Microfinance Mission Drift?

This paper examines MFI mission drift or the tendency to extend larger loan sizes in the process of scaling up. The paper states that mission drift is not driven by transaction cost minimization alone. Causes for mission drift need not be progressive lending or cross subsidization. It states that mission drift could occur because of the interplay between MFI mission, cost differentials between poor and unbanked, wealthier clients, and region-specific characteristics pertaining to the heterogeneity of clientele. The paper presents a simple one-period framework to pin down the conditions under which mission drift can emerge. The framework reveals that:

• Researchers find it difficult to establish whether an MFI has deviated from its poverty reduction mission as there is a thin line between mission drift and cross subsidization;
• Institutions operating in regions which host a relatively small number of very poor individuals might be misleadingly perceived as deviating from their mission.

Existing empirical studies cannot differentiate between mission drift and cross subsidization. The paper discusses this issue in light of the contrasting experiences between Latin American and South Asian MFIs.