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

Cozarenco, Anastasia; Hartarska, Valentina; Szafarz, Ariane

doi:10.1080/00036846.2022.2041176

Cited by 10 publications

(8 citation statements)

References 78 publications

(100 reference statements)

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“…Mia et al (2022) found that more leveraged MFIs had lower cost while the number of leverage sources (donations and loans to the MFI) did not affect costs, suggesting a role for deposits because of their effect on leverage. This result is consistent with recent literature on MFI efficiency and scope economies highlighting the need to account for business type (Malikov & Hartarska, 2018) and the findings that savings and subsidies interfere to affect scale economies in saving‐and‐loan MFIs (Cozarenco et al, 2022). Dasgupta and Roy Chowdhury (2022) show a different mechanism for efficiency differences by MFIs business type.…”

Section: Brief Literature Overviewsupporting

confidence: 92%

“…We specify a cost function following the relevant banking and microfinance literature and apply a modification that accounts for the limited number of rural‐only observations and the specific nature of our data. Specifically, we use the translog functional form adapted from the banking literature (Gilligan et al, 1984; Hughes & Mester, 2013) and the microfinance literature (e.g., Caudill et al, 2009; Cozarenco et al, 2022; Malikov & Hartarska, 2018). The cost function is:

\begin{array}{l} \ln C & newline= β_{0} goodbreak+ \sum_{i} β_{i} \ln y_{i} goodbreak+ \frac{1}{2} \sum_{i} \sum_{j} β_{ij} \ln y_{i} \ln y_{j} goodbreak+ \sum_{n} γ_{n} \ln w_{n} goodbreak+ \frac{1}{2} \sum_{n} \sum_{m} γ_{nm} \ln w_{n} \ln w_{m} goodbreak+ \\ \sum_{n} \sum_{i} δ_{ni} \ln w_{n} \ln y_{i} goodbreak+ φ_{1} \ln r goodbreak+ φ_{2} \ln r^{2} goodbreak+ \sum_{i} θ_{i} \ln r \ln y_{i} goodbreak+ \sum_{n} ρ_{n} \ln r \ln w_{n} goodbreak+ λ_{1} \ln e goodbreak+ \\ λ_{2} \ln e^{2} goodbreak+ \sum_{i} ν_{i} \ln e \ln y_{i} goodbreak+ \sum_{n} τ_{n} \ln e \ln w_{n} goodbreak+ κ \ln r \ln e goodbreak+ ψ_{1} t goodbreak+ ψ_{2} t^{2} goodbreak+ \sum_{i} α_{i} t \ln y_{i} goodbreak+ \\ \sum_{n} ϕ_{n} t \ln w_{n} goodbreak+ italicζt \ln r go... \end{array}

…”

Section: Methodsmentioning

confidence: 99%

“…Much of the microfinance literature is focused on scale economies, which exist when larger MFIs have lower per unit cost of output (see for example Cozarenco et al, 2022, Parmeter & Hartarska, 2021). Expanding from urban to rural markets or vice versa may not be cost decreasing if large scope diseconomies (from serving both rural and urban markets with specialized produces for each market) overwhelm potential scale economies.…”

Section: Brief Literature Overviewmentioning

confidence: 99%

“…literature (e.g., Caudill et al, 2009;Cozarenco et al, 2022;Malikov & Hartarska, 2018). The cost function is:…”

Section: The Cost Functionmentioning

confidence: 99%

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Scope economies from rural and urban microfinance services

Hartarska

Zhang

Nadolnyak

2023

Southern Economic Journal

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Microfinance institutions (MFIs) operate in both rural and urban credit markets and provide financial services to the poor not served by commercial banks. MFIs must keep operating costs low to better serve their clients. We evaluate whether MFIs can lower their costs by exploiting economies of diversification from serving both rural and urban markets rather than specializing in only one. We apply a novel method to estimate scope economies that minimizes the well‐known “excessive extrapolation” and accommodates MFIs' heterogeneity. Analyzing panel data on MFIs from 105 countries over 2008–2018, we find that about half of loan‐only MFIs benefited from diversification and enjoyed scope economies of 16.6% while over two thirds of savings‐and‐loan MFIs experienced scope diseconomies of 11.7% suggesting advantages from specialization. Over time, the declining magnitudes and the prevalence of scope (dis)economies in both groups suggest that loan‐only MFIs have been able to serve costlier marginal clients while savings‐and‐loan MFIs have been learning and decreasing their scope diseconomies. Stakeholders encouraging the transformation of MFIs into regulated savings‐and‐loan institutions that serve both rural and urban markets should be aware of the presence of scope diseconomies for that business type and offer adequate support.

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Section: Brief Literature Overviewsupporting

confidence: 92%

\begin{array}{l} \ln C & newline= β_{0} goodbreak+ \sum_{i} β_{i} \ln y_{i} goodbreak+ \frac{1}{2} \sum_{i} \sum_{j} β_{ij} \ln y_{i} \ln y_{j} goodbreak+ \sum_{n} γ_{n} \ln w_{n} goodbreak+ \frac{1}{2} \sum_{n} \sum_{m} γ_{nm} \ln w_{n} \ln w_{m} goodbreak+ \\ \sum_{n} \sum_{i} δ_{ni} \ln w_{n} \ln y_{i} goodbreak+ φ_{1} \ln r goodbreak+ φ_{2} \ln r^{2} goodbreak+ \sum_{i} θ_{i} \ln r \ln y_{i} goodbreak+ \sum_{n} ρ_{n} \ln r \ln w_{n} goodbreak+ λ_{1} \ln e goodbreak+ \\ λ_{2} \ln e^{2} goodbreak+ \sum_{i} ν_{i} \ln e \ln y_{i} goodbreak+ \sum_{n} τ_{n} \ln e \ln w_{n} goodbreak+ κ \ln r \ln e goodbreak+ ψ_{1} t goodbreak+ ψ_{2} t^{2} goodbreak+ \sum_{i} α_{i} t \ln y_{i} goodbreak+ \\ \sum_{n} ϕ_{n} t \ln w_{n} goodbreak+ italicζt \ln r go... \end{array}

…”

Section: Methodsmentioning

confidence: 99%

Section: Brief Literature Overviewmentioning

confidence: 99%

“…literature (e.g., Caudill et al, 2009;Cozarenco et al, 2022;Malikov & Hartarska, 2018). The cost function is:…”

Section: The Cost Functionmentioning

confidence: 99%

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Scope economies from rural and urban microfinance services

Hartarska

Zhang

Nadolnyak

2023

Southern Economic Journal

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“…Some segments of social banking, such as microcredit activities benefit however from a specific regulatory framework that recognizes their prosocial specifies. Regulators in most industrialized countries carefully monitor the activities of microcredit institutions, probably because these institutions receive significant subsidies from national and supranational public authorities and their activities belong to social finance (Morduch and Ogden, 2019;Cozarenco et al, 2022). Key regulatory rules impose ceilings on interest rates and loan sizes (see Cozarenco and Szafarz, 2019, for a detailed lists of obligatory and recommended ceilings in place in North America and Europe).…”

Section: Discussionmentioning

confidence: 99%

The Changing Role of Banks in the Financial System: Social Versus Conventional Banks

Cornée

Cozarenco

Szafarz

2023

Palgrave Macmillan Studies in Banking and Financial Institutions

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Social banks have emerged as a new group of banks that call themselves as "alternative", "ethical", "sustainable", and "value-based". Their small market share increases at a rapid pace and is still expected to grow in the future. Social banks are institutions with both (at least some) activities of financial intermediation and one or several non-financial missions, typically based on environmental and social values. By unpacking the observable, real-life differences between social banks and conventional banks, this chapter paves the way to theorizing the multidimensional characteristics of social banks within the global banking industry. Business models, governance issues, lending technologies; and social outcomes appear to be key aspects to understand how innovative, value-based, social banks work and how they might one day substantively affect mainstream banking business.

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