Mission Drift: Waiting to be Convinced

The Centre for the Study of Financial Innovation (CSFI) recently published “Microfinance Banana Skins 2008,” which is a part of series of reports CSFI disseminates on the risk outlook for different financial sectors. The report is based on a survey of over 300 practitioners, analysts, investors and observers (the sample was heavily biased towards Americans as the US accounted for 84 respondents). (http://cgap.org/portal/binary/com.epicentric.contentmanagement.servlet.ContentDeliveryServlet/Documents/MF_BananaSkins2008.pdf)

The report lists what were identified by the respondents as the 29 biggest risks to the profitability and sustainability of the microfinance sector. Listed number 1 and 2 are management quality and corporate governance. Listed number 14 is mission drift. I have often heard people anecdotally remark on the dangers of mission drift and the section on mission drift in the report is typical. Three microfinance managers and two researchers/experts are quoted to reveal that many in the sector fear that microfinance is just becoming another soulless industry driven by evil profit maximizing investors.

I don’t believe mission drift is a particularly well defined concept. It seems there are two main ideas about the meaning of mission drift, one narrow and the other broad. The narrow definition comes from the first sentence of this quote from a briefing paper by Opportunity International, and the broader concept comes from the second:

The concern is that efforts to reach a significant scale by securing financial sustainability may lead to a tendency to provide larger loans to less poor clients and to employ stricter loan screening procedures. In other words, scale-up could lead to a drift from an MFI’s poverty alleviation mission.
(http://www.appg-microfinance.org/files/What%20is%20Mission%20Drift.pdf)

Concerns about mission drift tend to be associated with commercialization, but I would argue that these worries apply similarly, if less so, to non-profit microfinance providers who are attempting to reach scale by traditional fundraising. This type of fundraising can lead to an institution deviating from its original purpose in an effort to satisfy the guidelines provided by major philanthropic institutions. The difference is that this altered mission, although possibly less oriented towards the organizations strength, will generally continue to be similarly development focused.

I decided to look further into the issue and sought out literature with quantitative evidence of mission drift (mostly by looking through the bibliographies of various papers and searches on the internet). The most pertinent and evidence based document I found was an Occasional Paper published by CGAP, an influential consultative group within the World Bank, titled, “Commercialization and Mission Drift: The Transformation of Microfinance in Latin America.” (http://dev.cgap.org/docs/OccasionalPaper_05.pdf).

The majority of the paper is dedicated to a portrayal of the microfinance sector in Latin America, with only a few pages specifically devoted to mission drift. Although the paper was published in 2001, it still seems quite relevant. Compared with Asia and Africa, Latin American microfinance has long been more commercially oriented. Perhaps the urban focus of Latin American MFIs led to these institutions being less interested in holistic welfare than South Asian MFIs that generally serve the rural population.

The paper explains that if you take a cursory glance at the numbers, it would seem that commercialization leads to higher loans and less focus on the poor. If you compare the average loan balance as a percentage of GDP of 10 leading Latin American MFIs in 1990, to that statistic for those same MFIs in 1999, you will find that this percentage has jumped by an average multiple of a little above 3 (ranging from 1.1 to 13.8). These are crude numbers, but they basically tell the story. Though, one could easily argue that this is not a indicative statistic for measuring whether an MFI is actually serving the poor.

The paper points out two important possibilities for why average loan size may have risen that one would not associate with mission drift. First, “Larger loan sizes could simply be the result of a deliberate strategy or choice on the part of microfinance institutions” and not caused by efforts to improve the bottom line. An MFI could benignly decide that serving slightly higher up the ladder clientele and “promoting small enterprise development” actually leads to more job creation and improved welfare for the society as whole. Second, the authors point out that maturity of the portfolio could lead to higher loan amounts. Microfinance is generally structured so that the first loan is given at a level that will be relatively easy for the client to pay back, with the size of the loan increasing as the bank gains more trust in the repayment abilities of the client. This means that an MFI that started in 1990 will naturally be giving higher loans year by year, so long as the institution retains clients.

The CGAP paper concludes that “at first blush” the statistics they collected might seem to demonstrate mission drift, but that a variety of factors could have been the reason average loan size has increased. CGAP has long been a proponent of sustainable and commercial approach to microfinance, so the conclusion that mission drift may not be happening in Latin America may be caused by an affirmation bias.

It would seem to me that there must be better ways of measuring mission drift. Many social performance indicators are being developed with a focus on determining the economic status of the clients that MFIs serve and whether MFI are truly delivering positive outcomes. But if strong studies have already been completed that demonstrate a deleterious affect of scaling up on social impact, I for one have not seen them (suggested readings are welcome). In a thorough article published by The Centre for Economic Self-Reliance, British microfinance analyst, James Copestake sets up a theoretical framework for the possible causes of and ways to avoid mission drift. He astutely writes:

In a mythical world of perfect information, the directors of an MFI would set performance goals, the managers would make decisions to achieve them, employees would systematically monitor outcomes, and everyone would learn. Unfortunately, leaders of MFIs are handicapped by the lack of timely and reliable evidence about performance. Mission drift occurs when their goals and preferences for the future subconsciously change in response to actual performance outcomes rather than being a fixed point against which performance can be guided and assessed. (http://findarticles.com/p/articles/mi_qa5457/is_200710/ai_n21298587/pg_1)

Yet this well-informed and balanced paper left in me an even greater desire for more tangible data.

Malcolm Harper, former chairman of BASIX and a man I admire, claimed in the “Microfinance Banana Skins” survey that microfinance was at risk of turning into “just another exploitative business which will continue the trend towards growing inequity, worldwide.” This may be true, but if those people in the sector who are concerned about mission drift want microfinance to change course, they must go beyond the anecdotal and begin to prove their point.