Managing Microfinance: Navigating Efficiency and Sustainability Challenges in Bangladesh's Financial Landscape

Abstract

The study undertakes a thorough examination of the efficiency and sustainability of Microfinance Institutions (MFIs) in Bangladesh against the backdrop of the financial crisis era spanning from 2020 to 2021. To achieve this objective, the study employs Data Envelopment Analysis (DEA) to quantify efficiency levels across MFIs, followed by an assessment of sustainability indicators. The findings reveal that larger MFIs, categorized as "very huge" and "huge," have traditionally exhibited high levels of profitability. However, there has been a noticeable downturn in portfolio quality over time. Interestingly, smaller MFIs have demonstrated resilience and adaptability by expanding their operations and achieving financial viability despite the challenging economic environment. The study identifies several key factors contributing to the efficiency and sustainability of MFIs. Effective management cost control emerges as a critical determinant, highlighting the importance of prudent financial management practices. Additionally, maintaining a reasonable cost of capital and leveraging economies of scale through portfolio expansion have been instrumental in enhancing the financial performance of MFIs. Notably, the study underscores the significance of external factors such as subsidized finances and access to low-cost reserves in bolstering the sustainability of MFIs. These external supports have played a crucial role in enabling MFIs to navigate through the financial crisis period and sustain their operations effectively. Overall, the findings of the study shed light on the dynamics of the microfinance sector in Bangladesh amidst economic challenges. By identifying key drivers of efficiency and sustainability, the study provides valuable insights for policymakers, practitioners, and stakeholders in the microfinance industry to enhance the resilience and effectiveness of MFIs in Bangladesh and beyond.