Economies of Scope of Lending and Mobilizing Deposits in Microfinance Institutions : A Semiparametric Analysis

At present, many microfinance institutions (MFIs) not only lend but also collect savings to serve better the needs of the poor. Little is known, however, if MFIs' overall costs decrease or increase as a consequence, nor it is clear which MFIs may benefit the most from expansion into savings mobilization. We fill in this gap by estimating scope economies using over 2,700 annual observations from MFIs operating across the globe. We make several contributions with this paper. First, we use a Semi-parametric Smooth Coefficient (SPSC) model which affords sufficient flexibility to incorporate zero-valued outputs and, therefore, include lending-only MFIs in analysis. Second, we estimate a generalized cost function which incorporates environmental variables to account for cost structure differences due to macroeconomic and MFI-specific factors. Third, we decompose the overall scope economies into fixed and complementary cost components. Finally, we employed robust cross-validation methods to deal with extreme observations, which should prove useful in future nonparametric work outside of the application here. Our findings indicate that policies designed to improve MFIs' performance to expand their services should be based on regional and organizational factors and characteristics of the environment in which MFIs operate. The analysis suggests that economies of scope are driven mostly by fixed cost sharing, while we do not find cost complementarities in most regions and MFI types