MICROFINANCE PAPER WRAP-UP: Stemming the Tide of Mission Drift: Microfinance and the Double Bottom Line, by Christina Frank

Written by Christina Frank of Women’s World Banking (WWB), a U.S. non-profit focused on microfinance for women entrepreneurs, released April 2008 by Women’s World Banking, 23 pages, available at: http://swwb.org/files/pub_lang_WWBworkingpaper.pdf

Microfinance institutions (MFIs) are less likely to lend to women and more likely to make larger loans once they are “transformed” – that is, morphed from being non-profit lenders to regulated financial institutions – according to the findings described in this paper.

The study examined the five years after “transformation” for 27 organizations and compared them to 25 that had not commercialized. On average, it found the proportion of women served by transformed institutions dropped from 88 percent to 60 percent. It also found that average loan sizes were two to three times greater than those of non-commercialized outfits.

The findings are troubling, suggests a summary by Time magazine, because they may demonstrate a drift from many of the original tenets of microfinance – a focus on lending to women and the poorest segments of society. Women have traditionally been considered better clients because they are less likely to spend money on consumable goods and more likely to use funds to fulfill social needs, such as health care and education. Larger loan sizes may serve as evidence that banks are increasingly turning away from the very poor, who tend to take out smaller loans – though the WWB study suggests this finding might be a result of improving economic conditions.

Nonetheless, it does raise the question of a shift in priorities – when MFIs become commercial financial institutions, do they become more interested in serving their investors than in serving the poor? Commercialization has been gaining in popularity in recent years, as microfinance has become an attractive option for investors worldwide.

On the other hand, the study does acknowledge several benefits of MFI transformation. Transformed institutions tend to extend their borrower reach and diversify their product offerings. The study reveals that the number of active borrowers increased by 30 percent a year on average for commercialized MFIs, compared to 25 percent for the non-profits. Also, since many countries do not allow non-profits to take deposits, savings accounts are more widely available with transformed MFIs. The number of savings accounts grew by an average of 45 percent annually for the commercialized institutions, while those in the non-commercialized group that were already able to offer such accounts only saw 28 percent average growth.

The commercialization of microfinance as a result of increased capital availability has been an ongoing concern in the microfinance community. MicroCapital has been continually tracking the debate, notably featuring Banco Compartmos of Mexico, a for-profit institution that had a well-publicized and highly controversial initial public offering (IPO) last year.

By Stephen Son

Additional Resources:

TIME: “Microfinance: Women Being Cheated?”

Women’s World Banking: “Stemming the Tide of Mission Drift: Microfinance and the Double Bottom Line”

MicroCapital.org article, April 7, 2008: “New York Times Reports on Controversial Microfinance Giant Banco Compartamos of Mexico”

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