Avoiding "Mission Drift": Do Microfinance Institutions Stop Serving Their Core Mission When Seeking Profit?

09/24/2010 02:01 pm 14:01:30 | Updated May 25, 2011

On Tuesday I participated in a panel discussion at the Clinton Global Initiative Annual Meeting in New York where I was seated between Vikram Akula of SKS Microfinance and Prof. Muhammad Yunus, the Nobel laureate founder of Grameen Bank. That seating arrangement turned out to be both a literal and a figurative description of my role in the discussion. The panel's discussion topic on Microfinance IPOs was focused on the appropriate role of commercial capital in the evolution of the microfinance industry.

The panel moderator, Adam Davidson of NPR's Planet Money, half-jokingly said at the beginning that our discussion would be studied in schools for years to come. While that may have slightly overstated the impact of our 90 minutes together, it does speak to the importance of this moment in the development of the microfinance industry.

Simply stated, Vikram, Yunus and I share a passion for providing access to financial services to the poor. Vikram even studied with Prof. Yunus at the Grameen Bank in Bangladesh. Our paths to achieving this goal, however, differ significantly. Yunus believes strongly in a model of local financing, with clients as sole owners of the MFI and profits from the MFI returned, not to the owners, but to support the MFI's growth. Vikram, on the other hand, acknowledged that SKS would never have been able to reach its 7 million clients in only a few years without tapping into large pools of international capital -- he even went so far as to call his investors "greedy venture capitalists."

And there I sat in the middle, agreeing fundamentally with both men. I strongly believe that there will never be enough donor capital to bring microfinance to the scale it must reach if we are to address the needs of the billions of people who remain unbanked worldwide. Yet as critical as commercial capital is to reach scale, I am acutely conscious of the impact commercial capital can have on the choices MFIs make on who to serve, and how they are served.

Becoming a regulated financial institution can have a tremendous positive impact for both the institution and its clients, if done properly. In most countries, by becoming regulated an MFI can tap additional external capital sources and begin to mobilize savings deposits, allowing it to reach more people. The additional regulatory oversight also tends to make for more transparent financial reporting and interaction with clients, resulting in better governance and more effective and accountable boards of directors for MFIs.

But against all these positives, research also shows a clear trend towards a declining focus on women clients once an MFI becomes a regulated, for-profit financial institution. A WWB research study entitled "Stemming The Tide Of Mission Drift," demonstrates that in a sample of 27 MFIs that had made the transition from NGOs to regulated financial institutions, the percentage of women clients served fell from an average of 88.5 % in the year prior to the transition to 68.5% percent within four years of that transformation.

So why is maintaining a focus on women clients important in the first place? Microfinance was originally created to serve the poor, regardless of gender, who were denied services by the mainstream financial sector because they lacked collateral and were perceived to be bad credit risks. However, it quickly became apparent that the poor were indeed creditworthy and that women borrowers in particular spent the proceeds from their businesses in ways that have a longer-lasting, more profound impact on the lives of their families: notably, education for their children, family health care, and improving their housing.

WWB believes it is the ideal moment to translate its knowledge of serving women through microfinance during the past three decades into an owner-operator strategy that generates both economic and social value. On Tuesday, we announced the launch of our own social enterprise: WWB Hold Co, a group of MFIs owned and operated by WWB and dedicated to providing access to responsible financial products globally. WWB Hold Co. will be established as a separate entity and will ultimately encompass a unified group of seven MFIs over the next decade that will serve an estimated 2 million people.

We are pursuing this venture because we believe there are several ways MFIs can reverse the negative trend away from serving women. The manner in which investors conduct due diligence, construct loan covenants and reporting requirements and maintain the post-investment relationship with an MFI can shape the MFI's direction, particularly with regard to maintaining its mission focus. Institutions that choose investors who are passionate about preserving the mission, while earning a reasonable economic return in the process, can help ensure mission-focus.

Moving MFIs away from a credit-only model can be another strong prevention against mission drift. Providing a broad array of products and services, including savings and insurance, gives women the ability to build assets and move toward having control over their economic well-being. WWB's MFIs will carry forward our organization's mission: serving women by designing products that meet the needs of women. These owner-operator institutions will be incubators for product innovation, contain a strong gender balance in management and continuously strive toward meeting both financial and social performance standards.

We see WWB Hold Co. as sitting in the center chair of microfinance. Our industry has a proud history of profoundly changing the lives of millions of poor people, beginning with the work of Prof. Yunus and other early microfinance pioneers. Now we are capturing the imagination of investors through the work of Vikram and others. By blending the possibilities of scale through capital and a renewed vigilance by investors and microfinance executives for maintaining the sector's original social purpose, microfinance can go on to an equally impressive future.