When a microfinance institution deviates from its social mission, borrowers are the most harmed, but stakeholders are also affected.

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Carlos Serrano-Cinca, Yolanda Fuertes-Callén & Beatriz Cuéllar-Fernández, University of Zaragoza, Spain.

Mission drift is a popular research topic with respect to non-profit organizations and, in particular, microfinance institutions (MFIs). The need for many microfinance institutions to generate profit often leads these institutions to lose sight of their social mission. The consequences of mission drift for borrowers and MFIs have been extensively studied. Mission drift usually reduces outreach, can be detrimental to the poorest borrowers, harmful to women, and disappointing to donors and social investors. However, the effects of mission drift on other stakeholders (employees, government, micro-savers, and banking creditors) have been insufficiently studied, a gap that our study seeks to address.

About Our Research

In our research, we first calculate the economic value that MFIs distribute to each stakeholder. Second, we study the relationship between mission drift and the financial returns to stakeholders. Our study shows that mission drift not only has effects on customers but also on all other stakeholders.

We propose a model to explain the effect of microfinance mission drift on stakeholder financial returns, using stakeholder theory as our conceptual framework. We tested the model through an empirical study using a panel data sample of 534 MFIs from 80 countries. We used the average loan size and the percentage of female borrowers as proxies for mission drift. We calculated the economic value distributed by the MFI to these stakeholders by considering salaries, taxes, and interest paid to measure the economic value that an MFI distributes among its stakeholders. In other words, we apply the idea proposed in the guidelines of the Global Reporting Initiative (GRI, 2016), which is a similar idea to surplus distribution.

What we Found

We reached the following findings. First, we found a negative relationship between average loan size and return to employees and a positive relationship between women borrowers and return to employees, which is justified because mission-focused MFIs are labour intensive. This is a relevant finding, given the importance of employment for the well-being of individuals and societies.

Second, we found a negative relationship between average loan size and return to the government and a positive relationship between women borrowers and return to the government, which is consistent with the stress inertia theory that predicts that organizational change causes negative effects on firm performance. We believe this is another good reason for MFIs not to drift away from their mission.

Third, we found a positive relationship between average loan size and return to micro-savers, and a negative relationship between women borrowers and return to micro-savers. This is justified because mission-focused MFIs are usually unregulated NGOs that cannot collect savings, which undermines the goal of financial inclusion. If the poorest cannot deposit their money in an MFI, alternative ways of channelling savings include rotating savings groups, keeping money at home, or even paying private savings collectors. Deposits offer security, pay interest, and can be the first step in accessing future loans because of the relationship established with the MFI. The win-win situation would be to continue lending to the poorest but attract deposits, and the way to achieve this is to become a regulated institution. However, it is not always possible for the MFI to opt for regulation, and shifting goals often creates confusion and impair performance.

Stakeholders should be taken into account when assessing the performance of MFIs. However, sometimes stakeholder objectives are incompatible, and in fact, our fourth finding is that the correlation coefficients between some of the indicators that measure the return to stakeholders are negative. The win-win MFI model would be a mission-centred institution, labour-intensive, profitable to pay taxes, and regulated to collect deposits. Not surprisingly, few MFIs match these criteria – only 12.4% of the analysed sample (66 out of 534). Managers may find it very difficult to please all stakeholders and will often have to prioritize. Lowering the financial margin benefits customers but can compromise sustainability, thus harming shareholders. Loan recovery practices are necessary to control delinquency, but an MFI must apply ethical limits. Efficiency gains in an MFI cannot be made at the expense of squeezing employees: a balance has to be achieved. It is difficult to combine the interests of all stakeholders, because sometimes they conflict and management has to make a choice. Ethics and the fulfilment of the mission must guide any social entity and avoid any kind of abuse.

In Conclusion…

Focusing on practical implications, a management-for-stakeholders approach requires managers to obtain indicators that measure the value created by the MFI for each of its stakeholders. However, there are no well-established indicators. The economic value distributed by the MFIs can help organizations to implement the management-for-stakeholders approach. It would be interesting for social rating agencies to extend their role to other stakeholders, using indicators such as those used in our study.

Let’s conclude our blog post by saying that an MFI may be inefficient, unproductive, generate little profit, and pay few taxes and little interest, but it can still achieve a notable outreach to clients, have a remarkable impact on the community, and also generate local employment by hiring many credit officers. This is a multi-objective problem that could be solved by incorporating multicriteria decision-making techniques. This can be another exciting line of research.

Read the full article here: Serrano-Cinca, C., Fuertes-Callén, Y., & Cuéllar-Fernández, B. (2022). The Relationship Between Microfinance Mission Drift and Financial Returns to Stakeholders. Nonprofit and Voluntary Sector Quarterly, doi. 10.1177/08997640221138763.

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