 KN
Netherlands

Aljar Meesters

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

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