Nonprofit microfinance organizations typically rely on subsidies and donations to finance their operations. The support of donors is often key to the sustainability of these organizations This article examines whether uncertainty in subsidies leads to mission drift in microfinance institutions (MFIs). It finds that interest rates increase with aid volatility while average loan size (ALS) is inversely related to aid volatility. The results of the study suggests that subsidy uncertainty has a detrimental impact on interest rate levels. By studying the impact of aid uncertainty on the management practices of grantees, this article has shed light on the micro level. This is especially relevant in the current context in which aid from developed countries has been compromised in the aftermath of the 2007-2008 economic crisis. With subsidies becoming increasingly scarce, they need to be designed efficiently.
Uncertainty makes objectives harder to reach. This article examines whether uncertainty in subsidies leads to mission drift in microfinance institutions (MFIs). Using a worldwide sample of 1,151 MFIs active in 104 countries, we find that interest rates increase with aid volatility while average loan size (ALS) is inversely related to aid volatility. These results suggest that MFIs consider ALS as a signaling device for commitment to their social mission, but use interest rates as an adjustment variable to cope with uncertainty. The policy prescription to donor agencies wishing to curtail the rise in interest rates is to deliver subsidies predictably and transparently.
Bert D’Espallier, Marek Hudon, and Ariane Szafarz
Aid Volatility and Social Performance in Microfinance
Nonprofit and Voluntary Sector Quarterly 0899764016639670, first published on April 7, 2016 doi:10.1177/0899764016639670