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

Anastasia Cozarenco, Valentina Hartarska and Ariane Szafarz

No 22-001, Working Papers CEB from ULB -- Universite Libre de Bruxelles

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.

Keywords: Finance; Microfinance; Cost Efficiency; Scale Economies; Subsidies (search for similar items in EconPapers)
JEL-codes: D24 F35 G21 O14 O16 (search for similar items in EconPapers)
Date: 2022-02-22
New Economics Papers: this item is included in nep-ban, nep-cwa, nep-eff and nep-mfd
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Citations: View citations in EconPapers (4)

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