On Mission Drift in Microfinance Institutions

Armendariz B., and A. Szafarz (2011). "On Mission Drift in Microfinance Institutions", in B. Armendariz and M. Labie (eds.) The Handbook of Microfinance, Singapour: World Scientific Publishing, pp. 341-366

26 Pages Posted: 27 Aug 2011 Last revised: 18 May 2017

See all articles by Beatriz Armendariz

Beatriz Armendariz

Harvard University; University College London; Université Libre de Bruxelles (ULB) - CERMi (Centre for European Research in Microfinance)

Ariane Szafarz

Université Libre de Bruxelles (ULB), Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) & CERMi

Date Written: 2011

Abstract

This paper sheds light on a poorly understood phenomenon in microfinance which is often referred to as a "mission drift:" A tendency reviewed 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 characteristics pertaining the heterogeneity of their clientele. 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 mission. Because existing empirical studies cannot tear apart between mission drift and cross-subsidization, these studies should not guide donors and socially responsible investors pertaining resource allocation across institutions offering financial services to the poor. The difficulty in tearing apart cross-subsidization and mission drift is discussed in light of the contrasting experiences between microfinance institutions operating in Latin America and South Asia.

Keywords: Microfinance, Mission Drift, Poverty Reduction, Cross-Subzidization

JEL Classification: F35, G21, G28, O54, O57

Suggested Citation

Armendariz, Beatriz and Szafarz, Ariane, On Mission Drift in Microfinance Institutions (2011). Armendariz B., and A. Szafarz (2011). "On Mission Drift in Microfinance Institutions", in B. Armendariz and M. Labie (eds.) The Handbook of Microfinance, Singapour: World Scientific Publishing, pp. 341-366 , Available at SSRN: https://ssrn.com/abstract=1918096

Beatriz Armendariz

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Université Libre de Bruxelles (ULB) - CERMi (Centre for European Research in Microfinance) ( email )

Campus du Solbosch
Avenue F.D. Roosevelt 21 - CP145/1
B-1050 Brussels
Belgium

Ariane Szafarz (Contact Author)

Université Libre de Bruxelles (ULB), Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) & CERMi ( email )

50 Avenue Roosevelt
Brussels 1050
Belgium

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