Efficiency, Productivity, Risk and Profitability of Microfinance Industry in Pakistan: A Statistical Analysis

This paper analyzes the major issues facing the microfinance sector in Pakistan including efficiency, productivity, credit risk, and profitability using an ordinary least square (OLS) regression model. The focus of the analysis is to identify the key drivers of these indicators within a theoretical model using the available quantitative data gathered by the Pakistan Microfinance Network. The paper also provides a comparison of regulated microfinance providers (MFPs) and unregulated MFPs in terms of their organizational performance. Key findings of the study include:

• MFPs can lower their expense ratio and become efficient by realizing economies of scale;
• Productivity of MFPs is affected by lending methodologies and efficiency. Using a combination of both group and individual lending methodologies results in higher productivity for MFPs. In addition, organizations that have lower expense ratio are also more productive;
• Credit risk decreased with increase in outreach which is opposite to the prevailing view that higher growth leads to increase in credit risk. The study also found that group lending practices lowered credit risk;
• Profitability of MFPs increased with the growth in outreach, whereas asset utilization had no impact on profitability.