Microfinance: The effect of commitment to social goals: An empirical analysis of reverse mission drift in microfinance institutions

Tomas Rosales

Student thesis: Master thesis

Abstract

Due to allegations of relentless profit seeking and studies showing limited social impact, microfinance is no longer considered the panacea to poverty that it once was. The industry is however still growing, and with it, an increasing body of research. Much of this literature points towards a co-existence of the two main goals of microfinance: to provide financial services to the poor and at the same time ensure financial sustainability. Simultaneously, there is ample evidence that many institutions are giving up some of their social outreach in order to perform financially. This theory of mission drift is usually investigated through financial data, as social performance outcome has been hard to measure and the availability of data has been scarce. This thesis takes the discussion one step further, and raises the question of whether commitment to social goals creates a "reverse mission drift"; in other words increases the social outreach, but dilutes the financial sustainability. Using financial and social data on more than 600 microfinance institutions (MFIs) in 90 countries from the MIX database, the thesis intends to assess the quantitative effect of three proxies for the commitment to social goals. The dependent variables are commonly used measures of social outreach, financial performance and portfolio quality. By constructing a model with more than 1500 observations in the period 2010-2012, it estimates the effects through linear regressions on a short, unbalanced panel. The findings reveal that a social performance committee on the board of directors’ decreases loan size, and increases the amount of both total borrowers and female borrowers, yet has no significant effect on financial performance. The effect on both repayment rates and risk coverage is positive. Employing a poverty measurement tool has the same positive effect on all social outreach variables, and again there is no evidence for a relationship with financial performance measures. The amount of defaults significantly decreases for MFIs measuring client poverty levels. Requiring compulsory insurance has less unequivocal indications. Whereas only weak evidence for decreasing loan sizes can be found, the operational self-sufficiency is consistently lower for MFIs requiring clients to take on insurance. Defaults, in terms of the write-off ratio do significantly decrease, but the use of compulsory insurance overall seems questionable as a client responsibility tool. The model is subjected to a number of robustness tests that overall confirm the findings. The magnitudes of the effects vary, with poverty measurement being the most robust. The main findings contradict some previous literature that finds a trade-off between social and financial performance. It also supports other claimants of no mission drift. At the same time the evidence points to an important new effect: The commitment to social goals has a positive impact on social outreach measures and to some extent repayment rates, but only minimally affects financial performance. Consequently, this raises a new suggestion, namely that it is possible to commit strongly to social goals whilst independently seeking profits and financial sustainability. More research with more longitudinal and stronger social data is therefore warranted on this particular issue. The implications are still important for future research, for investors seeking responsible yet strong returns, and for MFIs in search of a balanced business model.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2014
Number of pages100