Microfinance Institution’s Dual Missions: Does Profit Status Matter?

International Development and Cooperation Review, vol.10 no.3, 2018

32 Pages Posted: 19 May 2021

See all articles by Daehong Kim

Daehong Kim

Korea Development Institute (KDI)

Kye Woo Lee

KDI School of Public Policy and Management

Date Written: September 20, 2018

Abstract

This study aims to assess the impact of Microfinance Institution (MFI)’s profit status on their dual missions: poverty alleviation and financial sustainability. As the issue of financial sustainability and viability of MFIs has been raised in microfinance industry, more attention has been paid to transforming from non-profit entities to for-profits as a major solution to serve the impoverished with better financial services on a sustainable basis. Yet, this has been challenged with the label “mission drift” that the original mission serving the poorest of the poor for the poverty reduction would switch to targeting better-off clients to achieve financial profitability. Therefore, this study, based on the Dynamic Panel System GMM estimations, examines whether for-profit MFIs indeed more significantly contribute to reducing poverty at a financially self-sustainable basis in comparison with non-profit counterparts across 41 countries over 2008-2012. The results of the estimations indicate that for-profits were validated to be financially self-sustaining, but failed to help the poor alleviate the level of poverty. By contrast, non-profits were not able to operate in a financial sustainable way, whereas they served the poor segment of the population to reduce poverty. These findings suggest that the profit status of MFIs does really matter with the failure of achieving the dual missions in microfinance industry. In particular, it would not be possible to achieve the two missions when more priority is given to one over the other. Thus, it is recommended to take a balanced operational strategy between the poverty lending and financial systems approaches in microfinance industry, which would lead both non-profits and for-profits to play a significant role of ending extreme poverty as a sustainable financial instrument in a Post-2015 era.

Keywords: Microfinance Institutions, Profit Status, Poverty Reduction, Financial Sustainability, Sustainable Development Goals

JEL Classification: G28, O16

Suggested Citation

Kim, Daehong and Lee, Kye Woo, Microfinance Institution’s Dual Missions: Does Profit Status Matter? (September 20, 2018). International Development and Cooperation Review, vol.10 no.3, 2018, Available at SSRN: https://ssrn.com/abstract=3847659

Daehong Kim (Contact Author)

Korea Development Institute (KDI) ( email )

263 Namsejong-ro
Sejong-si 30149
Korea, Republic of (South Korea)

Kye Woo Lee

KDI School of Public Policy and Management ( email )

P.O. Box 184
Seoul, 130-868
Korea, Republic of (South Korea)

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