1. UNIVERSITE LIBRE DE BRUXELLES
EUROPEAN MICROFINANCE PROGRAM 2015/2016
How can we avoid Mission Drift in
Microfinance?
Adele Voyeux

2. 1
I. Introduction:
As yunnus well said it, access to credit should be a basic human right. Microfinance provides
it to the unbanked poors, and can thus be considered as a “progressively ethical activity”
(Villaamil, 2015).
Unfortunately several crisis’ followed by many suicides occurred in the microfinance industry,
that made many academics and the media requestion the ethicality of its activities (Hudon &
Sandberg, 2013). The confrontation between the moral values and the economic imperatives
is now clearly observed, and the microfinance industry is under the threat of experiencing an
“Ethical Crisis” (Villaamil, 2015).
This crisis can mainly be explained by the new tendency of MFIs to transform themselves
into regulated bodies. According to the CGAP (2001), excessive commercialization is a great
danger as it can develop an overpreocupation with profitability and lead MFIs to trump good
banking practices at the expense of their social goals. There is thus an increasing risk of
mission drift in the industry, which strongly damages the industry’s reputation.
It is important to notice that the MFIs that stayed the longest on the market, are the ones that
are the most mission fulfilling (Armendariz & Szafarz, 2011). However, there are many
internal and external factors that can increase the tension between the desire to maximize
social impact and the desire to increase profits, leading to a confusement and a loss of focus
on the original goal of alleviating poverty.
In the first part of this essay, we will study what is exactly mission drift, its importance and
how it emerged in the microfinance world. In the second part, we will explain how an MFI, by
implementing internal management processes, can avoid mission drift. Moreover, we will
see that mission drift is not a phenomenon that needs to be fought only at the MFI level, but
from the whole industry: donors, investors and regulators also have a role.
II. What is Mission Drift?
Mission drift is a truly redouted phenomenon causing real damages to the Microfinance’s
public image (Armendariz & Szafarz, 2011). Mission drift is a term given when an MFI
deviates from its original mission of alleviating poverty by servicing the poorest of the poor;
moving in a new direction where its desire for profitability exceeds its social objectives
(Opportunity International, 2007). In this essay we believe that Microfinance and therefore all
of the MFIs have a general mission of alleviating poverty.
The recent loss of reputation in the Microfinance industry didn’t stop it from growing, and it is
now experiencing a 15-20% annual growth (Etzensperger, 2014). As the industry is rapidly
expanding, and competition is kicking in, MFIs also need to evolve by scaling up and
become more efficient. To be able to grow at a significant level and benefit from economies

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of scale, they need a substantial amount of funding, and the usual donations are not enough.
MFIs therefore need to identify new financing strategies to stay on the market (Ghosh, Van
Tassel, 2011). With this in mind, the usual MFI will decide to transform itself into a regulated
body, in an attempt to raise funds from private investors (Charitonenko et al., 2003).
Transformation can bring many advantages to an MFI. Transformation changes the MFI in
two ways: they become regulated by the banking authorities; and they move from a self
owned NGO to shareholder owned organization. Regulation is a great advantage for an MFI,
as it enables them to collect deposits (Staschen, 2003), which are a very cheap source of
funding. Moreover, as they are regulated, they attract more easily the external investors.
They can thus be funded from the commercial market, grow faster, and benefit from
economies of scale. With economies of scale, the cost per loan decreases, making the MFI
more efficient and augmenting its profits (Kar (a), 2013). Shareholder ownership can also be
favorable, as it can improve the management, and hence the efficiency (Mersland & Strom,
2008). Managers need to answer to the owners, making them feel more responsible.
The advantages are not just financial. With economies of scale and its benefit of lower
transaction costs, MFIs can reach poorer clients, and hence therefore increase their depth of
outreach, as well as breadth. As a result, if transformation is well performed, it can improve
the financial but also the social objectives of an MFI (Kar (a), 2013).
In the transformation process, it is believed that it is the regulatory status and the ownership
one that make the MFI more efficient, however after some studies, it has been found that
they have no strong effect on the sustainability and outreach of an MFI (Merlsland & Strøm,
2008; Hartarska & Nadolnyak, 2007). It is the saving status that has the biggest influence.
Eventually, as an MFI grow, it will need to collect deposits. Many MFIs will thus transform
now, thinking of the future. In other words, they are investing in growth, to ameliorate
themselves in the long run. This might mean, socially, to mobilize resources in the short term
and lower social performance, however with the idea of enhancing it in the future. Managers
are diminishing their current social performance, because they have a preference for what is
possible in the future (Copestake (b), 2007).
Transformation is very expensive, and staying sustainable without receiving any donations
can be very hard. MFIs have a pressure to quickly scale up and expand their outreach to
stay financially efficient (Epstein & Yuthas, 2011). Small loans are costlier than larger loans.
Having this in mind, MFIs might start servicing wealthier clients to be viable. This fear of
staying sustainable, or even the new taste for higher returns might lead to an over-
preoccupation with profit at the expense of their social mission. As a result, if transformation
is not well performed, it is one of the main drivers of mission drift. This loss of focus in the
mission is difficult to recognize as the mission statement of the MFI may not change per se,

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but the profession does. In other words, their activities and their target clients are remodeled.
Average loan size can be used to observe this phenomenon (Cull et al., 2007). The bigger is
the loan size, the wealthier is the targeted client, and thus the smaller is the depth of
outreach of the MFI. However the issue with this proxy is that the loan sizes in an MFI might
increase due to other reasons. Giving out larger loans is not only driven by the transaction
cost minimization (Armendariz & Szafarz, 2011). There are many other factors that might
oblige the MFIs to increase it, and therefore drifting from their mission.
Firstly, the average might differ from countries. Microfinance’s aim is to alleviate poverty by
reaching the unserved. In some areas of the world, the financial sector is less developed,
creating a larger amount of unbanked individuals. In these situations, the MFIs usually have
wealthier clients as they serve the unbanked, not just the poorest. For these reasons in Latin
America, the average loan size in higher than in Asia, and this doesn’t necessarily mean that
they are drifting from their mission (Armendariz & Szafarz, 2011; Kar (b), 2010).
Secondly, the stream of subsidies given by the donors is not always constant, creating
uncertainty within the MFIs. MFIs might decide to increase average loan size, or interest
rates charged, as a precaution, if they do not receive any subsidies in the times to come
(Armendáriz, D’Espallier, Hudon, & Szafarz, 2011).
Thirdly, as they grow, they need to raise funds from the commercial market. Most of the
time, they are profit maximiser investors that expect a certain kind of return (Mersland,
2009). MFIs might thus decide to put forward their financial mission in the aim of attracting
them. We can notice that in the last two circumstances, it is the donors and the external
investors that trigger the mission drift phenomenon.
Finally, there is a very thin line between mission drift and cross subsidization. The average
loan size might increase because of cross subsidization. This is done with the aim of
financing the poorest with the return made with the richer clients. Moreover, progressive
lending can be another reason for an increase in the average loan size (Armendariz &
Szafarz, 2011).
It is therefore very difficult to judge if there is mission drift or not, only by looking at the
average loan size. Other proxies can be used, to complement the analysis, such as interest
rate charged or percentage of women in the portfolio to assess the depth of outreach of an
organization and therefore their social performance (Bhatt & Tang, 2001).
However if the usual trend is for the MFIs to transform themselves, there is a huge risk of
mission drift. It is therefore crucial to make sure that the MFIs are not drifting from their
mission and find specific mechanisms that can help them remember their original mission.
Microfinance needs to alleviate poverty.

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III. How can we avoid Mission Drift?
In this section some main recommendations are given to any top MFI manager, in the aim of
avoiding the experience of mission drift, and regain focus on the mission. Recommendations
are also given to other actors and drivers of mission drift, such as the donors, investors and
regulators.
At the MFI level mission drift can be escaped by developing a comprehensive internal
system of management that will help an MFI to recognize the warning signs when it loses
focus on its mission, and take the necessary actions (Epstein & Yuthas, 2011). Implementing
an entire Management system is complex and needs to be done in different stages and at
different levels of the MFI.
First of all, before any MFI is created, it needs to make sure that it has a clear, attainable
and motivational mission. This usually begins with a mission statement, guide to any
decision made by or in the organization (Jonker and Meehan, 2008). To make sure that the
organization is not loosing focus, clarity and direction can be enhanced with an “Intended
Impact” statement. This statement describes the benefits the organization is trying to seel
and identifies the targeted population (Bradach et al. 2008). With this, a “Theory of Change”
must also be developed, helping the MFI step by step in determining the processes through
which the impact can be achieved. These stages of action are then made more concrete
through specifications and quantifications of actions and outcomes, helping the employees in
better understanding them (Epstein & Yuthas, 2011). However this last stage can’t be done if
the actions and outcomes are not measured and assessed.
Second of all, any MFI requires a good performance measurement system. MFIs are hybrid
institutions with a financial but also a social mission. It has long been recognized that it is
very difficult to measure the success of an organization that has a double objective (Drucker,
1990; Forbes, 1998). This is mainly because it is extremely hard to measure poverty.
However, to make sure that they are well attaining both their goals, some social qualitative
indicators should also be included as a complement to the existing quantitative indicators
(Copestake (a), 2007). Determining these indicators and measuring social performance is
can be expensive (Khandler, 1998; Morduch, 1998). The social performance task force
website (2011), already developed some rating systems and methodologies that can be
easily implemented in the industry and the SPI4 (Social Performance Tool developed for the
MFIs by Cerise) can be used by the MFIs themselves at no acquiring cost. Measuring well
performance is crucial and should be done routinely, to reveal any internal problem. To stay
true to their mission, MFIs should only respond to their internal demand, and not the
pressure from the external organizations when taking decisions (Copestake (b), 2007).

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It is also very important to make sure that there is a good communication within the
organization. We need to make sure that everyone well understands the mission and is
acting according to it. To do that the mission statement as well as the performance
measures need to not only be communicated to the employees but also explained. The
employees therefore know what they actually need to ameliorate within the organization to
improve the MFIs performance (Aubert, Janvry, & Sadoulet, 2008). Moreover to make sure
that the employees are working with the intention of the MFI and not their own, a sense of
strong responsibility towards the MFI, or incentives, or trust between the MFI and the
employees can be installed. Firstly, it is important that the incentives are not solely based on
repayment, but others that can also rise the social performance of the MFI, such as
implementing audits at the level of the credit agents making sure they select potential poor
borrowers in accordance with the MFIs objective (Aubert, Javrty, & Sadoulet, 2008).
Secondly, responsibility can be given by counting the employees opinion when decisions are
made in the organization. Thirdly and finally, trust is very important. Employees need to be
sure that the MFI wants their good, and not rip them off (Amin, 2014). There is also trust
between the clients and the MFI, otherwise the clients wouldn’t have accepted to take a
loan, they must believe that the MFIs are here to help them, and not take advantage of them.
However mission drift is destroying this trust, as the MFIs are not acting according to their
original mission of alleviating poverty that they promised to their clients, and taking
advantage of them, seen as the vulnerable party (Amin, 2014). Violating the trust of their
clients adds to the unethicality of mission drifting.
Third of all, MFIs also necessitate a good governance mechanism. The board of directors
should well understand the importance of the social objective of microfinance, and don’t
forget to include them in their decision-making. They can implement periodical social audits
or the support of client activism (Arena, 2008). These mechanisms are expensive and a cost
benefit analysis has to be conducted by the managers (Epstein & Yuthas, 2011). It is also
important to have an efficient board of directors, as they can avoid mission drift. In other
words, an MFI starts increasing its loan size, or its interest rate charged, when it is
experiencing financial difficulties, and if the board is well composed, they can make sure that
the costs per loan doesn’t increase over time, and therefore no need to mission drift. Better
management can therefore be realized, by focusing on trying to reduce the costs per client
and not on “commercialization”. The industry is still growing strongly, and there is therefore
still a lot of room for cost reduction (Mersland & Strom, 2010).
Fourth of all, it is also important to design and innovate in the aim of moving the industry
forward, and ensure their ongoing effectiveness (Epstein & Yuthas, 2011). The market is
changing with the quick growth of the industry, and the MFIs must adapt themselves to stay.

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This is why they need an in house research department that can help in innovating new
methodologies or mechanisms. These should of course always be in line with the MFIs
mission. MFIs also need to consider being open to paradigm such as: implementing new
technology devices, or not only serving women.
Finally, MFIs are not the only ones to blame for the threat of mission drift in the industry.
Some external actors or factors can have a strong influence on the decisions taken by the
MFIs, making them deviate from their mission.
First, MFIs can’t survive if they don’t receive any funds from the exterior. MFIs can either
receive commercial funds or subsidies. On one hand, the commercial funds are most of the
time provided by profit-oriented investors (Gosh-Van Tassel, 2008). To attract them, MFIs
are obliged to increase their profits at the expense of their social mission. MFIs should
therefore try to target more socially responsible investors and if not possible, external
investors on their side should augment their social target in the conditions given with the
loan. This is very important to make sure that the whole industry is staying true to its mission
and not disappearing.
On the other hand, the subsidy uncertainty can also create a certain type of mission drift.
MFIs will increase either their interest rates or their loan size in order to build precautionary
savings under the fear that subsidies can dry up (Armendáriz, D’Espallier, Hudon & Szafarz,
2011). The MFIs are just acting according to their needs, created by the donors in this case.
Nonetheless, subsidies can be a huge help for the MFIs in reaching their social mission, as it
can reduce their costs and thus decrease the interest rate charged and reach poorer
households. If the volume and timing of subsidies are designed in a less uncertain fashion
by donors, they can have a stronger impact on the MFIs poverty reduction mission. However
there is of course a risk that subsidy are used inefficiently by the MFIs if they can receive
them easily (Bhutt and Tang, 2001). According to Hudon and Traça, Subsidies have a
positive impact only up to a certain threshold. To avoid mission drift in the industry, the
donors therefore have to provide a constant and optimal amount of subsidy to the MFIs,
allowing them to increase their efficiency and their mission fulfillment, and not facilitate
procrastination.
Second, Mission drift will also depend on the context of the country in which the MFI is
operating. In some countries the regulations are practically non-existent, even if the
microfinance industry is well implemented. In other words, the MFIs can operate as they
want with no real restrictions. This unregulated environment can of course lead to an
increase in the financial performance of the MFI, such as banco compartamos in Mexico, but
in term of social performance, there is no improvement, and the risk of mission drift
tremendously increases. It can be argued that regulation can be beneficial for the fight

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against mission drift and help the MFIs to act more ethically (Villaamil, 2015). After the crisis
in Andra Pradesh, the government decided to strengthen the regulations on microfinance in
the area. At first, this led to a positive decrease in the interest rates charged, however as the
regulation was too strict and theorem negatively affecting the financial and social
performance of the MFIs, they decided to decrease even more their interest rate with the aim
of reaching more clients and poorer ones, however this lead to a huge reduction in the
repayment rates. The argument is therefore valid, as long as the regulations are not too strict
or too tight (Villaamil, 2015).
IV. Conclusion:
Microfinance declared to the whole world that its main aim is to alleviate poverty by servicing
loans to the poor unbanked individuals. By affirming this, the Microfinance institutions
created a special trust with their clients whom believe that the institutions have a social
objective alongside their financial one, and are therefore not exploited.
Nowadays, microfinance is under the threat of experiencing an “Ethical crisis”, as there are
more and more institutions drifting from their mission. There is the fear that microfinance is
starting to take advantage of the vulnerable party being the clients, and that the investors in
the industry are the ones receiving money in their pocket, destroying the ethical dimension of
microfinance. With commercialization, microfinance might be loosing its true purpose of
alleviating poverty, and in the long term the trust it had with its clients.
It is therefore crucial that the whole industry understands the importance of this treat, and
takes measures to avoid mission drift and regain clarity on its original mission. In this essay,
it has been argued that profit can be addictive and needs to be resisted at the MFI level but
also at the whole industry one. MFIs can therefore implement some processes that will help
them remember their social mission, such as having an apparent mission statement, good
social performance indicators, and constant performance checks. However sometimes the
MFIs deviate from their mission not only because of a thirst for profit, but because they are
obliged to. To be able to grow, and stay on the market, the MFIs need funding, that can only
be found on the commercial market or met by deposits. MFIs will thus decide to transform,
and alongside this process loose focus on their mission. The industry therefore has to
contribute to improve the social mission of the MFIs by for instance providing better-
scheduled subsidies, having more social performance requirements from investors, or even
fairly regulate the industry.
The beauty of microfinance is that it created a social side to finance. It will be a shame to
see a whole industry disappear, and be replaced by profit-oriented organizations, when there
are already plenty of them in the world.

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