Microfinance institutions (MFIs) have emerged as a useful tool to eradicate poverty by giving financial services to the poor. Among these institutions that attain efficiency may obtain the ability to perform its operations at an optimal cost or lower cost relative to its peer companies. The study focused mainly on examining the association between microfinance efficiency, and its cost of lending to identify that, does MFI efficiency complements in its lending cost? The study employs a data envelopment analysis (DEA) to analyze the microfinance efficiency and stochastic frontier analysis (SFA) to explore the presence of any relationship between microfinance efficiency and its lending cost to the clients. Additionally, sensitivity analysis, robust regression and Granger causality tests were conducted to examine the direction of causality between these two variables. The finding of our study evidences a negative association between microfinance efficiency and its cost of lending. The results are relevant to policymakers, shareholders, donors, funders, etc. By taking strategic steps to enhance the MFI efficiencies to access low cost and faster finance and it could complement its cost of lending through facilitating funding at a low cost to the poor.

Microfinance efficiency, stochastic frontier analysis, cost of lending.