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Performance of Microfinance: The Role of Subsidies

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  • Ahmad Nawaz

Abstract

Unlike conventional finance institutions, Microfinance institutions (MFIs) strive for financial sustainability but also empowerment of the poor. This social nature of MFIs is mainly financed by subsidies from donors. This paper measures the extent of subsidization in MF sector for the years 2005 and 2006 using Yaron’s Subsidy Dependence Index (SDI) which measures the social cost of subsidized MFIs in a short time frame. This latest data set has been generated from the audit reports of the 204 MFIs with 23 million borrowers in 54 Countries worldwide constituting a significant part of the microfinance outreach worldwide. Based on our subsidy calculations, for the year 2005, 153 MFIs out of 204 are subsidy dependent while for year 2006 it is 122 out of 179 MFIs. A with & without subsidy analysis of conventional financial ratios confirm the fact that MFIs financial performance declines substantially with-out subsidies. Based on the evidence, the paper also highlights the factors which contribute and dec rease the sustainability of microfinance

Suggested Citation

  • Ahmad Nawaz, 2010. "Performance of Microfinance: The Role of Subsidies," Working Papers CEB 10-008.RS, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:sol:wpaper:10-008
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    References listed on IDEAS

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    1. Khandker, S.R. & Khalily, B. & Khan, Z., 1995. "Grameen Bank: Performance and Sustainability," World Bank - Discussion Papers 306, World Bank.
    2. Mark Schreiner & Jacob Yaron, 2001. "Development Finance Institutions : Measuring Their Subsidy," World Bank Publications, The World Bank, number 13983.
    3. Mark Schreiner, 2003. "A Cost-Effectiveness Analysis of the Grameen Bank of Bangladesh," Development Policy Review, Overseas Development Institute, vol. 21, pages 357-382, May.
    4. Yaron, J., 1992. "Assessing Development Finance Institutions; A Public Interest Analysis," World Bank - Discussion Papers 174, World Bank.
    5. 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.
    6. Congo, Youssoufou, 2002. "Performance of Microfinance Institutions in Burkina Faso," WIDER Working Paper Series 001, World Institute for Development Economic Research (UNU-WIDER).
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Abalo Kodjo, 2016. "Sustainability of Microfinance Institutions in Togo," Research Papers RP_327, African Economic Research Consortium.
    2. Karel Janda & Van Quang Tran & Pavel Zetek, 2015. "Faktory ovlivňující zapojení žen v mikrofinancích
      [The Factors Influencing the Participation of Women in Microfinance]
      ," Politická ekonomie, University of Economics, Prague, vol. 2015(3), pages 363-381.
    3. Janda, Karel & Van Tran, Quang & Zetek, Pavel, 2014. "Influence of External Funding on Microfinance Performance," MPRA Paper 58170, University Library of Munich, Germany.
    4. Janda, Karel & Van Tran, Quang & Zetek, Pavel, 2014. "Vybrané faktory ovlivňující zapojení žen v mikrofinancích
      [The Selected Factors Influencing the Participation of Women in Microfinance]
      ," MPRA Paper 59109, University Library of Munich, Germany.
    5. repec:ipn:esecon:v:12:y:2017:i:46:p:41-60 is not listed on IDEAS
    6. Janda, Karel & Tran, Quang & Zetek, Pavel, 2014. "Vliv externího financování na mikrofinanční rozvoj - makro perspektiva
      [Influence of external funding on microfinance performance - macro perspective]
      ," MPRA Paper 58166, University Library of Munich, Germany.
    7. Janda, Karel & Zetek, Pavel, 2014. "The Impact of Public Spending on the Performance of Microfinance Institutions," MPRA Paper 55690, University Library of Munich, Germany.
    8. Wijesiri, Mahinda & Yaron, Jacob & Meoli, Michele, 2015. "Performance of microfinance institutions in achieving the poverty outreach and financial sustainability: When age and size matter?," MPRA Paper 69821, University Library of Munich, Germany.

    More about this item

    Keywords

    Microfinance institutions; Subsidies; Sustainability;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact

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