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Efficiency and Expense Preference in the Philippines' Cooperative Rural Banks

DP 2002-12
2002

This paper attempted to test whether efficient cooperative rural banks (CRBs) have a better control of their agency costs. We used two different concepts of efficiency, namely, cost efficiency and alternative profit efficiency, and found somewhat different results from both approaches. Using Stochastic Frontier Approach and Distribution Free Approach, we tested two different propositions. The first proposition is that an adequate corporate governance scheme should improve efficiency of CRBs. We failed to find very conclusive evidence that corporate governance theories apply to the Philippines’ CRBs. However, the results confirmed both managers’ compensation theory and large stakeholders theory. The second proposition is that agency costs should reduce efficiency of CRBs, and we found a much clearer relationship on that issue. As expected, most efficient CRBs are characterized by a better control of agency costs. These results are in accordance with previous studies on shirking behavior among mutual financial intermediaries. We also found that rural CRBs are most profit efficient, despite their somewhat normal cost-efficiency, a manifestation that they are able to charge higher fees for the quality of services they offer. Large CRBs are not able to pass their higher costs to customers through higher fees. We found that small CRBs might have a better interest rate policy, that is, they offer lower rates on both loans and deposits.

Citations

This publication has been cited time(s).

  1. Moreno, Frede G., 2004 "Good governance in microcredit strategy for poverty reduction: Focus on western Mindanao, Philippines" , ZBW - Leibniz Information Centre for Economics

  2. Hassan, M. Kabir and Benito Sanchez, 2009 "Efficiency analysis of microfinance institutions in developing countries" , Indiana State University, Scott College of Business, Networks Financial Institute

  3. Hermes, Niels, Robert Lensink, and Aljar Meesters, 2008 "Outreach and Efficiency of Microfinance Institutions" , University of Groningen, Research Institute SOM (Systems, Organisations and Management)

  4. Hermes, Niels, Robert Lensink, and Aljar Meesters, 2011 "Outreach and efficiency of microfinance institutions" , Elsevier

  5. Solhi, Sanae and Sidi Mohamed Rigar, 2014 "Pérennité et efficience des institutions de microfinance dans la région mena" , Economic Research Forum

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  8. Lonbani, Delaram Najmaei and Bram De Rock, 2020 "The performance of microfinance institutions: An analysis of the local and legal constraints" , ULB -- Universite Libre de Bruxelles

  9. Fall, François, Al-mouksit Akim, and Harouna Wassongma, 2018 "DEA and SFA research on the efficiency of microfinance institutions: A meta-analysis" , Elsevier

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  11. Muneer Babu M., 2016 "Macroeconomic determinants of technological change in Indian microfinance institutions" , International Management Institute

  12. Soltane Bassem, Ben, 2014 "Total factor productivity change of MENA microfinance institutions: A Malmquist productivity index approach" , Elsevier

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Contributor
Philippine Institute for Development Studies
Authors
Lamberte, Mario B. Desrochers, Martin
Keywords
agency costs; corporate governance; efficiency
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