Performance of microfinance: the role of subsidies

Microfinance institutions (MFIs) strive for financial sustainability, but also for the empowerment of the poor. The social nature of MFIs is mainly financed by subsidies. This paper measures the sustainability of microfinance, employing Yaron’s Subsidy Dependence Index (SDI) which measures the social cost of subsidized MFIs. Generating the data set directly from the audit reports of the 204 MFIs with 23 million borrowers in 54 Countries, the results show that microfinance sector is highly subsidized. Moreover, once subsidies are accounted for, MFIs financial performance declines substantially. Further, the paper also highlights the factors which contribute to and decrease the sustainability of microfinance.