Financial-Linkages and Cost Efficiency: Lessons from Tanzanian Microfinance Cooperatives

Abstract

This paper attempts to examine the effect of financial linkages on cost margin and efficiency of microfinance cooperatives (MCs) in Tanzania. Based on data from six focus group discussions comprising 112 managers from 102 MCs, the paper starts by exploring the nature of linkages between commercial banks and MCs. It further applies quantitative analyses: the stochastic frontier and semi-logarithm regression models to examine the effect financial linkages on cost efficiency and cost margin. The paper reveals that financial linkages increase cost margin and inefficiency of MCs. It therefore enlightens MCs’ stakeholders on the possible explanations of the positive effects of financial linkages on cost margin and inefficiency. The findings are useful for policy makers, development institutions, MCs and banks.