Endogenous Scope Economies in Microfinance Institutions

36 Pages Posted: 21 Jun 2018

See all articles by Emir Malikov

Emir Malikov

University of Nevada, Las Vegas

Valentina Hartarska

Auburn University - Department of Agricultural Economics and Rural Sociology; Auburn University - Department of Finance

Date Written: May 25, 2018

Abstract

Scope economies resulting from the joint offering of loans and savings accounts (as opposed to loans only) are customarily invoked to promote the transformation of credit-only microfinance institutions (MFIs) into integrated loans-and-savings entities. To ensure robust inference, we estimate scope economies for the microfinance industry using a novel approach which, among its other advantages, accommodates inherent heterogeneity across loans-only and loans-and-savings MFIs as well as controls for endogenous self-selection of institutions into the either type. For analysis, we use a large 2004-2014 Mixmarket dataset. Unlike earlier studies, we do not find prevalent scope economies in the microfinance industry. We find that the median degree of scope economies is statistically indistinguishable from zero and that scope economies are significantly positive for less than a half of loans-and-savings MFIs. For a non-trivial 14% of institutions, the empirical evidence suggests the existence of significantly negative diseconomies of scope indicating that the separate production of loans and savings accounts actually has the potential to reduce an MFI's costs. We also find that the failure to account for endogenous selectivity dramatically overestimates the degree of scope economies resulting in the failure to detect scope diseconomies among MFIs. Thus, our findings call for caution when invoking scope economies as a blanket justification for universal expansion of the scope of financial operations by MFIs. Instead, promoting integrated loans-and-savings MFIs may be justifiable as a means to meeting the needs of the poor rather than as a way for the industry to save costs.

Keywords: microfinance institutions, scope economies, endogenous selection, financial intermediation, savings and lending

JEL Classification: G15, G21, O16, L33

Suggested Citation

Malikov, Emir and Hartarska, Valentina, Endogenous Scope Economies in Microfinance Institutions (May 25, 2018). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3197907

Emir Malikov (Contact Author)

University of Nevada, Las Vegas ( email )

4505 S. Maryland Parkway
Las Vegas, NV 89154
United States

Valentina Hartarska

Auburn University - Department of Agricultural Economics and Rural Sociology ( email )

Comer Hall
Auburn, AL 36849
United States

Auburn University - Department of Finance ( email )

Auburn, AL 36849
United States

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