José Luis Fernández Sánchez

The aim of this research has been to analyse how the method employed for lending can affect the cost efficiency of microfinance institutions (MFIs) since innovations for lending have been introduced in the sector in the last years and there are not empirical studies to analyse the actual impact of it. The improvement of MFIs' cost efficiency is very important for these institutions to achieve their financial self‐sufficiency and be sustainable in the long run. The data employed in this analysis have been an unbalanced panel composed of a sample of 1017 MFIs for the 2008–2018 period and collected from the microfinance information exchange (MIX) database. Our results also show that community or group‐lending methods, as village banking and solidarity groups, have a positive effect on the MFIs’ cost efficiency versus traditional methods based on individual lending. In addition, we have found that MFIs with a higher proportion of borrowers in rural areas are more cost efficient than institutions with more borrowers in urban areas, although community or group‐lending methods have a larger positive effect on MFIs’ cost efficiency in urban than in rural areas.