Financial Technology Adoption and Operational Efficiency in Pakistan’s Microfinance Institutions

Abstract

The speed of development of financial technology (FinTech) has changed the provision of financial services across the globe, especially for microfinance institutions (MFIs) that cater to financially excluded populations. In Pakistan MFIs play a crucial role in promoting financial inclusion, poverty alleviation, blood flow to small enterprise development; however, they are being confronted with persistent challenges as related to high operational cost, limited outreach, and efficiency constraints. This study examines the effect of FinTech adoption on operational efficiency of microfinance institutions in Pakistan. Drawing on regulated and non-regulated MFI panel data covering the years 2015-2023 and exploring the link between embracing digital financial services, mobile banking platforms, core banking systems, and data-driven credit assessment tools and their impact on cost efficiency, outreach efficiency, and overall operational performance. Using efficiency indicators such as cost: income ratio, operating expense ratio, and loan officer productivity, the study uses panel regression and efficiency analysis technique to determine empirical relationships. The results show that FinTech adoption is playing a major role in operational efficiency and that FinTech can reduce transaction costs and improve service delivery and reach to underserved populations. The study adds to the literature on FinTech and microfinance by presenting evidence from the context of a developing economy and offers some policy-relevant evidence for informing policymakers, MFI managers, and development practitioners who are interested in enhancing sustainability and inclusiveness of the microfinance sector in Pakistan.