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TECHNICAL EFFICIENCY AND ITS DETERMINANTS OF MICRO
FINANCE INSTITUTIONS IN ETHIOPIA: A STOCHASTIC
FRONTIER APPROACH

Bereket Zerai
Andhra University, India & Mekelle University Ethiopia
 
Lalitha Rani
Andhra University, India
 


ABSTRACT

This study aims to examine technical efficiency performance of Ethiopian Micro Finance
institutions (MFIs) over the period of 2004 to 2009 using Stochastic Frontier Analysis (SFA)
model. The results of the analysis revealed that an overall average technical efficiency of
71.72%; imply that there is a substantial scope for Ethiopian MFIs to improve their
performance without the need to use additional resources. The study further shows that
asset, operational sustainability, women, i.e., depth of outreach and trend are significant
determinants of efficiency. Our findings also provide evidence on tradeoff between efficiency
and outreach of microfinance institutions. Overall, the findings imply that the MFIs should
devise strategies and practices boosting scale and ensuring sustainability while maintain
social goals.

Key words: technical efficiency, stochastic frontier analysis, microfinance institutions,
Ethiopia

JEL Codes: D24, G21