Bangladesh started regulating microfinance in 2006 by establishing the Microcredit Regulatory Authority, which granted licenses to 746 microfinance institutions (MFIs) and supervised them through prudential and non-prudential regulations. Economic regulation is relatively inexpensive. It affects performance which is mostly reflected in the costs and revenues of the MFIs. This paper investigates the relationship between cost efficiency and regulation using data from 534 MFIs. Cost efficiency was measured using the stochastic frontier model and the ordinary least-squares method to find the inefficiency determinants. It was observed that microcredit regulation reduced the cost-inefficiency of the MFIs significantly in Bangladesh.
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