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Subsidies to microfinance institutions: how do they affect cost efficiency and mission drift?

Author

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  • Anastasia Cozarenco
  • Valentina Hartarska
  • Ariane Szafarz

Abstract

The costs and benefits of subsidized microfinance are still controversial. We utilize a cost-function estimation approach that accounts for the double bottom line (social and financial) of microfinance institutions (MFIs) to evaluate how subsidies affect both cost efficiency and risk of mission drift. We control for endogenous self-selection into the business models of credit-only versus credit-plus-deposit. Our results suggest that MFIs that both supply loans and collect deposits need no subsidies to be cost-efficient. In addition, subsidies to these MFIs are associated with an increase in deposit size, which might hurt the most disadvantaged depositors. In sum, combining subsidized funds from donors with deposits increases the risk of mission drift, and can therefore be socially undesirable.

Suggested Citation

  • Anastasia Cozarenco & Valentina Hartarska & Ariane Szafarz, 2022. "Subsidies to microfinance institutions: how do they affect cost efficiency and mission drift?," Applied Economics, Taylor & Francis Journals, vol. 54(44), pages 5099-5132, September.
    • Handle: RePEc:taf:applec:v:54:y:2022:i:44:p:5099-5132
    DOI: 10.1080/00036846.2022.2041176
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    Cited by:

    1. Moez Bennouri & Anastasia Cozarenco & Samuel Anokye Nyarko, 2024. "Women on Boards and Performance Trade-offs in Social Enterprises: Insights from Microfinance," Journal of Business Ethics, Springer, vol. 190(1), pages 165-198, February.
    2. Simon Cornée & Anastasia Cozarenco & Ariane Szafarz, 2023. "The Changing Role of Banks in the Financial System: Social Versus Conventional Banks," Palgrave Macmillan Studies in Banking and Financial Institutions, in: Chrysovalantis Gaganis & Fotios Pasiouras & Menelaos Tasiou & Constantin Zopounidis (ed.), Sustainable Finance and ESG, pages 1-25, Palgrave Macmillan.
    3. Hartarska, Valentina M. & Zhang, Jingfang & Nadolnyak, Denis A., 2023. "Scope Economies from Rural and Urban Microfinance Services," 2023 Annual Meeting, July 23-25, Washington D.C. 335439, Agricultural and Applied Economics Association.
    4. Valentina Hartarska & Jingfang Zhang & Denis A. Nadolnyak, 2023. "Scope economies from rural and urban microfinance services," Southern Economic Journal, John Wiley & Sons, vol. 89(4), pages 1138-1167, April.

    More about this item

    JEL classification:

    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • F35 - International Economics - - International Finance - - - Foreign Aid

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