Cost Dynamics of Microfinance Institutions with Rural and Urban Loan Portfolios

This study investigates cost dynamics of Microfinance Institutions (MFIs) engaged in joint production of rural and urban loans. Employing a translog cost function, the paper examines economies of scale, cost complementarities, and elasticities of substitution using three MFI categories: those offering both deposits and loans (Dep-MFIs), those offering only loans (Non Dep-MFIs), and the aggregate sample. The analysis utilizes data from 2008 to 2015, sourced from over 1,000 MFIs worldwide. Results indicate increasing economies of scale for all MFI categories, with Dep-MFIs demonstrating the most significant cost reductions over time. Urban loans are generally more expensive to produce for Non-Dep-MFIs, while rural loans remain costlier for Dep-MFIs and the aggregate sample. Despite positive but minimal cost complementarities, approximately one-fifth of Dep-MFIs experience negative cost complementarities, suggesting potential learning effects. These findings contribute to the literature on financial inclusion by offering empirical insights into cost efficiencies and production dynamics within MFIs.