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Department of Economics, Uppsala University Working Paper Series, Uppsala Center for Labor Studies, Department of Economics, Uppsala University

No 2012:18:
The Outreach and Sustainability of Microfinance: Is There a Tradeoff?

Niklas Bengtsson () and Jan Pettersson

Abstract: Both practitioners and academics posit that microfinance organizations face a tradeoff between financial performance and outreach. We designed a randomized controlled trial of a transitory interest rate subsidy to investigate this tradeoff. We find that subsidized credit substantially increases demand, although a non-trivial fraction of members abstain from borrowing even when credit is virtually free. Among those who borrow, we find no effect on default rates. Whereas the intervention is initially unpro table due to lost interest rate revenues, profits eventually catch up because subsidized clients are more likely to apply for new loans (with interest) after the subsidy is lifted. In addition, because loan-taking clients more often deposit savings in the bank, the subsidy decreases the bank's dependence on external funding. We conclude that transitory interest rate subsidies that are unpro table in the short run may improve outreach without undermining sustainability in the long run. However, outreach ultimately appears constrained by low returns to capital and weak market integration among the poor.

Keywords: Microfinanance; Collateral; Demand for credit; Interest rate changes; Experimental methods; Randomized controlled trial; RTC; (follow links to similar papers)

JEL-Codes: C93; O12; O16; (follow links to similar papers)

27 pages, October 30, 2012

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