Technical, Economic and Allocative Efficiency of Microfinance Borrowers and Non-Borrowers: Evidence from Peasant Farming in Bangladesh

This paper empirically examines the technical, economic and allocative efficiency of agricultural microfinance borrowers and non-borrowers in rice farming in Bangladesh using Data Envelopment Analysis (DEA) of survey data obtained in 2009. Inefficiency effects are modeled as a function of farm–specific and institutional variables. The mean technical, allocative, and economic efficiencies are found to be 72%, 66%, and 47 % respectively in the pooled sample under variable returns to scale specification. This indicates the existence of substantial gains in output and/or decreases in cost in the study areas. Results reveal that after effectively correcting for sample selection bias, land fragmentation, family size, household wealth, on farm-training and off–farm income share are the main determinants of inefficiency. Efficiency scores between microfinance borrowers and non–borrowers are significantly different which are also conformed by the non–discretionary DEA model. This study also revealed that excess costs owing to inefficiencies was 53% and concludes that main challenge facing the rice farmers in Bangladesh is to develop their cost minimizing skills. Some indicative policy guidelines to improve efficiencies are also suggested.