Sustainable Development and Microfinance: The Effect of Outreach and Profitability on Microfinance Institutions' Development Mission

Abstract

According to the concept of microfinance, financial institutions ought to contribute to sustainable economic and financial systems development by offering access to credit for clients who are usually excluded from the formal banking system. However, in recent decades microfinance institutions (MFIs) have often focused on their profitability rather than the support of their poor clients. In order to empirically examine this mission drift and its consequences for MFIs' performance, we propose a model of MFIs' contribution to sustainable development as dependent on their outreach and profitability focus measured by percentages of female borrowers and profit margins, respectively. Utilizing a large transnational panel data set comprised of institutional and country‐specific data, we provide preliminary empirical evidence indicating that both extensive outreach and profitability are negatively related to development. The model further highlights that the problem of a mission drift is especially pronounced for non‐profit‐oriented MFIs. Copyright © 2017 John Wiley & Sons, Ltd and ERP Environment

Microfinance institutions fostering sustainable development

“…In agreement with the literature, although social aspects are included in almost all MFIs’ mission, for some organizations, the dimension of financial self‐sufficiency prevails over the others, potentially causing a mission drift situation in socially oriented MFIs (Arena, ; Kunal, ; Lopatta et al, ).…”

“…The financial system affects sustainable development (SD) directly and indirectly (Beck, Demirgüç‐Kunt, & Levine, ; Busch, Bauer, & Orlitzky, ; de la Cuesta‐González, Muñoz‐Torres, & Fernández‐Izquierdo, ; Hu & Scholtens, ). The microfinance sector is considered an important contributor to the strengthening and expansion of the formal financial system (Lopatta, Tchikov, Jaeschke, & Lodhia, ; Vanroose & D’Espallier, ). It has become the world's largest banking market in terms of customers served (Mersland, ).…”

“…In articles in which financial issues prevail, on the one hand there is a latent interest in the impact on the social aspects that relate this sector and its performance to social and financial inclusion (Jose & Chacko, 2017;Lacalle-Calderón, Alfonso-Gil, & Rico-Garrido, 2015;Prior & Argandoña, 2009) and poverty alleviation (Kunal, 2013;Manta, 2016;Tashman & Marano, 2009). On the other hand, there is community impact (Perez, Gonzalez, & Aaronson, 2011;Warnecke, 2014), particularly in women's lives (Chakrabarty & Bass, 2014;Maclean, 2010;Warnecke, 2015), the prevention of overindebtedness (Hudon, 2009;Rahman, 1999;Sathye, Mukhopadhyay, & Sathye, 2014) and discussion of the mission drift problem (Arena, 2007;Kunal, 2013;Lopatta et al, 2017).…”

The Impact of Social Outreach on the Financial Performance of Microfinance Providers in Pakistan

“…Proponents of this view mainly stress upon the coverage of costs related to the provision of access to MF services to poor by the MFPs because the subsidies given by donors are limited and are uncertain in continuity for long run, hence, the MFPs must target sustainability and profitability as a tool to let them available a provider of MF services to poor over the long haul (Rhyne, 1998). From the study of literature, it seems that the "mission drift" from the societal development objectives to self-sustainability of MFPs may become unavoidable , although, this trade-off can be minimized if MFPs become cost-efficient, as identified by Lopatta, Tchikov, Jaeschke, and Lodhia (2017), Mersland and Strøm (2010).…”

“…Macroeconomic variables affect the overall economy and also affect the Financial Performance of MFPs (Lopatta et al, 2017;Nasrin et al, 2018). The current study used inflation (INF) and gross domestic product per capita as the macroeconomic control variable.…”