Scope Economies of Lending and Collecting Deposits in Microfinance Institutions

While economies of scope of lending and mobilizing deposits in banking are justifiedtheoretically (Diamond, 1984) and found empirically (see Saunders, 1999), in microfinance, theexistence and the magnitudes of scope economies has not been investigated. We use a semiparametric smooth coefficient model to estimate these economies using the largest publiclyavailable dataset of over 2,800 annual observations from MFIs across the world. Weaccommodate the outreach objective of Microfinance Institutions (MFIs) by measuring outputsas the number of clients (borrowers and savers) rather than the traditional volume of loans anddeposits and compare the results from the two cost functions.We find substantial scope economies of 47 percent on average. The results also indicatethat these economies are entirely due to shared fixed costs since MFIs could not profitably useinformation they collect from savers to improve their lending products and vice versa. In fact, wefind large negative variable cost complementarities. Overall scope economies are the largest inrural banks and coops, while lowest in banks. We further find that, while very few of MFIs inEastern Europe and Central Asia offer savings, the potential scope economies that they canrealize are by far the largest. Finally we compare the two methods and find that while on theaverage the traditional cost function approach would underestimate scope economies, it wouldoverestimate them for MFIs in Africa and all parts of Asia, as well as for NGOs and non-bankfinancial institutions.