Development Finance Institutions : Measuring Their Subsidy

Abstract

The term "development finance institutions" (DFI) encompasses no only government development banks, but also nongovernmental micro-finance organizations, that match grants to attempt to promote community development, decentralization of power, and local empowerment. Measures of the social cost of DFIs that receive public funds, help to check whether DFIs are good uses of public funds, i.e., if the social benefit of a DFI exceeds the social cost, then public funds are indeed well-spent, further improving social welfare. This report describes the measurement of costs but not of benefits; but even without knowledge of benefits, knowledge of costs can help to adequately spend funds. Two measures of social cost are presented: first, the Subsidy Dependence Index (SDI) - the ratio of subsidy received to revenue from loans; and, subsidy is the social cost of the public funds used to run a DFI - which does not discount flows, rather it works in short time frames, or when the rate of time preference is low; second, the Net Present Cost to Society (NPCs) - like standard present-value measures, it discounts cash flows, and works in any time frame. Both SDI and NPCs are tools, to help establish benchmarks, chart trends, and compare a DFI with identical clients, and services. It is stipulated that measurement of the social cost of public DFIs matters because funds earmarked for development are scarce, while subsidies for DFIs could be adequate, provided social welfare improves in a broader scale.