Microfinance Institutions Sustainability

Decent Essays

MFI sustainability: The role of subsidies and grants
Microfinance institutions (MFI) have created intense debates in an industry of traditional banking. Being primarily focused on mission of poverty reduction through economic stimulation of low income areas, MFI have sharpened the credit policy to specification of area of interests. The major distinction is loan interest rate being notably higher in comparison to profit orientated financial institutions (Rosenberg et al. 2009). The reason roots in excessive cost of funds and administrative loses faced by growing industry. As noted in Cull (2009), interest paid by borrowers represents the struggle of MFI to overcome the burden of expenses and achieve financial sustainability. The latter however, can be reached by altering the capital structure of MFI through diversification of source of funding or rejection of capital which can lead to malfunction. As soon as the changes are implemented, institutions can proceed to expansion reaching increasing return to scale and beneficially affecting sustainability. This essay would focus on the role on subsidies in performance of MFI. The rationale behind exploring this form of noncommercial capital is that total amount of subsidized capital in MFI reached almost 16 billion in 2009 (Bloomberg, 2012) posing a question regarding the alternative and probably more efficient use of respective funds to support poor. The second reason derives from the number of researches discussed later,

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