A Model of Mission Drift in Microfinance Institutions

This paper explores the mission drift occurring when an MFI considers commercialization, and moves away from its mission of serving the poor. It uses a model that distinguishes between the poorest of the poor and the less poor. The paper studies potential tradeoffs that an MFI faces when deciding on the allocation of scarce funds. The paper studies a situation where donors share the MFIs' poverty minimizing objective. It then introduces a donor who is focused on profit, and offers funds on a competitive basis. Maintaining focus on the poverty alleviation yields lower returns. Hence, the MFI is forced to make a choice and consider shifting some lending towards larger, more profitable loans. The paper finds that with the entry of profit-oriented donors, the most effective MFIs shift their lending portfolios away from the poorest to the less poor borrowers. Findings include:

• Reduction in poverty per dollar falls, but the MFI is able to achieve a larger reduction in poverty due to the larger budget;
• By directing funds to the highest performing microfinance portfolios, investors are trading poverty return for financial returns.