Welfare Implications of Subsidies in Bangladesh's Microfinance Sector

Microfinance institutions (MFIs), unlike traditional financial institutions, seek financial sustainability as well as impoverished empowerment.

Microfinance offers poverty alleviation without the need for government assistance. This promise has yet to be fulfilled after four decades in the sector since the role of subsidies endures despite the current boom in microfinance commercialization. Because of the social welfare approach generated with microfinance institutions, as well as the shift toward commercialization, their performance on the basis of traditional financial ratios, without uncovering their degree of subsidy dependence, only provides a partial, meaningless, or distorted picture of the social costs of running the MFIs. MFIs are mostly funded by donor subsidies because of their social nature. 

The welfare or institutionalised methodology has traditionally been used to analyse the quality of MFIs. The former emphasises assessing the influence on the welfare of the poor, whilst the latter argues for assessing the institution's performance in establishing self-sustainability and reaching out to a wide range of people. Essentially, the institutionalised method uses two metrics to assess success: outreach and long-term viability. There is no universal or agreed-upon definition of a high-performing MFI. Because they depend on a methodological approach, which in turn depends on the determination to give priority to the supply side or the demand side of the financial intermediation, the performance standards and metrics used differ considerably from one author to another or from one organization to another.

In contrast to the welfare state model, modifications to subsidies are required under this strategy, and they must be kept to a bare minimum when an MFI seeks sustainability.

Jannatul Ferdousi Prity is a student of BBA at North South University (NSU) [To contact: [email protected]]