Performance of Microfinance: The Role of Subsidies
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
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