Performance of Microfinance: The Role of Subsidies

This paper measures the extent of subsidization in the microfinance sector in 2005 and 2006 using Yaron’s Subsidy Dependence Index, which measures the social cost of subsidized MFIs.

MFIs have to take care of financial sustainability as well as outreach. The social nature of MFIs is mainly financed by donor subsidies. Data from the audit reports of 204 MFIs with 23 million borrowers in 54 countries worldwide reveals that:

• In 2005, 153 MFIs out of 204 were subsidy dependent;
• In 2006, 122 out of 179 MFIs were subsidy dependent;
• MFIs in Africa and South Asia were more subsidy-dependent, while Latin American MFIs were less subsidized;
• MFIs with bank or NGO status were more subsidy-dependent;
• MFIs with group lending were more subsidy-dependent, while those that lend to individuals were relatively less subsidy-dependent;
• MFIs that provide education and health services in addition to financial services were more subsidy-dependent;
• MFIs’ financial performance declined substantially without subsidies.

The paper highlights factors that contribute to and decrease the sustainability of microfinance. It also discusses the policy implications of the findings for microfinance stakeholders such as governments, donors, practitioners and clients.