Too Many Cooks Spoil the Broth : The Conflicting Impacts of Subsidies and Deposits on the Cost-Efficiency of Microfinance Institutions

The costs and benefits of subsidized microfinance are still a controversial topic. We evaluate how subsidies affect the cost-efficiency of microfinance institutions (MFIs). At the same time, we account for endogenous self-selection into the business models of credit-only versus credit-plus-deposit MFIs. Our findings draw a contrasting picture. First, they suggest that unsubsidized credit-plus-deposit MFIs have achieved optimal capacity and therefore constitute the most cost-efficient group of institutions in our sample. Second, the unsubsidized credit-only MFIs are the farthest away from their minimum cost. Between the two polar cases, there are subsidized institutions, among which the credit-only ones are closer to optimal capacity. Our results reveal the redundancy between subsidization and deposit-taking in microfinance. In conclusion, combining funds from donors and depositors tends to harm cost-efficiency