Subsidy Uncertainty and Microfinance Mission Drift

43 Pages Posted: 26 Dec 2010 Last revised: 21 Apr 2013

See all articles by Beatriz Armendariz

Beatriz Armendariz

Harvard University; University College London; Université Libre de Bruxelles (ULB) - CERMi (Centre for European Research in Microfinance)

Bert D'Espallier

Hogeschool-Universiteit Brussel (HUBrussel); Catholic University of Louvain (UCL) - Lessius University College

Marek Hudon

Université Libre de Bruxelles (ULB) - Solvay Brussels School of Economics and Management

Ariane Szafarz

Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) & CERMi

Date Written: 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.

Keywords: Microfinance, Subsidies, Mission Drift, Poverty Reduction, Average Loan Size, Interest Rate

JEL Classification: F35, G21, G28, O54, O57

Suggested Citation

Armendariz, Beatriz and D'Espallier, Bert and Hudon, Marek and Szafarz, Ariane, Subsidy Uncertainty and Microfinance Mission Drift (April 20, 2013). Available at SSRN: https://ssrn.com/abstract=1731265 or http://dx.doi.org/10.2139/ssrn.1731265

Beatriz Armendariz

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Université Libre de Bruxelles (ULB) - CERMi (Centre for European Research in Microfinance) ( email )

Campus du Solbosch
Avenue F.D. Roosevelt 21 - CP145/1
B-1050 Brussels
Belgium

Bert D'Espallier

Hogeschool-Universiteit Brussel (HUBrussel) ( email )

Stormstraat 2
Brussels, 1000
Belgium

Catholic University of Louvain (UCL) - Lessius University College ( email )

Department of Business Studies
Korte Nieuwstraat 33
Antwerp, 2000
Belgium

Marek Hudon

Université Libre de Bruxelles (ULB) - Solvay Brussels School of Economics and Management ( email )

50 Avenue Roosevelt
Brussels 1050
Belgium

Ariane Szafarz (Contact Author)

Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) & CERMi ( email )

50 Avenue Roosevelt
Brussels 1050
Belgium

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