On mission drift in microfinance institutions
AbstractThis paper sheds light on a poorly understood phenomenon in microfinance which is often referred to as "mission drift": A tendency reviewd by numerous microfinance institutions to extend larger average loan sizes in the process of scaling-up. . We argue that this phenomenon is not driven by transaction cost minimization alone. Instead, poverty-oriented microfinance institutions could potentially deviate from their mission by extending larger loan sizes 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 clientele parameters. In a simple one-period framework we pin down the conditions under which mission drift can emerge. Our framework shows that there is a thin line between mission drift and cross-subsidization, which in turn makes it difficult for empirical researchers to establish whether a microfinance institution has deviated from its poverty-reduction mission. This paper also suggests that institutions operating in regions which host a relatively small number of very poor individuals might be misleadingly perceived as deviating from their social objectives. Because existing empirical studies cannot differentiate between mission drift and cross-subsidization, these studies can potentially mislead donors and socially responsible investors pertaining resource allocation across institutions offering financial services to the poor. The difficulty in separating cross-subsidization and mission drift is discussed in light of the contrasting experiences between microfinance institutions operating in Latin America and South Asia.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 31041.
Date of creation: 2011
Date of revision: 2010
Microfinance; Loan Size; Mission Drift; Cross-subsidization;
Other versions of this item:
- Beatriz Armendariz & Ariane Szafarz, 2009. "On Mission Drift In Microfinance Institutions," Working Papers CEB 09-015.RS, ULB -- Universite Libre de Bruxelles.
- Beatriz Armendariz & Ariane Szafarz, 2011. "On Mission Drift in Microfinance Institutions," ULB Institutional Repository 2013/97387, ULB -- Universite Libre de Bruxelles.
- O1 - Economic Development, Technological Change, and Growth - - Economic Development
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-05-30 (All new papers)
- NEP-BAN-2011-05-30 (Banking)
- NEP-MFD-2011-05-30 (Microfinance)
- NEP-MIC-2011-05-30 (Microeconomics)
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