Too Many Cooks Spoil the Broth: The Conflicting Impacts of Subsidies and Deposits on the Cost-Efficiency of Microfinance Institutions

36 Pages Posted: 21 Dec 2018

See all articles by Anastasia Cozarenco

Anastasia Cozarenco

Montpellier Business School; Université Montpellier II - Montpellier Research in Management (MRM); Université Libre de Bruxelles (ULB) - CERMi (Centre for European Research in Microfinance)

Valentina Hartarska

Auburn University - Department of Agricultural Economics and Rural Sociology; Auburn University - Department of Finance

Ariane Szafarz

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

Date Written: December 3, 2018

Abstract

The costs and benefits of subsidized microfinance are still a controversial topic. We evaluate how subsidies affect the cost-efficiency of microfinance institutions (MFIs). At the same time, we account for endogenous self-selection into the business models of credit-only versus credit-plus-deposit MFIs. Our findings draw a contrasting picture. First, they suggest that unsubsidized credit-plus-deposit MFIs have achieved optimal capacity and therefore constitute the most cost-efficient group of institutions in our sample. Second, the unsubsidized credit-only MFIs are the farthest away from their minimum cost. Between the two polar cases, there are subsidized institutions, among which the credit-only ones are closer to optimal capacity. Our results reveal the redundancy between subsidization and deposit-taking in microfinance. In conclusion, combining funds from donors and depositors tends to harm cost-efficiency.

Keywords: Microfinance, Cost Efficiency, Scale Economies, Subsidies, Deposit Accounts

JEL Classification: O14, D24, G21, O16, F35

Suggested Citation

Cozarenco, Anastasia and Hartarska, Valentina and Szafarz, Ariane, Too Many Cooks Spoil the Broth: The Conflicting Impacts of Subsidies and Deposits on the Cost-Efficiency of Microfinance Institutions (December 3, 2018). Available at SSRN: https://ssrn.com/abstract=3295173 or http://dx.doi.org/10.2139/ssrn.3295173

Anastasia Cozarenco

Montpellier Business School ( email )

Université Montpellier II - Montpellier Research in Management (MRM) ( email )

Place Eugène Bataillon
Montpellier, 34095
France

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

Valentina Hartarska

Auburn University - Department of Agricultural Economics and Rural Sociology ( email )

Comer Hall
Auburn, AL 36849
United States

Auburn University - Department of Finance ( email )

Auburn, AL 36849
United States

Ariane Szafarz (Contact Author)

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

50 Avenue Roosevelt
Brussels 1050
Belgium

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