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The Outreach and Sustainability of Microfinance: Is There a Tradeoff?

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Author Info

  • Bengtsson, Niklas

    ()
    (Uppsala Center for Labor Studies)

  • Pettersson, Jan

    (Swedish Ministry of Finance)

Abstract

Both practitioners and academics posit that microfinance organizations face a tradeoff between financial performance and outreach. We designed a randomized controlled trial of a transitory interest rate subsidy to investigate this tradeoff. We find that subsidized credit substantially increases demand, although a non-trivial fraction of members abstain from borrowing even when credit is virtually free. Among those who borrow, we find no effect on default rates. Whereas the intervention is initially unpro table due to lost interest rate revenues, profits eventually catch up because subsidized clients are more likely to apply for new loans (with interest) after the subsidy is lifted. In addition, because loan-taking clients more often deposit savings in the bank, the subsidy decreases the bank's dependence on external funding. We conclude that transitory interest rate subsidies that are unpro table in the short run may improve outreach without undermining sustainability in the long run. However, outreach ultimately appears constrained by low returns to capital and weak market integration among the poor.

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Bibliographic Info

Paper provided by Uppsala University, Department of Economics in its series Working Paper Series, Center for Labor Studies with number 2012:18.

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Length: 27 pages
Date of creation: 30 Oct 2012
Date of revision:
Handle: RePEc:hhs:uulswp:2012_018

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Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
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Web page: http://www.nek.uu.se/
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Related research

Keywords: Microfinanance; Collateral; Demand for credit; Interest rate changes; Experimental methods; Randomized controlled trial; RTC;

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References

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  1. Pascaline Dupas & Jonathan Robinson, 2011. "Why Don't the Poor Save More? Evidence from Health Savings Experiments," NBER Working Papers 17255, National Bureau of Economic Research, Inc.
  2. Dehejia, Rajeev & Montgomery, Heather & Morduch, Jonathan, 2005. "Do interest rates matter? credit demand in the Dhaka Slums," MPRA Paper 33146, University Library of Munich, Germany.
  3. Nava Ashraf & Dean Karlan & Wesley Yin, 2006. "Tying Odysseus to the Mast: Evidence from a Commitment Savings Product in the Philippines," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 635-672, May.
  4. Morduch, Jonathan, 1999. "The role of subsidies in microfinance: evidence from the Grameen Bank," Journal of Development Economics, Elsevier, vol. 60(1), pages 229-248, October.
  5. Beatriz Armendariz & Ariane Szafarz, 2009. "On Mission Drift In Microfinance Institutions," Working Papers CEB 09-015.RS, ULB -- Universite Libre de Bruxelles.
  6. Pascali, Luigi, 2013. "Banks and Development: Jewish Communities in the Italian Renaissance and Current Economic Performance," The Warwick Economics Research Paper Series (TWERPS) 1026, University of Warwick, Department of Economics.
  7. Michal Bauer & Julie Chytilová & Jonathan Morduch, 2008. "Behavioral Foundations of Microcredit: Experimental and Survey Evidence From Rural India," Working Papers IES 2008/28, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Nov 2008.
  8. Karna Basu, 2011. "Hyperbolic Discounting and the Sustainability of Rotational Savings Arrangements," American Economic Journal: Microeconomics, American Economic Association, vol. 3(4), pages 143-71, November.
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Cited by:
  1. Dean Karlan, Jonathan Zinman, 2013. "Long-Run Price Elasticities of Demand for Credit: Evidence from a Countrywide Field Experiment in Mexico-Working Paper 331," Working Papers 331, Center for Global Development.
  2. Dean Karlan & Jonathan Zinman, 2013. "Long-Run Price Elasticities of Demand for Credit: Evidence from a Countrywide Field Experiment in Mexico," NBER Working Papers 19106, National Bureau of Economic Research, Inc.

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