Do Subsidies Enhance or Erode the Cost Efficiency of Microfinance? Evidence from MFI Worldwide Micro Data

Fumiharu Mieno and Hisako Kai

No 26, PRIMCED Discussion Paper Series from Institute of Economic Research, Hitotsubashi University

Abstract: A recent issue in the microfinance literature is whether microfinance institutions (MFIs) are financially sustainable without a subsidy as a prerequisite for competition policy or commercialization processes. Although some recent studies have proposed relevant theoretical frameworks, empirical analyses are scarce. Using financial data for MFIs across a panel of 1791 observations for 2003-2006, we estimate a cost function for the MFIs and a measure of inefficiency using the stochastic frontier cost approach, and then examine the effects of subsidies, operating age and other possible factors as determinants of efficiency. We find that subsidies are generally not an impediment to cost efficiency; instead, they are generally utilized to improve cost efficiency. We also find that the effect of a subsidy on efficiency is larger for younger MFIs, suggesting that subsidies for these institutions are effectively utilized for intensifying initial technology investment or hu man resource development. The findings are consistent with the arguments that stress the importance of subsidies for the initial stage of development of MFIs, and partially contradictory to the claims that the subsidies generally erode MFIs’ financial sustainability.

Keywords: microfinance; financial institutions; frontier cost function approach (search for similar items in EconPapers)
JEL-codes: G21 O16 R51 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2012-03
New Economics Papers: this item is included in nep-eff and nep-mfd
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:hit:primdp:26

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