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Subsidy Uncertainty and Microfinance Mission Drift

  • Beatriz Armendariz
  • Bert D'Espallier
  • Marek Hudon
  • Ariane Szafarz

This 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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Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 11-014.

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Length: 43 p.
Date of creation: Apr 2011
Date of revision:
Publication status: Published by:
Handle: RePEc:sol:wpaper:2013/83742
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  1. McIntosh, Craig & Wydick, Bruce, 2005. "Competition and microfinance," Journal of Development Economics, Elsevier, vol. 78(2), pages 271-298, December.
  2. Ahmad Nawaz, 2010. "Efficiency and Productivity of Microfinance: Incorporating the Role of Subsidies," Working Papers CEB 10-009.RS, ULB -- Universite Libre de Bruxelles.
  3. Beatriz Armendariz & Ariane Szafarz, 2009. "On Mission Drift In Microfinance Institutions," Working Papers CEB 09-015.RS, ULB -- Universite Libre de Bruxelles.
  4. Isabelle Agier & Ariane Szafarz, 2013. "Microfinance and Gender: Is There a Glass Ceiling on Loan Size?," ULB Institutional Repository 2013/149090, ULB -- Universite Libre de Bruxelles.
  5. Laurence Broze & Christian Gouriéroux & Ariane Szafarz, 1985. "Solutions of Dynamic Linear Rational Expectations Models," ULB Institutional Repository 2013/675, ULB -- Universite Libre de Bruxelles.
  6. Mersland, Roy, 2007. "The cost of ownership in microfinance organization," MPRA Paper 2061, University Library of Munich, Germany.
  7. Steven B. Caudill & Daniel M. Gropper & Valentina Hartarska, 2009. "Which Microfinance Institutions Are Becoming More Cost Effective with Time? Evidence from a Mixture Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(4), pages 651-672, 06.
  8. Zeller, Manfred & Meyer, Richard L., 2002. "The triangle of microfinance," Food policy statements 40, International Food Policy Research Institute (IFPRI).
  9. Conning, Jonathan, 1999. "Outreach, sustainability and leverage in monitored and peer-monitored lending," Journal of Development Economics, Elsevier, vol. 60(1), pages 51-77, October.
  10. Broze, L. & Gourieroux, C. & Szafarz, A., 1985. "Solutions of Linear Rational Expectations Models," Econometric Theory, Cambridge University Press, vol. 1(03), pages 341-368, December.
  11. Mersland, Roy & Strøm, R. Øystein, 2010. "Microfinance Mission Drift?," World Development, Elsevier, vol. 38(1), pages 28-36, January.
  12. Copestake, James, 2007. "Mainstreaming Microfinance: Social Performance Management or Mission Drift?," World Development, Elsevier, vol. 35(10), pages 1721-1738, October.
  13. 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.
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