Subsidy Uncertainty and Microfinance Mission Drift
43 Pages Posted: 26 Dec 2010 Last revised: 21 Apr 2013
Date Written: April 20, 2013
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.
Keywords: Microfinance, Subsidies, Mission Drift, Poverty Reduction, Average Loan Size, Interest Rate
JEL Classification: F35, G21, G28, O54, O57
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