Subsidy Uncertainty and Microfinance Mission Drift
AbstractThis paper shines light on subsidy-dependent microfinance institutions (MFIs). Firstly, our model shows that subsidy uncertainty can have pervasive effects on MFIs’ poverty-reduction mission. In particular, we argue that supply-driven uncertainty can lead to mission drift. MFIs maximize utility by serving the poor on the one hand, but must be financially sustainable on the other. Under the fear that subsidies can dry up, MFIs lend to wealthier clients in order to build precautionary savings. In a subsidy-uncertain world this is a rational reaction by MFIs struggling to preserve a pool of poor clients. We show that the incidence of mission drift increases with subsidy uncertainty. Secondly, we test the predictions of the model on original data collected from rating agencies assessment reports on 230 MFIs active in 60 countries over the period 1999-2006. Using both cross-section and panel-data regressions, we estimate the effect of subsidies on poverty reduction as proxied by average loan size, interest rates, and outreach. Our results suggest that more subsidies are associated with smaller loan sizes, but that higher subsidy uncertainty is positively correlated with higher interest rates. We also find that subsidy uncertainty is negatively correlated with outreach.
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Bibliographic InfoPaper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 11-014.
Length: 43 p.
Date of creation: Apr 2011
Date of revision:
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microfinance; subsidies; mission drift; poverty reduction; average loan size; interest rate; outreach;
Find related papers by JEL classification:
- F35 - International Economics - - International Finance - - - Foreign Aid
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- O54 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean
- O57 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries
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