Do Subsidies Enhance or Erode the Cost Efficiency of Microfinance? Evidence from MFI Worldwide Micro Data
AbstractA recent issue in the microfinance literature is whether microfinance institutions (MFIs) are financially sustainable without a subsidy as a prerequisite for competition policy or commercialization processes. Although some recent studies have proposed relevant theoretical frameworks, empirical analyses are scarce. Using financial data for MFIs across a panel of 1791 observations for 2003-2006, we estimate a cost function for the MFIs and a measure of inefficiency using the stochastic frontier cost approach, and then examine the effects of subsidies, operating age and other possible factors as determinants of efficiency. We find that subsidies are generally not an impediment to cost efficiency; instead, they are generally utilized to improve cost efficiency. We also find that the effect of a subsidy on efficiency is larger for younger MFIs, suggesting that subsidies for these institutions are effectively utilized for intensifying initial technology investment or hu man resource development. The findings are consistent with the arguments that stress the importance of subsidies for the initial stage of development of MFIs, and partially contradictory to the claims that the subsidies generally erode MFIs’ financial sustainability.
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Bibliographic InfoPaper provided by Institute of Economic Research, Hitotsubashi University in its series PRIMCED Discussion Paper Series with number 26.
Length: 25 p.
Date of creation: Mar 2012
Date of revision:
microfinance; financial institutions; frontier cost function approach;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
- R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-02 (All new papers)
- NEP-EFF-2012-05-02 (Efficiency & Productivity)
- NEP-MFD-2012-05-02 (Microfinance)
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