The Determinants of the Efficiency of Microfinance Institutions in Africa

Round 1

Reviewer 1 Report

Comments and Suggestions for Authors

First of all, I congratulate the authors for their manuscripts.

However, there are some problems with the empirical application. The most obvious problem is the incorrect use of sub-indices in equations 1, 2 and 3. This is either an oversight or the authors are not familiar with the panel data. The transition from DEA to panel data and how the data obtained from DEA are transformed into variables should be explained more emphatically. In addition, how accurate is the approach of taking the obtained values as a percentage and using them as a variable? Academic sources should be cited in this regard.

In order for the model results to be valid, heteroscedasticity and autocorrelation tests should be performed on these models or on the model selected as the last model to be used. These tests will determine whether the models are valid or not.  The authors should also explain why they did not use panel unit root tests by providing evidence. If they do not have an academic justification, they should conduct panel unit root tests first. 

Best Regards

Author Response

see the attachement

Author Response File: Author Response.docx

Reviewer 2 Report

Comments and Suggestions for Authors

The Determinants of microfinance institutions efficiency 2 in AFRICA

 

Microfinance is immensely important to many micro businesses in Less Developed Nations as it seeks to plug a credit gap. Arguably, the development of this sector has much to teach us in terms of micro firm financing in both middle income and high income nations. All nations seemingly suffer from varying types of “credit gap” for (especially younger) micro enterprises. This paper is of potential consequence to both the local African landscape and the wider global micro enterprise financial landscape.

 

Fundamental Contributions

 

The papers main contributions appear to be:-

 

(i)                 Presenting data for Africa, although as far as I can see the data comes from a single world bank curated dataset so there is little if any advance in assembling specific data.

(ii)               That micro – finance efficiency can be segmented between financial, social and overall efficiency although, the definition of “Overall” as a category is not clear.  Do the authors mean the contribution to Economic Development of both (a) the micro sector and (b) the economy as a whole?

 

The discussion is replaced by a presentation of statistical results, with the conclusion being combined with “the discussion” to be something that feels like it is neither a discussion nor a conclusion. Combining the two sections is OK, but it is disappointing that this section has not been used to develop thoughts as to :-

 

(i)                  how the statistical results describe the tension between financial, social and economic development objectives.

(ii)               How understanding the interplay between these different objectives describes both the regulatory space (institutional safety via regulations such as Basel Capital Adequacy rules), the social space (as defined by grants and subsidy to achieve social goals or  address market failure) and the economic development space as to how micro finance contributes to the achievement of relevant UN Strategic Development Goals

(iii)            Recommendations for further study

 

The authors may wish to consider adding a few sentences that weave in their statistical results to deal with these points. The abstract could also benefit with “tweaking” to highlight the three contrasting mantras or financial, social and perhaps a relabeled “overall” as economic development. This may also have an implication on the keywords used to describe the article.

 

Generalities

 

Before highlighting a few main themes, a few “preliminary” comments.

 

(i)                 The authors use of English is good and the paper is linguistically well written, even if it “rambles” in a few places.

 

(ii)               Picking up the “rambling” point, in some places it feels like this is “an essay” or review article rather than a research article. See for example the text following line 112. Maybe it is a style thing, but is the reader interested in a perambulation that meanders through what each scholar thinks? Isn’t the reader more interested in the “argumentary thread” and how this aligns to other experts in this field? The authors should consider reviewing the literature review section to “sharpen” the text to address this point.

 

(iii)            An important reference (which seems to be very close to this piece of work) that the authors may wish to review for inclusion into both the narrative and the Bibliography is as follows:-

 

Wijesiri, M., Yaron, J., & Meoli, M. (2017). Assessing the financial and outreach efficiency of microfinance institutions: do age and size matter?. Journal of Multinational Financial Management, 40, 63-76.

 

I am surprised this is missing as much of the article text seem close to this article, although the data are of course different.

 

(iv)            The use of acronyms seems to be inconsistent. Most especially the authors should think about relabeling the IMF to be something else. The IMF is conventionally known as the International Monetary Fund, and this is not the usage of this term in this paper. I cannot find the definition as to how the authors use IMF in this paper, so I can only guess what they are referring to. This point must be addressed.

(v)              MFI should be formally defined the first time it is used – which in this case is in the Abstract. My personal preference is to avoid using acronyms in abstracts, and retain the full text until the article proper, making the definition at the first reference in the main body text. In this case that would be at line 23.

 

(vi)            The MFI definition in lines 23 and 24 feels weak and the authors should consider if it should be tightened.

 

Isn’t micro finance provided to “micro business” rather than being a consumer loan to an individual? This may sound pedantic, but doesn’t assessing the overall efficacy of the monetary transmission system in terms of economic development (which is what I suspect this article should be contributing to), require that the article is restricted to business and not consumer lending. Of course, many of these very small micro firms will be sole traders that are not registered as firms, but from an economic viewpoint they are acting as productive enterprises.

 

(vii)          Developing this thought, why does this paper not have some mention of the UN / World Bank Strategic Development Goals? One imagines the audience who will be reading this will be somewhat familiar with this methodology.

 

(viii)        The referencing should include reference to the data sources used.

 

The Underlying Tension Between Financial Prudence and Economic Development

 

The “Conclusion” for this paper needs “sharpening” into something more concise. As written, when I read the conclusion, despite the contribution the paper is making, I struggle to understand what is the main innovation from this paper. Although the statistics and rest of the paper do suggest the authors are potentially making a helpful contribution to the body of analytical knowledge, the conclusion does not give me the clarity as to what this contribution is. The issue should be addressed before the paper is published.

 

When I take everything together, I think the authors are presenting data that reflects a fundamental tension between micro firm risk capital financial risk management and economic development requirements, that is crystalized in a trade-off between finance provider profitability and stability and public policy / subsidize to realise social / economic development objectives and / or mitigate market failure. Market failure is not mentioned in the paper, and I would advise the authors to consider adding a sentence or two to include it. The comments below are intended as “indicative context” regarding this suggestion.

 

Information asymmetry (which they do not mention) is (as highlighted by Stiglitz & Weiss) a fundamental issue in small (and especially micro) firm financing. Set against this context, the text between lines 457 and 471 is troubling.

 

Expanding the point, information asymmetry between lender and borrower. Micro finance lenders have very little information in respect of the actual borrower and it is too expensive to collect it to make an economically rational lending decision. In consequence this means that micro - lending is often not on the basis of individual borrower probabilistic risk, but upon a combination of  some view regarding individual borrower (Knightian) uncertainty, together with a risk mitigating “pool” probabilistic risk metric for a group of micro-finance loans that us used as a proxy for overall loan repayment failure rates. The lack of detailed financial information on individual borrowers leads to lender market failure – as each individual loan is by definition granted without a proper risk assessment, but, reiterating, against the general “pool” parameters that may or may not characterize the specific borrower and that may not be determined by some underlying state or NGO grant or guarantee.

 

Restating, donor / state subsidy acts as an underpin to compensate for this risk, thereby arguably addressing “market failure” to increase overall “economic efficiency” (or optimal allocation of scarce resources). In this nexus social and economic success are aligned to financial prudence via the used of subsidies that compensate for the market failure consequent upon there being imperfect and insufficient information to make a “rational” risk determined individual lending decision.

 

Could the authors give consideration to the above to see if they could perhaps consider rewording or “sharpening” their conclusions to reflect both the tensions between the different “efficiency imperatives" and how these interplay with concepts of interventions to (a) reduce market failure and (b) deliver social or developmental policy objectives?

 

Efficiency vs Efficacy

 

The authors seem to follow the existing literature in the way they use the word “efficiency”. This is problematic as it can mean many things depending upon the context it is used it. For example, isn’t “economic efficiency” different from “operational efficiency” different from “financial efficiency”? I am confused as to whether this paper is trying to measure the “operational efficiency” of Micro Finance Institutions or the “economic efficiency” or perhaps “operational efficiency” of micro finance as a tool and economic social development?

 

That makes we wonder if the authors may find using the term “efficacy” rather than “efficiency” to be more precise?

 

The definitions (borrowed from the clinical world) below illustrates the difference between the two words. In reproducing the quote, the emphasis in mine.

 

“Efficacy is getting things done. It is the ability to produce a desired amount of the desired effect, or success in achieving a given goal. Efficiency is doing things in the most economical way.”

Quoted from : https://clinmedjournals.org/articles/iaphcm/international-archives-of-public-health-and-community-medicine-iaphcm-4-035.php#:~:text=Efficacy%20is%20getting%20things%20done,in%20the%20most%20economical%20way.

 

Moving forward

 

1.      The authors should consider substituting “efficacy” in place of “efficiency” (including in the title), add a formal definition (as efficacy does not have as wide a linguistic use as efficiency in developmental economics) and align the text accordingly. This should add clarity.

2.      Reiterating a previous point, as they clarify this it would help if the authors can clarify if they are looking to assess the “economic impact” as their “overall” measure or if they are more interested in “institutional efficiency” of the microcredit institutions.

 

Can I suggest that the authors may wish to consider if there is an inherent conflict between economic efficacy and institutional safety (e.g. bad debt related stability) and efficiency and that state subsidies exist to bridge the gap and address the resultant market failure? If the authors agree with the above exposition, would it help for the paper to briefly highlight the tensions between the differing objectives (financial, social and economic development)  and perhaps to include a few comments as to how this tension relates to implicit or actual micro finance “credit rationing” under conventional commercial banking regulation?

 

UN / World Bank Strategic Development Goals

 

UN / World Bank Sustainable Development Goals (SDG) are a contemporary building block in understanding economic development including that in Less Developed Nations. The authors implicitly refer to one of these goals at line 278 when they mention the percentage of women borrowers. This directly links to SDG #5. Consideration should be given to including some text that relates the results to the SDG framework. Perhaps they could consider adding a table to show how their results demonstrate the impact of micro finance on each SDG in an African only context. I suspect such a table would be of significant benefit to and have potential for wide usage in the multilateral economic development world. It might offer an interesting extract to blog or social media post on to raise over visibility on the article.

 

Micro Finance Role In Economic Development

 

The data elements the authors use do not combine into a cohesive and testable model of micro firm economic development. This is unfortunate and limits the usefulness of the paper as a contributor towards the body of knowledge relating micro-finance to Less Developed Country micro business development and entrepreneurship.

 

The ideal would be to present such a model (even if this is done at a very high level), and then align their statistical work and results to illuminating such a model.

 

Given that this paper is already written and the results calculated (and it apriori looks like the authors are not using all required / appropriate variables that would be required to test such a model of economic development), can I suggest the authors consider including (i) some very simple and brief language in the “methodology” section that explains the limitations of / bounds as to what they are testing in the context of an overall micro business entrepreneurial / development model so the results can be viewed within that overall framework and (ii) comments in the conclusions that recommend further study based upon a more formal model of micro firm economic development in Less Developed Nations.

 

This article can make a significant contribution and should be published after appropriate revision.

Author Response

see the attachment

Author Response File: Author Response.docx

Round 2

Reviewer 1 Report

Comments and Suggestions for Authors

The comments of the authors to the editor are good. Only the homoscedasticity test in the Appendix must be checked. Homoscedasticity about the variance, but they wrote, "no sequential dependence" as a hypothesis. Is the hypothesis correct? Homoscedasticity hypotheses are related to the equality of variances. 

Author Response

see the attachment

Author Response File: Author Response.pdf

Reviewer 2 Report

Comments and Suggestions for Authors

This is significantly improved. Thank you. There is one small glitch that should be corrected. Page 4 refers to GDP, whereas on page 8 it is GDP per capita. GDP is different from GDP per capita and the mention on page 4 should be updated to match the definition on page 8 or visa versa.

Author Response

see the attached file

Author Response File: Author Response.pdf