On mission drift in microfinance institutions

Beatriz Armendariz de Aghion () and Ariane Szafarz

MPRA Paper from University Library of Munich, Germany

Abstract: This 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.

Keywords: Microfinance; Loan Size; Mission Drift; Cross-subsidization (search for similar items in EconPapers)
JEL-codes: O1 O16 (search for similar items in EconPapers)
Date: 2011, Revised 2010
New Economics Papers: this item is included in nep-ban, nep-mfd and nep-mic
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Citations: View citations in EconPapers (5)

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https://mpra.ub.uni-muenchen.de/31041/1/MPRA_paper_31041.pdf original version (application/pdf)

Related works:
Chapter: On Mission Drift in Microfinance Institutions (2011)
Working Paper: On Mission Drift in Microfinance Institutions (2011)
Working Paper: On Mission Drift In Microfinance Institutions (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:31041

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