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Subsidies to microfinance institutions: How do they affect cost efficiency and mission drift?

Author

Listed:
  • Anastasia Cozarenco
  • Valentina Hartarska
  • Ariane Szafarz

Abstract

The costs and benefits of subsidized microfinance are still controversial. We utilize a cost-function estimation approach that accounts for the double bottom line (social and financial) of microfinance institutions (MFIs) to evaluate how subsidies affect both cost efficiency and risk of mission drift. We control for endogenous self-selection into the business models of credit-only versus credit-plus-deposit. Our results suggest that MFIs that both supply loans and collect deposits need no subsidies to be cost-efficient. In addition, subsidies to these MFIs are associated with an increase in deposit size, which might hurt the most disadvantaged depositors. In sum, combining subsidized funds from donors with deposits increases the risk of mission drift, and can therefore be socially undesirable.

Suggested Citation

  • Anastasia Cozarenco & Valentina Hartarska & Ariane Szafarz, 2022. "Subsidies to microfinance institutions: How do they affect cost efficiency and mission drift?," Working Papers CEB 22-001, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:sol:wpaper:2013/340133
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    More about this item

    Keywords

    Finance; Microfinance; Cost Efficiency; Scale Economies; Subsidies;
    All these keywords.

    JEL classification:

    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • F35 - International Economics - - International Finance - - - Foreign Aid

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