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Subsidies and Self-Sustainability

Subsidies and Self-Sustainability. Lecture 11 Week 6. Structure of this lecture. Subsidies: Evidence from the Grameen Bank Costs and benefits of subsidies -The Case of Thailand - The Case of Bangladesh Moving the debate forward Smart Subsidies Subsidizing the very poor

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Subsidies and Self-Sustainability

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  1. Subsidies and Self-Sustainability Lecture 11 Week 6

  2. Structure of this lecture • Subsidies: Evidence from the Grameen Bank • Costs and benefits of subsidies -The Case of Thailand - The Case of Bangladesh • Moving the debate forward • Smart Subsidies • Subsidizing the very poor • Strategic subsidization over the long term • Concluding comments

  3. Evidence from the Grameen Bank Two important considerations: - Accounting practices (e.g., Grameen did not earn profits in 1985-1996) -Diverse sources of profits (e.g., “soft loans”) One should systematically account for subsidies L (1+r*) (1-d) + I = L + C + S r* = [C + S - I +dL] / [L(1-d)] (r* - r) / r = [C + S - I +dL - r(1-d)L] / [r L(1-d)] = (S + K - P) / [rL(1-d)] (SDI)  Grameen Bank needed to increase lending rates by 75% to break-even without subsidies! But lenders like Grameen are driven by a “social mission”

  4. Costs and benefits The case of BAAC Thailand --Townsend and (2001) The costs in terms of subsidies: 4.6 billion baht per year Did such costs yield comparable benefits? Theoretically: A General Equilibrium model with consumption smoothing In practice: estimation of benefits = 13.5 billion from risk reduction

  5. Bangladesh (Khandker (1998) for the case of the Grameen Bank • Focuses on household consumption • It costs 91 cents in subsidies for every dollar of benefit received by borrowers (when lending to women) • While it costs 1.48 if subsidy directed towards male borrowers Estimates reviewed indicate lower subsidies and lower benefits • Bangladesh (Khandker) for the case of BRAC: 2.53 for females, and 2.59 for male In reality: very difficult to assess, among other things, the lack of counterfactual

  6. Moving the debate forward • Clear sense of objectives and social weights • The impact of subsidy on credit demand and supply • Impact on average returns to borrowers • Impact on other (nonsubsidized) lenders

  7. Smart subsidies

  8. Subsidization of very poor clients

  9. Concluding Remarks • Subsidies in modern microfinance can be well-designed • Some institutions have already achieved financial self-sufficiency and social missions (e.g., ASA) • Some parts of the world are inherently more costly (e.g., Africa and Latin America) • Concerns about subsidies having a negative impact on efficiency might be justified in some cases • The objective in principle is to maintain “hard budget constraints” • Scale and innovations are also a concern • Chapter 10 Armendáriz – Morduch on “Managing Microfinance” Enjoy the weekend -

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