Microfinance is generally seen as a way to fix credit markets and unleash the productive capacities of poor people dependent on self-employment. The microfinance sector grew quickly since the 1990s, paving the way for other forms of social enterprise and social investment. But recent evidence shows only modest average impacts on customers, generating a backlash against microfinance. We reconsider the claims about microfinance, highlighting the diversity in evidence on impacts and the important (but limited) role of subsidy. We conclude by describing an evolution of thinking: from microfinance as narrowly-construed entrepreneurial finance toward microfinance as broadly-construed household finance. In this vision, microfinance yields benefits by providing liquidity for a wide range of needs rather than solely by boosting business income.
By Jonathan Morduch and Robert Cull
By Jonathan Morduch and Robert Cull
Recent evidence suggests only modest social and economic impacts of microfinance. Favorable cost-benefit ratios then depend on low costs. This paper calculates the costs of microcredit and other elements of the microcredit business model using proprietary data on 1,335 microfinance institutions between 2005 and 2009, jointly serving 80.1 million borrowers. The costs of making small loans to poorer clients are high, and when revenues fall short of costs, subsidies are necessary to deliver services to those clients on a sustainable basis. Using a method that accounts for the opportunity costs of all forms of subsidy, the analysis finds that the median institution receives five cents of subsidy per dollar lent and $51 of subsidy per borrower (in PPP adjusted terms). Relatively low levels of median subsidy suggest that even modest benefits of microcredit could yield impressive cost-benefit ratios. The distribution of subsidies is highly skewed, however: the average subsidy per dollar lent is 13 cents and the average subsidy per borrower is $248. The data show that subsidies per borrower are substantially higher for commercial microfinance banks and some non-bank financial institutions that make relatively large loans. MFIs organized as non-governmental organizations (NGOs), in contrast, generally rely less on subsidy.
By Robert Cull, Asli Demirgüç-Kunt, and Jonathan Morduch
By Robert Cull, Asli Demirgüç-Kunt, and Jonathan Morduch
The Social Meaning of Money too shows how preferences develop and are reinforced by social contexts. Economists have not yet paid much attention to preference formation, but the work so far suggests that it is a promising path for empirical inquiry, especially as researchers look to next steps in understanding the economics of gender and the nature of decision-making under conditions of substantial scarcity.
By Jonathan Morduch
November 7, 2015
By Jonathan Morduch
Economics and the Social Meaning of Money
The Social Meaning of Money too shows how preferences develop and are reinforced by social contexts. Economists have not yet paid much attention to preference formation, but the work so far suggests that it is a promising path for empirical inquiry, especially as researchers look to next steps in understanding the economics of gender and the nature of decision-making under conditions of substantial scarcity.
