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Aid Volatility and Social Performance in Microfinance

Listed author(s):
  • Bert D'Espallier
  • Marek Hudon
  • Ariane Szafarz

Uncertainty makes objectives harder to reach. This paper examines whether uncertainty in subsidies leads to mission drift in microfinance institutions (MFIs). Using a worldwide sample of 1,151 MFIs active in 104 countries, we find that interest rates increase with aid volatility while average loan size is inversely related to aid volatility. These results suggest that MFIs consider average loan size as a signaling device for commitment to their social mission, but use interest rates as an adjustment variable to cope with uncertainty. The policy prescription to donor agencies wishing to curtail the rise in interest rates is to deliver subsidies predictably and transparently.

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Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 16-015.

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Length: 40 p.
Date of creation: 18 Feb 2016
Publication status: Published by:
Handle: RePEc:sol:wpaper:2013/227277
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