| Abstract: |
This paper shines light on subsidy-dependent microfinance institutions (MFIs).
Firstly, our model shows that subsidy uncertainty can have pervasive effects
on MFIs’ poverty-reduction mission. In particular, we argue that supply-driven
uncertainty can lead to mission drift. MFIs maximize utility by serving the
poor on the one hand, but must be financially sustainable on the other. Under
the fear that subsidies can dry up, MFIs lend to wealthier clients in order to
build precautionary savings. In a subsidy-uncertain world this is a rational
reaction by MFIs struggling to preserve a pool of poor clients. We show that
the incidence of mission drift increases with subsidy uncertainty. Secondly,
we test the predictions of the model on original data collected from rating
agencies assessment reports on 230 MFIs active in 60 countries over the period
1999-2006. Using both cross-section and panel-data regressions, we estimate
the effect of subsidies on poverty reduction as proxied by average loan size,
interest rates, and outreach. Our results suggest that more subsidies are
associated with smaller loan sizes, but that higher subsidy uncertainty is
positively correlated with higher interest rates. We also find that subsidy
uncertainty is negatively correlated with outreach. |