Armendáriz, Beatriz and Szafarz, Ariane (2011): On mission drift in microfinance institutions. Published in: The Handbook of Microfinance, Beatriz Armendáriz and Marc Labie (eds), UK: World Scientific
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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.
|Item Type:||MPRA Paper|
|Original Title:||On mission drift in microfinance institutions|
|Keywords:||Microfinance; Loan Size; Mission Drift; Cross-subsidization|
|Subjects:||O - Economic Development, Technological Change, and Growth > O1 - Economic Development
O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
|Depositing User:||Beatriz Armendariz|
|Date Deposited:||21. May 2011 19:20|
|Last Modified:||12. Feb 2013 16:07|
Armendáriz, Beatriz, and Jonathan Morduch (2010), The Economics of Microfinance, Second Edition, Cambridge, MA: MIT Press.
Armendáriz, Beatriz, and Marc Labie (eds.), The Handbook of Microfinance, UK: Scientific Word