Microfinance Subsidy : What we have Learnt So Far?

Microfinance (MF) had been functioning in many parts of the world for several centuries. However, it comes into greater attention and started to get outstanding growth only from the 1970s, since when MF has perceived as an effective tool for poverty alleviation. Thus various donors, as well as governments, started to subsidize microfinance institutions' (MFIs) heavily. But after decades of heavy support, recent impact studies on MFIs have been exhibiting lower than expected performance of the sector. In practice, three major procedures of the experiment have commonly been followed for the impact study, namely, experimental design, quasi-experimental design, and non-experimental design. None of these procedures comes up with any conclusive evidence of poverty alleviation directly brought by the MFIs. Moreover, by relying on subsidy many MFIs remain non-resilient and inefficient. However, depending on impact studies solely to justify MFI subsidy is not sufficient as MFI supposedly play a great role in developing financial system and inclusion where traditional financial institutions are not viable. This paper dealt with these extended roles of MFI based on the extensive literature review. It is evident that for sustainable development in the financial system of the developing countries, the heavy subsidy to MFI industry should be revised and minimized, rather a more market-based framework should be implemented to bring efficiency, innovation, and accountability. Among various market-based financing source, general equity and socially responsible equity investment could be the viable alternative for MFIs. Because equity investment eventually transfers the low-cost fund (needed for sustainability) as well as control (essential for achieving efficiency and innovation) over the MFIs. This research can be extended to the empirical study of the financial viability of MFIs without subsidy in the future