The Microfinance Business Model: Enduring Subsidy and Modest Profit

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 betw...

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Main Authors:	Cull, Robert, Demirgüç-Kunt, Asli, Morduch, Jonathan
Format:	Journal Article
Published:	Published by Oxford University Press on behalf of the World Bank 2019
Subjects:	MICROFINANCE MICROCREDIT POVERTY SUBSIDIES COST-BENEFIT ANALYSIS COMMERCIALIZATION IMPLICIT SUBSIDY NONPROFIT
Online Access:	http://hdl.handle.net/10986/32775

id	okr-10986-32775
recordtype	oai_dc
spelling	okr-10986-327752021-05-25T10:54:37Z The Microfinance Business Model: Enduring Subsidy and Modest Profit Cull, Robert Demirgüç-Kunt, Asli Morduch, Jonathan MICROFINANCE MICROCREDIT POVERTY SUBSIDIES COST-BENEFIT ANALYSIS COMMERCIALIZATION IMPLICIT SUBSIDY NONPROFIT 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. 2019-12-04T20:59:40Z 2019-12-04T20:59:40Z 2018-06 Journal Article World Bank Economic Review 1564-698X http://hdl.handle.net/10986/32775 CC BY-NC-ND 3.0 IGO http://creativecommons.org/licenses/by-nc-nd/3.0/igo World Bank Published by Oxford University Press on behalf of the World Bank Publications & Research Publications & Research :: Journal Article
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
topic	MICROFINANCE MICROCREDIT POVERTY SUBSIDIES COST-BENEFIT ANALYSIS COMMERCIALIZATION IMPLICIT SUBSIDY NONPROFIT
spellingShingle	MICROFINANCE MICROCREDIT POVERTY SUBSIDIES COST-BENEFIT ANALYSIS COMMERCIALIZATION IMPLICIT SUBSIDY NONPROFIT Cull, Robert Demirgüç-Kunt, Asli Morduch, Jonathan The Microfinance Business Model: Enduring Subsidy and Modest Profit
description	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.
format	Journal Article
author	Cull, Robert Demirgüç-Kunt, Asli Morduch, Jonathan
author_facet	Cull, Robert Demirgüç-Kunt, Asli Morduch, Jonathan
author_sort	Cull, Robert
title	The Microfinance Business Model: Enduring Subsidy and Modest Profit
title_short	The Microfinance Business Model: Enduring Subsidy and Modest Profit
title_full	The Microfinance Business Model: Enduring Subsidy and Modest Profit
title_fullStr	The Microfinance Business Model: Enduring Subsidy and Modest Profit
title_full_unstemmed	The Microfinance Business Model: Enduring Subsidy and Modest Profit
title_sort	microfinance business model: enduring subsidy and modest profit
publisher	Published by Oxford University Press on behalf of the World Bank
publishDate	2019
url	http://hdl.handle.net/10986/32775
_version_	1764477270787883008

The Microfinance Business Model: Enduring Subsidy and Modest Profit

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