subsidies on interest rate are justified if credit market is imperfect( poorer clients' weight &positive social impact)
The role of subsidies in microfinance: Evidence from the Grameen Bank
Use of it
1. subsidy plays an essential role when a MFI starts and expands
2. truly self-sufficient may indicate high interest rate
3.if socially efficient interest rate is lower than break-even rate, thus subsidization is needed
GOOD PRACTICE
GUIDELINES FOR FUNDERS
OF MICROFINANCE
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CGAP (Consultative Group to Assist the poor)
Bibliographical information
October 2006, 2nd edition
A paper of 'THE KEY PRINCIPLES OF MICROFINANCE'
Source evaluation: relevant, detailed, authoritative
Summary: subsidies should complement private sector funds on 3 levels: micro, meso, macro
Use of it:
recommended reading list….
Quotation and paraphrase
'Microfinance can pay for itself, and must do so if it is to reach very large numbers of poor people.' (CGAP 2004) Experience shows that self-sufficiency is possible, and the size of clients can grow satisfyingly only when a MFI is financially sustainable. Meanwhile, larger scale saves operation costs per loan.
A consensus has been reached: to achieve this goal indicates less dependence on subsidies, formalization and commercialization as an integral financial sector (CGAP 2004), thus resulting in higher interest rates.
Origin Statement
Microfinance can pay for itself, and must do so if it is to reach very large numbers of poor people. Unless microfinance providers charge enough to cover their costs, they will always be limited by the scarce and uncertain supply of subsidies from donors and governments.
Microfinance will reach its full potential only if it is integrated into a country's mainstream financial system.
From 'the key principles of microfinance' CGAP 2004

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