Subsidy And Sustainability
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Subsidy and Sustainability
Introduction
The August 20, 2003, Wall Street Journal carried a short article on micro- finance in Latin America (Kaplan 2003). The article starts with the story of Mrs. Esther Simone Garcia, a shopkeeper in rural Mexico. Mrs. Garcia’s $130 loan from Pro Mujer, a leading microlender founded in Bolivia, was enough to improve the range of offerings in Mrs. Garcia’s small grocery store. With the debt repaid and business expanding, the Wall Street Journal reports that Garcia has started raising her ambitions, and even thinks of sending her daughter to college.
“Now, one of the highly praised tools in the global fight against poverty is also proving it can be a viable business,” the article continues, “increasingly drawing investors who seek profits along with the loftier goal of social development.” BancoSol’s 1996 $5 million bond issue in Bolivia and Compartamos’s 2002 $10 million bond issue in Mexico are cited by the Wall Street Journal writer to support the case, along with the news of Bank Rakyat Indonesia’s plan to sell 30 percent of its equity through an initial public offering in late 2003. These banks are proving part of the promise of microfinance—that microlending can be profitable.
The other part of the promise of microfinance is that it can deliver critical benefits to underserved borrowers such as Esther Garcia in Mexico. Some programs have achieved both promises (sustainability and deep outreach to the underserved), but most have not—even though many microlenders are now well-established and run impressively efficient (if not actually profitable) operations. On the other hand, BancoSol, Compartamos, and Bank Rakyat Indonesia (BRI) all serve underserved low-income populations, but their outreach to the most impoverished falls short of the leading programs in Bangladesh and
India. The South Asian programs, on the other hand, have not been as commercially successful as BRI or the top Latin American programs. The challenge remains to find ways to deliver small loans and collect small deposits while not sending fees and interest rates through the roof. And if that objective cannot be met, the challenge is then to develop a framework for thinking about microfinance as a social tool that may need to rely, to some degree and in some places, on continuing subsidies.
The reality is that much of the microfinance movement continues to take advantage of subsidies—some from donors, some from governments, and some from charities and concerned individuals. The Micro banking Bulletin (Microbanking Bulletin 2003), for example, shows that sixty-six out of 124 microlenders surveyed were financially sustainable, a rate just over 50 percent. For microlenders focusing on the “low-end,” just eighteen of forty-nine were financially sustainable as of the July 2003 accounting, a 37 percent rate. On one hand, the data show that even programs reaching poorer clients can do so while covering the full costs of transactions. But, on the other hand, the norm remains subsidization.’
Not only that, but bear in mind that these 124 microlenders in the Microbanking Bulletin data are a relatively impressive bunch, sustainability-wise. They only include programs that have indicated particularly strong commitments to achieving financial sustainability, and have allowed their financial accounts to be reworked by Bulletin staff to improve numbers’ conformity with international accounting principles. Bangladesh’s Grameen Bank, for example, is not included. In terms of financial management, the programs are thus skimmed from the cream of the global crop. We lack comparable data on the 2,572 programs counted by the Microcredit Summit at the end of 2002, but the bulk presumably show weaker financial performances than the select 124 in the Microbanking Bulletin.
Given the role of subsidies in microfinance, one might expect to find a mini-industry of consultants with expertise in cost-benefit analysis, plying their trade on data from program after program, quantifying whether the subsidies are used well or not. In a perfect world, microfinance cost-benefit analyses would be routinely pitted against cost-benefit studies from other poverty reduction efforts, following well-established modes in the study of public finance—such as Rosen (2002). These studies could usefully frame policy debates. In chapter 1, for example, we reported the finding of Binswanger and Khandker (1995) that during the 1970s the state banking system in India appeared to have caused increases in nonfarm growth, employment and rural wages. But those programs were inefficient and badly targeted, and there were just modest benefits on agricultural output and none on agricultural employment. Binswanger and Khandker conclude that the costs of the government programs were so high that they nearly swamped the economic benefits.
Microfinance promises to improve on state banks by reducing costs, improving targeting, and maintaining (or expanding) benefits. Even to get a snapshot of microfinance performance, measuring benefits alone is clearly inadequate. To test the full promise, cost-benefit studies pit independent assessments of subsidized program costs against measured benefits. Cost-benefit studies can show that even if a microfinance program delivers less impact than alternative uses of funds (e.g., for schools or health clinics), supporting the microlender could still end up being a more effective use of funds if the microlender delivers more impact for a given budget.
But in fact, we know of just two serious cost-benefit analyses of microfinance programs—and those were completed by researchers rather than by donors. Microfinance is not an outlier with regard to the lack of rigorous evaluations. As Lant Pritchett argues in his paper “It Pays to Be Ignorant,” rigorous impact studies of health and education interventions are few as well.2 Pritchett argues that the general lack of rigorous impact analyses is no accident: Most programs have little incentive to be seriously evaluated. After all, why risk a negative assessment? So programs fail to collect the kinds of data required, especially data on appropriate control groups. Collecting data also takes resources away from programs’ core missions: doing microfinance. In the end, for most programs the costs outweigh the benefits of undertaking cost-benefit studies.
Donors, on the other hand, should be keen on cost-benefit analyses since