Financing microfinance institutions: subsidies or deposit mobilisation

Al-Azzam, Moh’d

doi:10.1080/00036846.2018.1527467

Cited by 17 publications

(15 citation statements)

References 29 publications

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“…Evidence shows that subsidies crowd out deposit collection (Cozarenco et al, 2016). Moreover, both subsidies and deposits are associated with lower outreach and worse financial results (Al-Azzam, 2019;Cozarenco et al, 2016). As for loan repayment rates, they are lower in subsidized MFIs but are insensitive to deposit collection (Al-Azzam, 2019).…”

Section: Introductionmentioning

confidence: 99%

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

2022

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The costs and benefits of subsidized microfinance are still controversial. We utilize a costfunction 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.

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Section: Introductionmentioning

confidence: 99%

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

2022

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“…The answer is yes if the only social goal of nonprofit MFIs is to provide credit at low interest rates. However, in addition to low interest rates, nonprofit MFIs also focus on additional social goals such as serving more women and reaching poorer clients (D'Espallier et al 2013a(D'Espallier et al , b, 2016Al-Azzam 2019). Achieving these social goals simultaneously is challenging.…”

Section: Tablementioning

confidence: 99%

Competition and microcredit interest rates: international evidence

Al-Azzam

Parmeter

2019

Empir Econ

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The limited number of existing papers that link competition among microfinance institutions (MFIs) and microcredit interest rates, provide inconclusive and counterintuitive results. This paper uses data from 1997 MFIs operating in 109 countries between the years 2003 and 2016 to construct three measures of competition and evaluate their impacts on interest rates. These measures reflect three different aspects of competition: geographical expansion, market concentration, and the marginal pricing. While the results for market concentration are inconclusive, the results for both geographical expansion and marginal pricing show an economically strong impact of competition on interest rates. Specifically, regardless of whether an MFI is a for-profit or nonprofit, we find meaningful evidence that competition reduces interest rates. Our findings evince that lower interest rates are needed if the microfinance movement is to continue to be relied on as an effective means to alleviate poverty. marginal cost (i.e. the Lerner Index). These measures give different signals on the evolution of competition over time. Although the results for market concentration seem to be inconclusive (but consistent with the nascent literature), the results for the number of branch offices and the Lerner Index show a consistent impact of competition on interest rates; specifically, increased competition reduces interest rates charged by for-profit and nonprofit MFIs.The paper proceeds as follows: Sect. 2 presents the data. Section 3 outlays the empirical model, explains the variables used, and develops alternative measures of competition. Section 4 presents the estimation methods, and Sect. 5 presents the results and discussion. Finally, Sect. 6 presents several concluding thoughts and offers policy recommendations. DataThere are more than 3000 MFIs reporting to the MIX Market. Data for MFIs date back to 1999. The MIX Market classifies MFIs into diamonds according to the availability and quality of data provided by the MFIs. Diamonds range from 1 to 5 where a higher number indicates more transparent and reliable data. To evaluate the overall impact of competition, all MFIs are included regardless of their classifications. To address the quality and availability of data, MFIs with three or less diamonds are also used, and the subsequent results were essentially the same. Data on macroeconomic variables and interest rate ceilings are gathered from the World Bank and Naimbo and Gallegos (2014), respectively.The full data set contains information on 2944 MFIs operating in 122 countries with 17,819 annual observations. Due to some missing values and data trimming, data for 947 MFIs were dropped. Therefore, the final unbalanced sample used in the empirical analysis contains information on 1997 MFIs operating in 109 countries for the period 2003-2016. The breakdown by region is 504 from Latin America and the Caribbean, 322 from South Asia, 420 from Africa, 369 from Eastern Europe and Central Asia, 315 from East Asia and the Pacific, and 67 from the M...

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“…No repayment is required. This distinction between subsidies and donations is important, as existing research suggests that the presence of an active institutional donor provides a monitoring mechanism for the efficient allocation of resources [24,25] and that the most technically efficient institutions are able to raise the most donations [26]. There is also this proposal that MFIs that have a higher proportion of donor funding versus subsidies have lower rates of portfolios at risk, fewer delinquent loans, and that their overall portfolios are less risky [17].…”

Section: Donationsmentioning

confidence: 99%

“…The impact of subsidy on performance of MFIs has been an issue of continuous debate in the sense that there are some arguments in support of subsidy's positive impact on performance of MFIs while few others are in favour of negative impact of subsidy on performance of MFIs [22,54]. Nevertheless, some other scholars agree only on, the positive impact of subsidy on performance only as it concerns borrowings as against on equities and revenue grants [17,25].…”

Section: Empirical Reviewmentioning

confidence: 99%

Subsidy/Donation and Performance of Microfinance Institutions

Steve

Onyeanu

Chika

et al. 2019

AJEBA

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Subsidies and Donations are veritable tools that are supposed to engender effective performance in Microfinance institutions. On the face value, subsidies seem to be very positive but they can be counterproductive when related to their effects on performance, efficiency and self-sustainability of the Microfinance institutions. This paper therefore focuses on the assessment and review of issues relating to Subsidy/Donation and their effect on Performance of Microfinance Institutions (MFIs) in Nigeria. The methodology adopted is descriptive in nature and secondary source of data were made use of. Our review revealed mix results on the empirical findings of effect of subsidies/donations on performance of Microfinance institutions. This review shows that Subsidies can disincentive workers and managers, thereby creating moral hazard problems (Corruption and Financial impropriety). However, when applied to effect low borrowing costs and Tax incentives/concessions, it affects performance positively. The review also shows that subsidies ought to be used only in the startup phases of the life cycle and to be withdrawn when the Microfinance institution improves. Overall, to achieve the double bottom lines of social and financial sustainability obligations, funding structure in Microfinance should de-emphasise subsidy dependence and encourage market based principles and commercialisation. For effective corporate governance, big Microfinance institutions at the status of Banks and big NGOs should be mandated to disclose their accounts to the public and not just mere annual returns to the Central bank of Nigeria (This may involve quoting them in Nigeria Stock Exchange).

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Financing microfinance institutions: subsidies or deposit mobilisation

Cited by 17 publications

References 29 publications

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

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

Competition and microcredit interest rates: international evidence

Subsidy/Donation and Performance of Microfinance Institutions

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