Development Finance Institutions: Measuring Their Subsidy

What should be considered in evaluating a rural financial institution's financial performance?

This paper presents measures of the social cost of development finance institutions (DFIs), which help to check whether DFIs are good uses of public funds. It describes the measurement of costs, because measuring cost is less expensive than measuring benefit and cost calculations can provide a useful reality check on proposed interventions.

The paper presents two measures of social cost, the Subsidy Dependence Index (SDI) and the Net Present Cost to Society (NPCS). The SDI is the ratio of subsidy received to revenue from loans. It works best in the short time frame. The NPCS discounts cash flows and works in any time frame. SDI and NPCS:

  • Shift the paradigm from reported costs to opportunity costs;
  • Use standard tools of project analysis to answer questions from society's point of view;
  • Provide answers to governments and donors who care about sustainability;
  • Help to establish benchmarks, chart trends, and compare a DFI with peers with identical clients and service;
  • Help to move towards the wiser use of public funds.

About this Publication

By Yaron, J. & Schreiner, M.