Paper
Should Microfinance be Subsidized? What are the Costs and Benefits?
Discussing subsidy versus sustainability in designing microcredit schemes
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6 pages
This paper stresses the advantages of sustainable microfinance programs over subsidized ones.
The paper states that subsidized credit programs, in the long run, cannot fulfill the main goal of microfinance, which is poverty alleviation. Subsidized microfinance programs:
- Cannot survive over the long term and shut down before they reach significant numbers;
- Charge low interest rates that fail to cover total costs;
- Depend on donors for on-going finance and are unable to attract additional funding;
- Isolate credit marketers from microenterprises, and prohibit their growth beyond the parameters of the microfinancing scheme.
Sustainable schemes have a more realistic approach. They:
- Believe that high interest rates guarantee effort on the borrowers' part to make productive use of the borrowed funds;
- Extend money markets to areas where they did not operate before;
- Do not require on-going financing since the interest income covers operating expenses and losses;
- Attract additional funds because they increase invested funds;
- Arouse interest of traditional credit market players;
- Assure business growth, since a failure involves financial losses for creditors and borrowers;
- Lead to healthy market competition.
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