Welfare implications of subsidies in the microfinance industry in Bangladesh

Abstract

This chapter assesses welfare implications of intensified competition among microfinance institutions (MFIs) arising from the high level of subsidy toward MFIs in Bangladesh. It shows that demand of microfinance products is substitutable across MFIs. Such high substitution sheds a note of caution on subsidizing different MFIs simultaneously. Our simple welfare calculation shows that only around 30% of all upazilas (sub-districts) would not have been able to accommodate the entry of MFIs without the existing subsidies, and only 10% of upazilas are experiencing improvements in welfare by subsidized entry at a reasonable assumption on return of microfinance. In other words, substantially high return of microfinance for borrowers should be present to justify the current level of subsidies to MFIs in Bangladesh.