Declining Benefits to Membership in Microfinance Programes: Theory and Empirical Evidence

This paper studies the benefits of participation in microfinance programs, and uses the Euler equation approach to model returns from membership. Although membership in microfinance programs is effective in combating inter-seasonal consumption differences, these benefits diminish with participation stretching beyond a certain length of time.

The paper hypothesizes that experienced members are better able to withstand seasonal shocks to household per capita consumption. This enhanced ability demonstrates the households’ long run capacity to survive independently without aid. Findings suggest that there may be an optimal length of membership in microfinance programs after which participatory benefits diminish and cost of membership is not insubstantial. After such a length of time, experienced members might find it optimal to skip payments.

These results have important implications for program structuring. The paper recommends that eligibility to join these programs and remain a participant must be reevaluated regularly instead of just once at the very beginning.