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Subsidy Uncertainty and Microfinance Mission DriftBeatriz ArmendarizHarvard University; University College London; CERMi Bert D'EspallierHogeschool-Universiteit Brussel (HUBrussel); Catholic University of Louvain (UCL) - Lessius University College Marek HudonUniversité Libre de Bruxelles (ULB) - Solvay Brussels School of Economics and Management Ariane SzafarzUniversité Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) & CERMi April 20, 2013 Abstract: We demonstrate that subsidy uncertainty in microfinance can lead to mission drift and defeat poverty alleviation efforts. Our model shows that microfinance institutions, fearing that subsidies may dry up, have no alternative but to build precautionary savings by serving wealthier clients, thereby deviating from their poverty alleviation mission. Using data from rating agencies, we find a positive relationship between subsidy uncertainty and the interest rate charged to borrowers. The policy prescription to donors wishing to maximize social impact is to deliver subsidies in a predictable and transparent way.
Number of Pages in PDF File: 43 Keywords: Microfinance, Subsidies, Mission Drift, Poverty Reduction, Average Loan Size, Interest Rate JEL Classification: F35, G21, G28, O54, O57 working papers seriesDate posted: December 26, 2010 ; Last revised: April 21, 2013Suggested CitationContact Information
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