Denis A. Nadolnyak

Microfinance and Microenterprises’ Financing Constraints in Eastern Europe and Central Asia

We study whether microfinance institutions (MFIs) have improved the availability of credit to microenterprises in Eastern Europe and Central Asia (ECA) in the first half of the past decade. Our approach is different from that of a typical microfinance impact study, which focuses on evaluating social or economic impact of a single MFI (or product). Our motivation is closer to the financial sector development microfinance ‘schism’ that requires MFIs to lend to poor entrepreneurs who already have the skills and the markets but lack credit (Conning, 1999). Countries in the ECA region are appropriate for such an approach because, during the study period, they had an educated but impoverished population and limited credit supply.

A Cost Function Approach to MFI Efficiency: The Role of Subsidy and Social Output Measures

Microfinance institutions (MFIs) strive to reach many poor clients while remaining financially sustainable. Most MFIs have quasi-equity owners who expect the organization to be financially self-sufficient, but do not necessarily expect competitive return on their equity. This chapter analyses the efficiency in MFIs by developing a model to identify the optimal MFI size that takes into account the outreach and the sustainability aspects of MFI performance. Moreover, we assess how results vary when we account for the cost of capital subsidy, measured by the opportunity cost of equity. Since MFIs across the world operate in diverse environments, we also estimate optimal MFI size by region and control for a number of internal and external characteristics. By identifying the optimal size of an MFI based on its location and other characteristics, this research could help donors understand the role of size in MFIs’ performance and help practitioners cut costs and achieve their social mission.