Introduction: What is Mission Drift in MFIs?
Microfinance institutions (MFIs) typically provide small loans to low-income individuals and families who cannot access traditional banking services. MFIs are often set up as non-profit organizations, but some may also be for-profit. MFIs have been around since the 1970s when Prof. Muhammad Yunus first introduced them in Bangladesh, and later, he was awarded the Nobel Prize for the same in 2006. Today, over 40 million borrowers in more than 80 countries worldwide have benefited from microfinance services offered by MFIs.
MFIs operate under dual objectives of helping the poor gain access to financial services and promoting social development. Its first objective is achieved by facilitating credit, savings, and insurance services for marginalized communities. In contrast, the second is achieved by catering to the needs of the most underprivileged households alongside promoting entrepreneurship, skill development and collective action among the poor. It can be tricky to balance these two objectives and ensure the sustainability of the institutions. As a result, most MFIs run into mission drift.
Mission drift is a phenomenon that occurs when the objectives of a microfinance institution (MFI) change over time. MFIs, generally, begin with the goal of providing financial services to low-income people, but over time, they can shift their focus to financially profitable ventures. Alternatively, it may be the other way round (though rarely), wherein MFIs start with a for-profit objective and gradually focus more on increasing their social outreach over time. In either case, mission drift can be detrimental as it raises questions on the long-term financial viability or social sustainability of the MFIs.
How Does Mission Drift Occur and How Does It Affect MFI Operations?
Mission drift occurs in MFIs for multifaceted and complex. However, it should be noted here that the causes of mission drift are not always negative; sometimes, they are necessary for an MFI to keep up with changing times and circumstances. Nevertheless, it is important to monitor these changes so that they do not spiral out of control and cause too much damage to the organization’s original goals and objectives. Broadly, they include the following:
- Commercialization of MFIs, which may lead to financially profitable products and services but neglects reaching out to and serving the needs of the underprivileged communities
- MFI’s disproportionate focus on outreach that may lead it to offer products that have a more significant social impact but are less profitable or financially unviable in the long run
- Apart from this, mission drift can be caused by external factors as well, such as unprecedented changes in the market or society. It can also be caused by internal factors, such as changes in leadership or organizational structure.
- Other relevant factors, including organizational culture and environment, changes in management, or the introduction of new, disrupting technology, can also have a significant impact on mission drift
Fig. 1 above has been adapted from Mersland & Strøm (2010), and it depicts average loan sizes given by MFIs that have been adjusted using the gross domestic product (GDP) per capita calculated on the basis of the purchasing power parity (PPP) of respective countries and distributes it according to the age of MFIs. The median curve helps in depicting a truer-to-life scenario of the MFI industry as it is not skewed by a few large loans granted per annum. It shows that the per capita loan size does not increase with age but, in fact, might decrease over time, which cannot be deduced to prove the existence of mission drift. Though, in the same research, authors point out that the average loan size increased with the transactional costs associated with loan delivery. Thus, mission drift can hinder MFIs’ performance as they lose sight of their initial aims and objectives, which means they are not fulfilling their mission statements (either financially, socially or both).
Consequently, mission drift can critically decrease organizational efficiency and increase the risk of failure. It can also lead to an increase in transactional costs for the MFI and result in less money for its clients. This can be seen as a problem because it means MFIs suffering from mission drift can no longer fulfil their financial commitments making them less lucrative for investors. MFIs are particularly at risk of mission drift because they are dependent on investors, operate under heavy regulations, have a limited scope of operations, and their environment is constantly changing.
Managing Risk and Preventing Mission Drift in MFIs
Despite aiding in the improvement of borrower retention, operational efficiency and overall financial performance, the scale does not guarantee a proportionate expansion of outreach for larger MFIs. Unsurprisingly, data regarding the average loan per borrower suggests that smaller MFIs perform better on social metrics (Armendáriz & Morduch, 2010). Smaller loans given by MFIs translate to a greater depth of outreach, which, in turn, indicates that such firms are socially mission-aligned. However, retaining borrowers can be an issue for them, and there is a higher risk of default involved. This, coupled with the firm’s inability to contain operating costs and pass them effectually on to clients, results in inefficient service delivery of smaller MFIs.
Several studies (Leite et al., 2019; Mersland & Strøm, 2010; Serrano-Cinca et al., 2016) have shown that the operational scale of MFIs can have a significant impact on their performance. Large-scale operations have improved efficiency and better borrower retention, which translates into lower default rates, increased profitability and better financial performance. However, studies (Chahine & Tannir, 2010; Ranjani & Kumar, 2018) have also shown that smaller-scale MFIs are more efficient in reaching the bottom of the pyramid since they can focus on a narrower range of borrowers and design tailored products for their clientele.
Larger and more efficient MFIs catering to wealthier clients might tend to exclude the poorest borrowers, leaving a crucial disparity for authorities to address. Similarly, smaller and less profitable MFIs might need policy-driven stimuli to continue operating and serving the poorer borrowers. Also, access to affordable finance, better trained staff, support for capacity growth and training, and wider network of industrial support can help ailing MFIs survive. Thus, strengthening the organizational governance framework could act as a starting point for implementing any such intervention.
In order to manage this misalignment in objectives, MFIs should be monitored and regulated by authorities more rigorously and critically. Larger MFIs could be incentivized to subsidize the more needy borrowers and to focus on increasing the average loan size, through government mandates, like in the case of Priority-Sector Lending mandated by RBI. On the other hand, smaller MFIs could be encouraged to implement digital solutions like modern-day FinTech firms to reduce operational costs and remain financially viable.
Conclusion: The Future of Microfinance Institutions
The objective article was to provide an overview of the challenges and opportunities for microfinance institutions (MFIs) in developing countries and identify a way forward to help MFIs address these challenges and seize these opportunities. Financial viability is a major concern for the industry, and mission drift can cause an MFI’s activities and objectives to change over time, leading to financial problems for the organization and social problems for the community it serves.
From the above discussion, it is evident that a trade-off between MFIs’ efficiency and deepening (depth) of outreach is unavoidable. It also indicates that MFIs can become more efficient by boosting the average loan size. However, in doing so, they are likely to tilt more towards wealthier clients and away from their original target audience, which included the economically disadvantaged strata of society (who characteristically require smaller loans). Therefore, critical structural changes in MFIs are essential to address this issue.
Innovative policy interventions like the SHG-Bank Linkage Programme as part of the National Rural Livelihood Mission (NRLM) and tokenized financial products explicitly intended for marginalized rural communities may help in the performance management of smaller MFIs. Incorporating digital technologies can also enable MFIs to reach a wider range of clients affordably. In addition, training borrowers to use online fund transfers and other digital services can further bring down the cost of operations. Hence, incentivizing firms to employ digital solutions for better management could be considered by policymakers.
In conclusion, it can be said that mission drift in MFIs is a widespread phenomenon, and it could be interesting to investigate further how operational strategies differ between MFIs operating under different governance frameworks. Using a larger panel dataset, exploring the impact of desirable and undesirable carry-over variables on MFI’s performance and the intensity of their social mission could provide more insights into the causes and probable solutions of mission drift in MFIs.
References
Armendáriz, B., & Morduch, J. (2010). The Economics of Microfinance (B. Armendáriz & J. Morduch (eds.); 2nd ed.). The MIT Press. https://doi.org/10.1086/523604
Chahine, S., & Tannir, L. (2010). On the Social and Financial Effects of the Transformation of Microfinance NGOs. Voluntas, 21(3), 440–461. https://doi.org/10.1007/s11266-010-9136-6
Leite, R. de O., Mendes, L. dos S., & Sacramento, L. C. (2019). To profit or not to profit? Assessing financial sustainability outcomes of microfinance institutions. International Journal of Finance & Economics, 24(3), 1287–1299. https://doi.org/10.1002/ijfe.1718
Mersland, R., & Strøm, R. Ø. (2010). Microfinance Mission Drift? World Development, 38(1), 28–36. https://www.sciencedirect.com/science/article/pii/S0305750X09000990
Ranjani, K. S., & Kumar, S. (2018). An investigation of mission drift in Indian MFI. International Journal of Social Economics, 45(9), 1305–1317. https://doi.org/10.1108/IJSE-06-2017-0244
Serrano-Cinca, C., Gutiérrez-Nieto, B., & Reyes, N. M. (2016). A social and environmental approach to microfinance credit scoring. Journal of Cleaner Production, 112, 3504–3513. https://doi.org/10.1016/j.jclepro.2015.09.103
(Views expressed in the blog are personal and not of any organization/institution)
By Mr. Anirban Pal & Dr. P. K. Singh; ARF group members
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