What win-win lost: rethinking microfinance subsidy in the past and designing for the future

The modern microfinance industry was built on the idea that lenders could (and should) profit while serving poor and excluded customers. This idea - that lenders could 'win' while customers would also 'win' - inspired the broader field of social enterprise and opened possibilities for business-driven responses to social problems. However, in hindsight it is possible to see that not only was the idea flawed - important claims underpinning the core idea have failed to find empirical support - but the lingering belief that 'win-win' was right continues to handicap not only financial inclusion and consumer protection policies, but the social investment and finance industry as a whole. The win-win formulation was driven by the assertion that customers would be indifferent to the level of interest rates on loans and that it was simply access to finance that mattered most to customers. The argument was used to justify charging the highest interest rates to the most operationally expensive customers, who turned out to not coincidentally be the poorest customers. However, studies show that customers are indeed sensitive to interest rates and that high interest rates discourage borrowers. Moreover, despite charging high rates, financial data show that most lenders failed to earn profit after fully accounting for the subsidies received from donors and social investors. Microfinance and the social investment industry it helped spawn remain important tools for addressing poverty and inequality, but both sectors are overdue for a transparent reckoning of the roles of subsidy (including its benefits) and greater recognition of the potential for exclusion caused by high prices and the drive for profitability or 'sustainability'. Muddled thinking on subsidy and prices handicapped the past but does not need to handicap the future.