Subsidy efficiency in microfinance

The microfinance sector has been growing rapidly in the last couple of years. An important attribution to the rise of these growth rates is the financial support Microfinance Institutions (MFIs) have received from private and public donors. Yearly, more than 1 billion USD of subsidies and donations is being attracted by the microfinance sector, yet research with respect to the effect of these funds on the performance of the MFI is limited. This research uses a Stochastic Frontier Analysis (SFA) to analyse the relationship between the subsidy reliance of a MFI and its cost-efficiency, using panel data of 203 MFIs from 49 different countries within a period of 8 years (2006-2013). It is shown that there is no significant relationship. Other factors such as the control of corruption in a country, the political stability, the average loan size and the percentage of female borrowers, all do have a significant positive effect on MFIs cost-efficiency. These are important findings for public and private policy makers.