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Journal of International Development J. Int. Dev. 22, 890–905 (2010) Published online 12 November 2009 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/jid.1639

MANAGEMENT OF MICROFINANCE INSTITUTIONS: DO SUBSIDIES MATTER?
MAREK HUDON* ´ libre de Bruxelles, Belgium and Burgundy School of Business, France CERMi, Universite

Abstract: It is estimated that donors commit between US$ 800 million and US$ 1 billion to microfinance per year. This paper analyses the management of microfinance institutions (MFIs) and its relationship with donors’ subsidies. The results show that the level of subsidies granted per year is related to the management quality but not the subsidies divided by the gross loan portfolio or the total equity. Well-managed MFIs are larger and regulated organisations but not significantly older. The organisational structure or the experience of the MFI however does not play a role in determining its financial effectiveness, except for cooperatives. Copyright # 2009 John Wiley & Sons, Ltd. Keywords: microfinance; subsidies; management; governance; nonprofit JEL Classification: L31; M54; O16; Q14

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INTRODUCTION

Formal financial institutions have neglected a large part of developing country populations. Considered as high-risk clients, the poor have been denied access to financial services. Microfinance has been praised during the last twenty years as a new development policy tool serving people who have been excluded from the formal banking system. The financial performances of microfinance institutions (MFIs) have been largely highlighted by the international community (Armendariz de Aghion, 1999; Murduch, ´ 1999a,b; Tucker, 2001; Stephens, 2005; Gutierrez-Nieto and Serrano-Cinca, 2007; Hudon and Lietaer, 2007; Hermes and Lensink, 2007; Vanroose, 2008). However, little research has focused on the implications of management policies (McGuire,

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