On the Efficiency Effects of Subsidies in Microfinance: An Empirical Inquiry

Hudon, Marek; Traça, Daniel

doi:10.1016/j.worlddev.2009.10.017

Cited by 167 publications

(108 citation statements)

References 21 publications

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“…Since NGOs have no owners, they mainly have to rely on donor money and different kinds of subsidized funding (Hudon and Traca, 2011;Mersland and Urgeghe, 2013). Transformed MFIs,…”

Section: Why Do Mfis Transform?mentioning

confidence: 99%

From NGOs to Banks: Does Institutional Transformation Alter the Business Model of Microfinance Institutions?

et al. 2017

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Microfinance, which pledges to provide financial services to people without access to banking, is chiefly run by non-governmental organizations (NGOs). Little is known about the extent to which the transformation of these NGOs into shareholder-owned and, most often, regulated firms affects the way microfinance institutions (MFIs) conduct their business. By applying the event study methodology to 66 MFIs that have transformed, we quantify the effect that transformation has on the MFIs' business models. Our results suggest that portfolio yield is driven down by 3.9 percentage points due to transformation, indicating that clients get more favorable interest rates. At the same time, MFIs are able to significantly cut down their operational expenses, of which 1.1 percentage points can be attributed to transformation. Other findings include a steep increase in commercial debt leverage and deposits, a significant decrease in the fluctuation of funding costs and a sharp rise in average loan size. Profitability goes down in the short and medium term, while return on equity is driven up in the medium to long run. By exploiting within-MFI data, our approach goes beyond previous studies that mainly relied on between-MFI data. Overall, the results suggest that transformed MFIs become an attractive environment for investors, potentially encouraging a more profit-seeking behavior among transformed MFIs. Acknowledgements.We thank Victoria van Lennep and Li Yang for research assistance in data gathering data. We also AbstractMicrofinance, which pledges to provide financial services to people without access to banking, is chiefly run by non-governmental organizations (NGOs). Little is known about the extent to which the transformation of these NGOs into shareholder-owned and, most often, regulated firms affects the way microfinance institutions (MFIs) conduct their business. By applying the event study methodology to 66 MFIs that have transformed, we quantify the effect that transformation has on the MFIs' business models. Our results suggest that portfolio yield is driven down by 3.9 percentage points due to transformation, indicating that clients get more favorable interest rates. At the same time, MFIs are able to significantly cut down their operational expenses, of which 1.1 percentage points can be attributed to transformation. Other findings include a steep increase in commercial debt leverage and deposits, a significant decrease in the fluctuation of funding costs and a sharp rise in average loan size.Profitability goes down in the short and medium term, while return on equity is driven up in the medium to long run. By exploiting within-MFI data, our approach goes beyond previous studies that mainly relied on between-MFI data. Overall, the results suggest that transformed MFIs become an attractive environment for investors, potentially encouraging a more profit-seeking behavior among transformed MFIs.Word count: 210

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“…Since NGOs have no owners, they mainly have to rely on donor money and different kinds of subsidized funding (Hudon and Traca, 2011;Mersland and Urgeghe, 2013). Transformed MFIs,…”

Section: Why Do Mfis Transform?mentioning

confidence: 99%

From NGOs to Banks: Does Institutional Transformation Alter the Business Model of Microfinance Institutions?

et al. 2017

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“…The CSR literature almost exclusively focuses on commercial sectors (mostly manufacture and trade), which rely on their own revenues and resources to set up social and environmental initiatives. The microfinance sector is quite different in that it is highly subsidized (Hudon & Traca, 2011), with many MFIs still requiring subsidies to cover their costs and finance their loans (UNCDF, 2005) and around USD 1 billion of subsidies given by private and public donors per year over the last 20 years (CGAP, 2006). We could therefore assume that proactive MFIs are able to mobilize funding from outside their institution in order to set up environmental management programs.…”

Section: Financial Performancementioning

confidence: 99%

Green Microfinance: Characteristics of Microfinance Institutions Involved in Environmental Management

Allet

Hudon

2013

J Bus Ethics

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“…If the aim of the French regulator is to segment the credit market, then co-financing arrangements should be prohibited. However, ruling out co-financing while maintaining a very low loan ceiling could compromise the sustainability of the microfinance industry, especially if subsidies dry up (Hudon and Traça, 2011). In any case, forcing MFIs to accept a loan ceiling that is too low to meet the needs of micro-businesses is counterproductive.…”

Section: Resultsmentioning

confidence: 99%

Gender Biases in Bank Lending: Lessons from Microcredit in France

Cozarenco

Szafarz

2015

J Bus Ethics

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The evidence on gender discrimination in lending remains controversial. To capture gender biases in banks' loan allocations, we observe the impact on the applicants of a microfinance institution (MFI) and exploit the natural experiment of a regulatory change imposing a strict EUR 10,000 loan ceiling on microcredit. Descriptive statistics indicate that the presence of the ceiling is associated both with bank-MFI co-financing and with harsher treatment of female borrowers. To investigate causal links, we develop an econometric approach that addresses the concerns of selection biases, multicollinearity, and endogeneity. Our empirical findings suggest that the change in the MFI's gender-related attitude was triggered by banks through co-financing. Hence, we speculate that co-financing pushes ceiling-constrained MFIs to import whatever biases in loan granting that the banks are prone to. Overall, this paper stresses that apparently benign regulations such as loan ceilings can significantly harm the women's empowerment efforts made by MFIs.

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On the Efficiency Effects of Subsidies in Microfinance: An Empirical Inquiry

Cited by 167 publications

References 21 publications

From NGOs to Banks: Does Institutional Transformation Alter the Business Model of Microfinance Institutions?

From NGOs to Banks: Does Institutional Transformation Alter the Business Model of Microfinance Institutions?

Green Microfinance: Characteristics of Microfinance Institutions Involved in Environmental Management

Gender Biases in Bank Lending: Lessons from Microcredit in France

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