Microfinance Subsidy Efficiency

The microfinance industry has been growing rapidly with an influx of capital from many sources. The donors of these funds want to make sure that the subsidization of the MFI is being put to good use. Marek Hudon and Daniel Traca were able to research the efficiency effects of such subsidies in microfinance. The efficiency for a MFI was found by calculating the productivity according to the amount and size of loans. In microfinance there are two sides of the argument where one believes subsidies reduces sustainability and efficiency. The reason they believe it reduces efficiency is MFIs who are unsustainable can continue doing business with subsidies. The other side of the debate is that subsidies are beneficial to MFIs because it allows them to invest more in infrastructure and become efficient in the long run. Since many MFIs are difficult to monitor for the donors it might be easy to get away with some inefficiencies. The researchers’ central question was to understand the level of subsidies that will help out a MFI and when increased subsidization might cause inefficiencies.
The research was done on 71 large MFIs since the data could be verified with their financial statements and it excludes MFIs with savings services since the costs are difficult to track. Many of the subsidies are difficult to calculate accurately since they can come from a variety of sources. Cash, tax benefits, and public goods are some examples of the subsidies a MFI may receive. The amount of subsidization for a MFI was another important aspect of the research. This was calculated by finding the amount of subsidy equity divided by the total equity for a MFI which resulted in subsidy intensity. The mean rating of subsidy intensity was 0.73 while only 16 received no subsidies. As seen most MFIs rely heavily upon subsidization as it is a necessary part of their business. The argument for subsidies is that it allows many MFIs to invest in their infrastructure and human resources. This becomes especially important for MFIs when they expand services and loan larger amounts out. The research was able to show MFI productivity per staff member increased with larger loans due to economies of scale. Almost the entire sample size shows that subsidies allow MFIs to be more productive. However, from the sample it was found 26% of the MFIs were experiencing deceasing efficiency with an increase of subsidies.
The study found that MFIs who had a rating of 0.88 or above in subsidy intensity were prone to inefficiencies. As seen in the figure below the increased efficiency bottoms out around 0.88 subsidy intensity and then the MFI becomes less efficient as they rely more on subsidies for their funding. The results do not call for a clear winner in the debate on subsidy efficiency. The effects of subsidies are seen strongly at the lower levels of subsides. Still subsides are seen to bring a decrease in efficiency at levels about 0.88 due in part to moral hazard. Only a quarter of the MFIs were in the situation of decreased efficiency because of subsides. If the MFIs were able to decrease the amount of subsidies then the marginal efficiency rate would increase. Unfortunately, the lack of data has been key in holding back a definitive answer to the efficiency of subsidies.