Do Microfinance Institutions Trade Off Financial and Social Performance? Exploring the Business Cycle and the Funding Channels

Abstract

Microfinance institutions (MFIs) contribute to financial inclusion in developing countries but face the challenge of being profitable while serving the poor and the excluded, especially in times of economic downturn. This study examines whether MFIs trade off their social mission (depth of outreach) with their goal of profitability or self-sufficiency over the business cycle. Using an international sample of 2,214 MFIs from 2002 to 2018, we find evidence of mission drift for for-profit MFIs, meaning that these MFIs target wealthier clients to increase their profitability. Non-profit MFIs, on the other hand, which are more concerned with outreach, are more likely to adhere to their social mission over the business cycle. We also find that donor support acts as a moderating factor, reducing the trade-off between social performance and financial performance. Moreover, the business cycle does not play a significant role in amplifying or attenuating the relationship between the two performance measures.

Keywords: Social performance, financial performance, Trade-off, Exogenous chocks, Business cycle