Technical efficiency in a semi-formal financial sector: The case of Mexico

The semi-formal financial sector in Mexico is playing an increasingly important role in serving a largely poor, rural clientele. A stochastic frontier with non-monotonic marginal effects [Wang, Journal of Productivity Analysis (2002, Vol. 18, pp. 241-253] reveals a wide disparity in technical efficiency levels among 190 Mexican semi-formal financial intermediaries. The results show that technology, average loan size, rural outreach and institutional age are all positively associated with technical efficiency. The marginal effects vary widely and, in some cases, the effects are non-monotonic over percentile groups. The results indicate that strengthening younger, technologically undeveloped financial institutions will have the strongest marginal benefit in revitalizing the rural financial sector.