Paper
Subsidies and Sustainability in Microfinance
This paper presents empirical evidence on the impact of subsidies on MFI performance
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This paper presents empirical evidence on the impact of subsidies on microfinance institution (MFI) performance. It uses data from the financial statements gathered by two leading microfinance rating agencies - PlaNet Rating and Microfinanza. The paper analyzes:
- The impact of subsidy on sustainability of MFIs;
- Effects of subsidies for poverty indices, moral hazard inefficiencies and pricing distortions of MFIs.
It concludes that:
- Subsidies to MFIs are associated with lower sustainability because they tend to fall onto institutions that target poor customers, with higher unit costs;
- Subsidies are required to ensure that MFIs remain faithful to their mission of bringing credit to the poorest, who cannot afford commercial microfinance based products.
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