Social and Financial Efficiency of Microfinance Institutions in Pakistan

Financial efficiency and profitability of „for profit‟ institutions have been traditionally measured with the help of financial ratios [Hassan and Sanchez (2009)]. However, financial ratios are inappropriate to investigate the sources of inefficiency, estimate financial or social efficiency with multiple inputs and outputs, and to decompose the sources of efficiency or inefficiency into technical, technological and scale efficiencies or inefficiencies respectively [Hassan and Sanchez (2009)]. Microfinance Institutions (MFIs) are special institutions, which simultaneously consider their social role to uplift the marginalised community members along with their commercial objective to secure self-sustainability. In standard literature this phenomenon is coined MFIs as being „double bottom line” institutions. [Gutierrez-Nieto, Serrano-Cinca, and Mar Molinero (2007); Gutiérrez-Nieto, Serrano-Cinca, and Molinero (2007)]. This simultaneity differentiates MFIs from conventional financial institutions. The achievement of socioeconomic efficiency is indispensable for MFIs to operate independently and on a wider scale. Thus investigation of socioeconomic efficiency of MFIs is important for monitoring and optimal policy implications.