@article{74b06861eeac4f87be07cf6012c268b2,
title = "The microfinance business model: Enduring subsidy and modest profit",
abstract = "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.",
keywords = "Commercialization, Cost-benefit analysis, Implicit subsidy, Microcredit, Nonprofit, Poverty",
author = "Robert Cull and Asli Demirg{\"u}{\c c}-Kunt and Jonathan Morduch",
note = "Funding Information: Robert Cull (corresponding author, rcull@worldbank.org) is Lead Economist in the World Bank Development Research Group, Asli Demirg{\"u}{\c c} -Kunt (ademirguckunt@worldbank.org) is Director of Research in the World Bank Development Research Group, and Jonathan Morduch (jmorduch@nyu.edu) is Professor of Public Policy and Economics at the Wagner Graduate School of Public Service at New York University. The views are those of the authors and not necessarily those of the World Bank or its affiliate institutions. The Mix Market provided the data through an agreement with the World Bank Research Department. Confidentiality of institution-level data has been maintained. We have benefited from comments at presentations at Yale, Princeton, George Washington University, and the World Bank. Morduch acknowledges support from the Gates Foundation through the Financial Access Initiative at NYU. We thank Ippei Nishida and Anca Bogdana Rusu for research assistance. A supplementary online appendix for this article can be found at The World Bank Economic Review website. 1 Data are as of December 31, 2013, reported as part of the Microcredit Summit{\textquoteright}s State of the Campaign Report 2015. Data are from https://stateofthecampaign.org/data-reported/, accessed April 15, 2016. Publisher Copyright: {\textcopyright} The Author 2016. Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development / The World Bank. All rights reserved.",
year = "2018",
month = jun,
day = "1",
doi = "10.1093/wber/lhx030",
language = "English (US)",
volume = "32",
pages = "221--244",
journal = "World Bank Economic Review",
issn = "0258-6770",
publisher = "Oxford University Press",
number = "2",
}