Working Paper Series, Uppsala Center for Labor Studies, Department of Economics, Uppsala University
The Outreach and Sustainability of Microfinance: Is There a Tradeoff?
() 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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