The difference between many of commercial banks and microfinance institutions (MFIs) is the commitment to a double-bottom line, financial and social, of the latter. The microfinance itself is considered as a poverty alleviation tool and as the sector with potential to become self-sustainable. There have been a number of debates about the future of the microfinance industry. Since 1990s, some debates regarding the possibility of achieving the social mission of the MFIs, mission to serve the poor and thus to alleviate the poverty, emerged as many microfinance institutions have been moving towards commercialization. Others argue that for-profit oriented microfinance institutions may move to targeting customers who are better off than their initial target. This phenomenon is known as "mission drift".
Recently, with the increased interest of microfinance sector from international investors, commercial, private and socially responsible, and up-scaling of the MFIs, there have been a number of discussions about the mission drift and concern that the microfinance is losing its social mission, commitment to poverty alleviation. Despite this interest, only few studies have been conducted to examine this issue. This paper will attempt to discuss whether or not MFIs moving up-market face difficulties in reaching their double bottom line. The first part of the paper will provide an overview of the literature on the topic of mission drift and try to answer the questions whether the "mission drift" is a relevant concern for the MFIs. The second part will discuss on whether MFIs that go public drift mission, to which extent growth and development of the industry really help poor people and what could be done in order to control and ‘protect’ social bottom line. The last part will conclude.
In the existing literature there is definitely more than one definition of mission drift, but all of them stating generally about the same issues: mission drift is the notion when MFIs drift away from their original mission, to serve poor clients and alleviate poverty, to more profit generating vision by serving wealthier clients or by charging high interest rates for their clients. Most of the recent papers agree on the definition of mission drift given by Cull et al. (2007) "A¢â‚¬A¦microbanks moved away from servicing their poorer clients in pursuit of commercial viability". Some researchers indicate mission drift with commercialization and transformation (Christen, 2001). It is thought that the commercialization approach may lead to more profit oriented motives and will decrease social impact, which in turn may follow by targeting less risky clients, thus drifting its focus away from the poor population.
According to Dichter and Harper (2007), the microfinance institutions are losing their sight of mission to serve the poor while growing and getting mature. Muhammad Yunus, the Nobel Peace Prize winner, claims that "A¢â‚¬A¦less poor clients crowd out poorer clients in any credit scheme" (Christen and Drake, 2002, p. 10). Meanwhile, as the mission of MFIs is to provide microfinance services to the poor, the assumptions could be made that, is to lend relatively small amount of money to very poor clients.
At the same time, concern of the financial viability of the MFIs should not be underestimated. The issue of mission drift has been discussed since 1992, when microfinance institution in Bolivia PRODEM was commercialized and transformed into the bank, BancoSol (Rhyne, 1998). Recent news, such as the initial public offering (IPO) of Banco Compartamos in Mexico in 2007, that led to total proceed of this sale to almost USD 450 million profit, have added new value to the debate (Rosenberg, 2007; Hudon, 2009).
Thus, there are some critics about microfinance, saying that MFIs are becoming more profit oriented at the expense of greater outreach to the poor people. The point is that higher profits lead to lower outreach. Woller, Dunford, and Woodworth (1999) and Woller (2002) state that mission drift actually happens when a MFI step back from their initial poor customer segment. However, some researchers conjecture that MFIs that became commercialized are better able to serve the poorest customers due to spillover effect, as their profit motives lead them to be more efficient and increase their willingness to extend loan services to the new markets (urban and rural) (Rhyne, 1998; Christen and Drake, 2002). The underlying message is that when someone seeks the explanations for mission drift, the profit of the MFI is not the only key element that should be considered, but the MFIs costs should also be focused upon.
Some country studies give evidence that there is a trade-off between social and financial bottom line, serving the poorest and being financially viable, since transaction costs for smaller loans are higher than transaction costs for larger loans (Paxton, Graham, and Thraen, 2000). However, Christen (2001) in his study about commercialized and transformed MFIs in Latin America made a conclusion that mission drift has not occurred.
Despite the ongoing debates and interest on mission drift, only few studies have been conducted to investigate the issue. There is a lack of cross-country studies with a large number of MFIs involved in order to receive extensive results and findings. C. Bruck writes in the New Yorker article about these debates: ”Since relatively few rigorous studies on the impact of microfinance have been completed, ideology tends to dominate" (Bruck, 2006).
Important empirical evidence on scaling up was made by Hishigsuren (2007) in India. The study concludes that when measured by depth and scale of outreach to poor clients, MFI shows no evidence of mission drift. At the same time it shows that up-scaling MFI is able to achieve greater cost efficiency. Another finding of this study (Hishigsuren, 2007) indicates that mission drift is not a result of well-planned decisions by the board of directors or management. The analysis of 39 transformed MFI by Fernando (2004) concludes that these MFIs did not lose sight of the mission but on contrary even improved their financial performance. The cross-country study by Cull et al. (2007) uses a sample of 124 MFIs in 49 countries addressing the issue of mission drift. They found that even the MFIs might follow vigorous financial goals, they still can be dedicated to their social mission. The paper of Mersland and Strom (2009) investigates mission drift while taking into account average loan size, lending methodology, gender and market served by the MFI. So far it is the largest cross-country study on mission drift. Mersland and Strom found "A¢â‚¬A¦no evidence of mission drift in the industry as a whole" (Mersland and Strom, 2009, p. 29). However, this study on the observation of 379 MFIs reveals that the mission drift may occur if a MFI is cost inefficient and seeks higher financial returns, so MFI’s attention should be made on reducing its costs first.
Almost all studies on mission drift, including the ones mentioned above, used average loan size as a proxy for the empirical analysis to measure to degree of outreach of the MFI, assuming that the increase of the size of the average loan means serving better off client thus leads to mission drift of the MFI (Bhatt and Tang, 2001; Cull et al., 2007; Schreiner, 2002). However, this MFIs’ focus on wealthier clients, that cost less, might be driven by profit-motivated donors. Therefore, drifting away from the mission is the way MFI sees to attract more financial sources (Gosh and Van Tassel, 2008). Gosh and Van Tassel (2008) tried to investigate mission drift issue using poverty gap ratio approach and came to the conclusion that providing larger loans lowers the actual poverty reduction per dollar spent on one side, but the MFI is not necessarily forsaking its social mission on the other side.
Thereby, the concern about financial sustainability of the MFIS has led to commercialization, transformation and scaling-up, which in turn suspected of being in the way of reaching further outreach and cause on mission drift. The process of commercialization and scaling-up, which most of the most involve interfere with large donors, may indeed tend to an increase in the average loan size and the tendency to lend to better off clients, wealthier people. However, Armendáriz de Aghion and Szafarz (2009) argue that mission drift is not only driven by transaction cost minimization: "Instead, poverty-oriented microfinance institutions could potentially deviate from their mission by extending larger loans neither because of "progressive lending" nor because of "cross-subsidization", but because of the interplay between their own mission, the cost differentials between poor and unbanked wealthier clients, and region-specific characteristics pertaining to the heterogeneity of their clientele" (Armendáriz de Aghion and Szafarz, 2009). Additionally, such factors as strategy and portfolio maturity (Christen, 2000) may indeed increase the amount of the loan size without MFIs necessarily drifting from their poverty alleviation mission.
According to the literature review and empirical analysis mentioned above, one can come to the conclusion that mission drift is indeed a relevant concern for some MFIs, but not necessarily for all. Though this statement may sound unconvincing, it is in fact essential to understand that institutional factors may also affect how well a MFI is able to reach both social and financial goals. Lending methodology, individual lending or group lending, cost structure and operating and country environment, market where a MFI is operation, urban or rural, – are among these factors. Therefore, a wider perspective into the development of the microfinance sector is needed in order to deviate from mission drift.
Recently microfinance institutions have begun to attract private investments and gone public (capital market). Is the microfinance sector losing vision of its mission to help poor and alleviate poverty? To which extent growth and development of the industry really help poor people?
The initial public offering (IPO) of the Banco Compartamos in 2007, the largest MFI in Mexico, awoke tremendously number of debates. Especially MFI has been criticized for charging very high interest rates to its clients (sometimes even 100% for some products). At what level are interest rates excessive, even for a MFI?A This is the question at the heart of the Compartamos’ debate. Surprisingly, but most of the literature publications on mission drift do not take into consideration interest rate issue. Cull et al. (2008), Gonzalez and Rosenberg (2006) argue that NGOs charge higher interest rates than commercial (regulated) MFIs, explaining it that NGOs have higher costs while serving poorer clients than commercial MFIs. But maybe the situation is like this just because these types of microfinance institutions are funded by profit-oriented donors? No doubts that interest rate should be considered as a part of comprehensive view of mission drift (Ashta and Hudon, 2009). However, we should not to forget that interest rate charged for clients might be relatively high due to country environment and monopoly power. This is what is happening in Mexico, where interest rates are higher than in other countries, but Compartamos’ co-founder and executive vice-president, Carlos Danel, says that this is because the loans are typically much smaller, than elsewhere:
"We could push people to borrow bigger loans, but we don’t believe in doing that [A¢â‚¬A¦] In the four years since we’ve gone public  our rates have gone down 10%, and we offer by far the lowest rates in the Mexican market. Taking the company public raises the bar in terms of performance, transparency and accountability." (Evans, 2010)
Nevertheless, it should be noticed that even through the IPO of Compartamos generated almost USD 450 million gains, there was no additional money raised to finance portfolio growth. Two third of this money, around USD 300 million, went to the three NGOs and development agencies, and one third (around USD 150 million) went to private individuals (Ashta, 2009). Although there has already been other IPOs in microfinance industry before (Bank Rakyat Indonesia (BRI) proceed IPO in 2003 and was listed on the Jakarta, Singapore and other stock exchanges; Equity Bank Kenya – in 2006, on the Nairobi Stock Exchange and Network Microfinance Bank in Pakistan, a much smaller organization), nowhere had been generated so high profits, therefore there was no much discussion about it.
Where this can lead microfinance industry? Largest MFI in India, SKS Microfinance, recently has announced it plans to go public and sell shares on the India stock exchange in IPO. This will be the first microfinance IPO in India and beyond any doubt this is the hot topic these days to discuss. SKS Microfinance is planning to raise more than USD 250 million through the sale of equity shares (the Economic Times, 2010). A number of other MFIs, including Spandana, Share Microfin, Bandhan, BASIX and Equitas, may also have plans to go public based on the success of SKS’s IPO (Deepika Thapliyal, 2010).
This news has caused debates on whether a public company can prevent financial objectives fromA displacing the social goals, to put it simple, whether MFI will drift their mission towards more profit orientation. Mohammad Yunus argued on this topic in an interview with Microfinance Focus (2010):
"This is coming from the banking side, from the profit maximizing side and I am opposed to that. If they do it, I cannot stop them but I would encourage genuine Microcredit programs."A¢â‚¬A¦"The concern is that when you put an IPO, you are promising your investors that there is a lot of money to be made and this is a wrong message. Poor people should not be shown as an opportunity to make money out of. If you have a new kind of IPO where you can say that you can help people get out of poverty, it is a social business and if you invest here you never get any return from this then it is good."
It is clear that it is important to focus on what is really at risk here, not only in India, but around the world, as movement of microfinance going public may continue and after the IPO of SKS. Can microfinance and the capital markets together be focused on poverty alleviation? Can IPO help MFI to serve larger number of people at the lowest sustainable prices and in the quickest possible time?
Coming back to Mohammad Yunus statement mentioned above, some can challenge his argument. Microfinance institutions from its very name shows that MFI is actually a financial intermediator that deals all the time with risks and returns, trying to attract funds in order to finance portfolio growth, and with products and services that are similar to the ones offered by the formal financial sector. Therefore similarly the capital funding sources may be obtained from donors, investment companies and funds, including commercial loans, customer deposits, and financial markets. All these options have their opportunities, limitations and risks. For instance, there is always a risk that investors will be more profit-oriented than involved in achieving social objectives by the MFI. Therefore, MFI will tend to obtain higher profits, thus charging higher interest rates for its clients or drifting to better off clients to mitigate its risk of non repayment, mission drift can occur. As it was shown in the first part of this paper, this is not the case for all MFIs.
Some practitioners support the idea of an IPO and claim some advantages of the IPO, which can be seen as the following (blogs on www.microfinancefocus.com, www.microfinanceinsights.com, www.devex.com, www.linkedin.com):
The raise of the additional capital (not the case of Compartamos’ IPO). Funding obtained thought is nothing else than just another financial instrument.
Reliable long-term source of funding and expanding the loan portfolio, as opposed to commercial bank borrowings and clients deposits that must be reimbursed at maturity. Additionally there is always a risk of unexpected termination of clients’ deposits, thus leading to a risk of liquidity when tending to finance portfolio only by inner sources (savings).
Sometimes, for instance in times of financial crisis even the commercial bank borrowings may be canceled before their maturity, that again trigger the same problems as with savings.
Usually the cost of funds obtained through the IPO is lower than the cost of commercial banking sources. Therefore the assumption could be made that interest rates for the loan to microentrepreneurs can be lower.
From the financial point of view, the funds raised through the IPO actually is an equity injection for which a MFI is not obliged by the regulations of Central Banks to set the liquidity reserve requirements as it is required for instance for customers deposits, thereby increasing the interest rates charged.
Where there are pros, there are always cons, thus criticism against each of the statement above exists on the same blogs, for instance Milford Bateman on his interview to Microfinance Insights (April 2010) says: "New regulations and prohibitions on what managers can do with ‘their’ MFI may well become a reality in the near future", "MFIs that have gone through the IPO procedure quickly lose all remaining links with, and concern for, the local community. They become hard-headed, profit-driven businesses providing a product to anyone willing to pay for it: no more, no less." But an IPO does not necessarily mean that poor people are "A¢â‚¬A¦shown as an opportunity to make money out ofA¢â‚¬A¦". The MFI’s profit obtained through the IPO may be distributed as dividends to the respective shareholders or to retain these gains in order to reinvest them in the further development of its activities, serving more poor people and thus increase the outreach and contribute to the process of poverty alleviation.
At the same time, other practitioners say that just the fact that microfinance is going towards an IPO is "an example in itself of serious mission drift" (Bateman, 2010). "It is a technique most often deployed under cover of ‘providing more microfinance’, but the most important motivation in practice, is actually for an MFI’s managers/owners to privately benefit. The gains to the poor are simply not there." (Bateman, 2010).
Nevertheless, at this point it is quite early to make any conclusion, as only few MFIs have gone public.
Microfinance still remains to be considered as being a social business, even with loads of criticism about IPO, especially the IPO of Compartamos. Thus it is essential to protect social line of the microfinance industry and try to avoid mission drift, trade-off between financial objectives and social objectives at the expense of the poor. In order to obtain successfully both these objectives, a professional board of directors, senior executive management and operational staff with the sound of social mission is needed, who will perform management decision not only driven by profit. Sound social corporate governance is designed to demonstrate the institutional social and development goals (Todd, 2008; Ashta, 2009). Social corporate governance that is properly designed, alleviate the strain between financial and social objectives and may provide a solution to mission drift in the MFI (Todd, 2008). In addition, reliable internal control system, comprehensive financial and risk management systems, including asset and liability management for liquidity, interest rate and foreign currency risks, social performance management are essentially should be taken into account, as being a core of the institution. To make regularly social performance assessment of the MFI, for instance using CERISE tools, might help to be on the sight of the current situation of the institution and therefore to mitigate the risk of mission drift.
It is obvious that mission drift issue of microfinance has manifold sources and the exclusion of one relatively minor source is not an adequate prescription for mitigating this issue. Commercialization of the MFIs is only one among several ways to mission drift, and not the most threatening. Some studies showed that even the MFIs might follow vigorous financial goals, they still can be dedicated to their social mission. The mission drift may occur if a MFI is cost inefficient and seeks higher financial returns, so rather than concentrating on the issue of commercialization of the MFIs, attention should be made on reducing the costs per client. Mission drift is indeed a relevant concern for some MFIs, but not necessarily for all. Though this statement may sound unconvincing, it is in fact essential to understand that institutional factors may also affect how well a MFI is able to reach both social and financial goals.
Absolutely controversial debates occur around the IPO of the MFIs and mission drift related to this issue. Someone claims that just the fact that microfinance is going public is a serious mission drift itself. Others seek positive trends of the IPO on social mission, stating that it is the source of long-term funding and thus might help to achieve greater outreach through expanding the loan portfolio and therefore can be devoted to social mission of the MFI. Nevertheless, it is quite early to make any conclusions as only few MFIs went public.
Although mission drift is a very long-debating issue, this paper did not discuss in detail about the ‘normal’ strategy that should be used by MFIs in order to seek consistency with the social mission for which they have been established by its donors. There is no saying which the "right" focus is and which one is not. This can be a future discussion. There is certainly room and demand for different institutions in the microfinance sector: those focusing on the poorest and perhaps therefore more depending on donations; as well as those moving up-market and serving a better-off clients with the support of commercial funds and investors. The fact that the latter ones are able to serve large numbers of people should not be avoided. One more issue is needed to be emphasized – social corporate governance and management of the MFI. Social corporate governance that is properly designed, alleviate the strain between financial and social objectives and may provide a solution to mission drift in the MFI. Through a sound and comprehensive social corporate governance policy, the respective investors and donors will also have the responsibility in relation to social mission and ethical questions, for instance the interest rates charged for the MFIs clients, in order to get the assurance that a MFI is not drifting from its social mission.
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