Mission Drift in Microfinance

Microfinance institutions (MFIs) are crucial for promoting financial inclusion among individuals living below the poverty line, especially in rural areas. These institutions are designed to empower underserved communities by providing them with the financial tools to improve their livelihoods. However, to sustain their operations and attract additional funding, MFIs need to generate profits. This dual focus on financial sustainability and social impact often creates tension, and critics argue that the profit-making objective can sometimes overshadow their original mission of serving the poor.

What happens when MFIs lose sight of their goal to provide financial inclusion and focus primarily on generating profits? Mission drift occurs when the client base of MFIs shifts from poorer individuals to wealthier ones, driven by the pursuit of higher profitability. Critics warn that this shift undermines the social objectives of microfinance, turning these institutions into profit-driven enterprises rather than vehicles of financial empowerment. This drift often stems from the misconception that the microfinance sector is highly profitable, which is not always the case.

As MFIs mature, they face increasing pressure to meet financial performance metrics. Factors contributing to mission drift include the high operational costs associated with servicing small loans for poor clients, the risk of arrears from non-repayment, and the appeal of donor funding that often favours financially robust institutions.  A 2012 study analysing 379 MFIs found that increased commercialization and the pursuit of profitability can lead to mission drift, causing MFIs to shift focus from poorer clients to wealthier ones. This shift is often driven by the need to attract external funding, which typically favours financially robust institutions. Consequently, MFIs may prioritize profitability over their original mission of serving the poor, leading to mission drift. This reliance also underscores the challenges MFIs face in balancing financial sustainability with their social mission.

Additionally, external investments and commercial funding can exert undue influence on MFIs, further diverting them from their core mission. These investments often come with expectations of high returns, compelling MFIs to prioritize wealthier clients who can repay larger loans more reliably. Over time, this shift can erode the foundational principles of microfinance, leaving the poorest segments of society underserved.

To address this issue, MFIs must adopt a balanced approach that prioritizes their social objectives while maintaining financial viability. Some strategies include:

Leveraging Technology: Digital platforms can help reduce operational costs and improve the efficiency of loan disbursements and repayments, enabling MFIs to continue serving poorer clients.
Innovative Loan Products: MFIs can design products tailored to the needs of underserved communities, such as micro-insurance or flexible repayment schemes.
Strengthening Governance: Strong governance frameworks can ensure that MFIs remain committed to their social mission, even as they pursue financial sustainability.
Transparent Reporting: Regular reporting on both financial and social performance can help MFIs remain accountable to stakeholders and highlight their commitment to serving the poor.

In conclusion, mission drift in microfinance can have severe implications for the industry and the communities it seeks to serve. Developing countries, in particular, risk seeing their most vulnerable populations left without access to essential financial services. To remain legitimate and impactful, MFIs must pursue socially acceptable goals that align with the norms and values of the communities they serve. By striking the right balance between profit and purpose, MFIs can continue to uplift underserved populations and fulfil their mission of financial inclusion.

Authored by Shayan Khan