Marek Hudon

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

Summary Using an original database of rating agencies, this paper gives empirical evidence on the impact of subsidy intensity on the efficiency of Microfinance Institutions (MFIs). We find that subsidies have had a positive impact on efficiency, in the sense that MFIs that received subsidies are more efficient than those that do not. However, we find also that subsidization beyond a certain threshold renders the marginal effect on efficiency negative. In our sample, 26% of MFIs receive levels of subsidization higher than that threshold, which implies that a marginal cut on subsidy intensity would increase their efficiency.

Surplus Distribution in Microfinance Differences Among Cooperative, Nonprofit, and Shareholder Forms of Ownership

How do microfinance institutions (MFIs) allocate their surplus to stakeholders? This article shows that this allocation process varies depending on the MFI ownership structure. Nonprofit organizations and shareholders-held MFIs exhibit a tendency to largely keep their surplus within the MFI as a self-financing margin (reserve accounts, future investments, and capital increase) rather than transferring it to their clients (interest rate decrease) and their employees (salary increase). The surplus distribution in COOPs is more in favor of providers and employees. Finally, the article discusses the importance of these findings for the evaluation of MFIs by policy makers.

Are Financial and Social Efficiency Mutually Exclusive? A Case Study of Vietnamese Microfinance Institutions

A major debate in microfinance focuses on the existence of a trade-off between the financial sustainability of microfinance institutions (MFIs) and their outreach to poor clients. This paper adds to this debate by analyzing whether financial and social efficiency are mutually exclusive in a context of implicit subsidies by the state and international donors. We use data from a sample of 28 Vietnamese MFIs and apply Data Envelopment Analysis (DEA) to identify the existence of a trade-off. Our analysis shows that for Vietnamese MFIs financial and social efficiency are not related. We interpret this as evidence for the fact that there is no support to believe that there is such a trade-off. Subsidies, based on which most Vietnamese MFIs currently operate, helps them to show high financial efficiency, while at the same time being able to attain their social goals. Nevertheless, this model may not be sustainable in the long-term.

To whom should we be fair? Ethical issues in Balancing Stakeholder Interests from Banco Compartamos Case Study

In the world of microfinance, interest rate ethics is an important issue, thrown into the limelight by the Initial Public Offering of Compartamos which resulted in millions of dollars of gains, some of which found their way into private pockets. These high gains were based on high interest rates, raising ethical questions. The paper then uses a stakeholder analysis to explain the interests of different stakeholders in this case and present that fairness to one group of stakeholders is often at the expense of another group. We take the position that in this case, specifically, the firm objectives could have been met without such ethical trade-offs. The specifics of the case are then generalised to all NGOs participating in for-profit firms.

A Case Study of Microfinance and Community Development Banks in Brazil Private or Common Goods

Inclusive financial sectors are essential to poverty alleviation. While microcredit can be governed as a private good, self-managed civil society organizations propose an alternative way of managing financial services. Brazil’s Community Development Banks (CDBs) are growing and dynamic manifestations of these nonprofit organizations. Based on field research in Brazil, this article uses Elinor Ostrom’s design principles of successful self-governing common-pool resource organizations to analyze CDBs’ microcredit system. Our results suggest that private goods could be altered when they are governed by community self-managed enterprises. They become hybrid goods as they mix the characteristics of private and common goods. This change is facilitated by specific organizational arrangements such as self-governance that emerge from grassroots dynamics and the creation of collective-choice arenas. These arrangements help strengthen the inclusion properties of nonprofit microcredit services.

Subsidy Uncertainty and Microfinance Mission Drift

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.

Microfinance studies : introduction and overview

Microfinance (MF) has grown over the last two decades into an important sub-field of development studies. This special issue of Oxford Development Studies explores the contributions of MF, drawing particularly on research conducted in India. After a brief overview of the emergence of MF as a research field, this introduction develops three themes. First, we argue that MF interventions generally involve, and assume a process of transformation of, financially excluded people and groups who are not fully dominated by the logic of market exchange but have histories, culture, social relationships and politics structured by other kinds of authority and dynamics. Second, we argue that understanding MF interventions at the local level requires the social and political analysis of global development architecture, while MF may also play a role in consolidating or cementing global political economy at its base. Third, we argue that MF interventions have provided fertile ground for research into the causes and consequences of poverty. The introduction ends with summaries of the contents of the special issue.

Aid Volatility and Social Performance in Microfinance

Uncertainty makes objectives harder to reach. This article examines whether uncertainty in subsidies leads to mission drift in microfinance institutions (MFIs). Using a worldwide sample of 1,151 MFIs active in 104 countries, we find that interest rates increase with aid volatility while average loan size (ALS) is inversely related to aid volatility. These results suggest that MFIs consider ALS as a signaling device for commitment to their social mission, but use interest rates as an adjustment variable to cope with uncertainty. The policy prescription to donor agencies wishing to curtail the rise in interest rates is to deliver subsidies predictably and transparently.

Microfinance from the Clients' Perspective: An Empirical Enquiry into Transaction Costs in Urban and Rural India

Inclusive financial sectors are important for development in terms of equity and efficiency. Although microfinance has developed rapidly, little is known about the actual costs for clients to access microfinance services, except for interest rates. The insufficient outreach of microfinance in rural areas remains one of the main challenges for the sector. This paper uses the individual data of 255 clients in India and the data of 48 groups to which they belong to compare the transaction costs (TCs) between urban and rural microfinance clients. The results suggest that the TCs incurred by urban microfinance borrowers are globally higher than those incurred by their rural counterparts (4.81% compared with 3.35%), mainly because of their opportunity expenses and individual costs that are unrelated to microfinance groups. Yet, when considering a households total monthly expenditure level, the microfinance TCs constitute a much higher relative expenditure for rural households than for their urban counterparts. Total TCs are still relatively low compared with the main cost of loans, i.e., their interest rates.

From Distant Neighbours to Bedmates: Exploring the Synergies between the Social Economy and Sustainable Development

To introduce this special issue we explore the conceptual and practical synergies between the social economy and sustainable development. New empirical evidence is presented on the emergence of these two research fields and the increasing combination of these fields in the literature. Several avenues through which social enterprises can contribute to the transition towards sustainable development are then identified. This is followed by a discussion of how and why the combination can be particularly fruitful both for the social economy and for sustainability transition movements. We also highlight some important challenges facing the social economy with regard to its contribution to sustainable development. Finally we introduce the papers that constitute this special issue and show how they contribute, individually and collectively, to a better understanding of the increasing linkage between the social economy and sustainable development.