Microfinance, a “trickle-up,” market-based approach to poverty alleviation, is a hotly contested subject in the field of development.
The most famous case of microfinance is that of the Grameen Bank of Bangladesh, founded in 1976 by Muhammad Yunus, who went on to receive the 2006 Nobel Peace Prize jointly with the bank. In his acceptance speech, he noted the extreme poverty and inequality present in the contemporary world, but asserted that a world free of poverty can be attained because poverty is not an invention of the poor; it is a structural problem within a given economic and social system, promulgated by the “institutions and concepts that make up that system [and] the policies we pursue.” Microcredit organizations do their part in attempting to change that system by expanding the reach of financial institutions and offering credit to those who need it most. Yunus argues that maximizing profit and “doing good to people and the world” are “mutually exclusive, but equally compelling.”
Although Yunus and the microfinance movement appear to have altruistic aims of alleviating poverty and improving the lives of the most impoverished people in our society, the movement is currently facing an existential problem. Some microfinance organizations, traditionally non-profit institutions, have converted to private, for-profit banks, with the goal of “grow[ing] exponentially” (Christen 3). Thus, within the world of microfinance is a rift between those who prefer commercialization and formal regulation and those who believe that the banks must retain their altruistic spirit by remaining non-profit organizations. Commercialization has been an increasingly popular trend, especially in Latin America, where microfinance organizations tend to be more financially viable and self-sustainable than their Southeast Asian counterparts, due largely to their advancements in the “process of drawing in external funding” (Weiss, Montgomery 392). In fact, commercialization is often seen as a goal of infant Latin American microfinance organizations, with a formal, regulated bank considered to be the most evolved and efficient stage of development. Specifically, the Bolivian microfinance sector is very developed and provides a good case study for the effect of commercialization on these organizations.
The Microfinance Boom in Bolivia
Bolivia was the first country to see the traditionally non-profit microfinance sector integrate into the formal financial sector. After the debt crises of the 1980s and the subsequent economic instability, the microfinance industry boomed, inciting competition among NGOs. This competition and the desire to grow encouraged some microfinance NGOs to commercialize, allowing them to be financially independent by having more funding sources and expanding their loan portfolios to accommodate more clients. However, commercialization often leads to a change from the original goal of poverty alleviation to the goal of earning profit. This transformation of objective exemplifies the trend of “mission drift” among microfinance institutions (MFIs) in their struggle to balance expansion with altruism. Due perhaps to the moral ambiguities entertained by this issue, some NGOs prefer not to commercialize, arguing that the change would “force them to abandon their broader missions” of reaching out to the poor with credit and with other social services, such as health education (Rhyne 29). However, their loan balances tend to be lower than commercialized MFIs, and they must rely on subsidies and donations, leading some critics to claim that they are unstable and not as far-reaching as they could be with formal regulation. But these NGOs criticize their commercial counterparts for multiple reasons. They argue that commercial microfinance organizations “seduce clients into borrowing more than their repayment capacity allows” and that these commercial MFIs are “already starting to shun risky innovations and less attractive markets in favor of immediate profitability and a safer portfolio” (Rhyne 31).
The legal status of microfinance NGOs in Bolivia is a bit uncertain, as the left-leaning government wishes to exert control over the large and booming microfinance industry. The 1993 New Law of Banks and Financial Entities requires that “all financial organizations, including financial NGOs, […] be supervised” (Navajas 11). This statute equates all donations to a non-commercialized NGO as monies coming from the government, which ends up compromising 70 percent of their total financial resources. In essence, “this means that just about all financial NGOs should be audited by the Government.” (Navajas 12) The government also imposes numerous controls over commercial MFIs. The regulatory framework caters to “large loan sizes and few clients,” the opposite of microfinance’s aim of providing small loans to many clients (Navajas 13).
BancoSol
The first commercial microfinance institution was BancoSol, S.A., formerly an NGO under the name PRODEM; it went through this monumental transition in 1992 after years of mulling over expansion plans and feasibility projections. Now, BancoSol appears to be quite successful, with offices in nearly every large city in Bolivia and even multiple branches in some cities. But along with commercial success has come evidence of mission drift.
In her article “Evaluating Mission Drift in Microfinance,” Gaamaa Hishigsuren provides a framework that can be used to evaluate BancoSol. She begins with the assumption that for financial institutions to be conceived as “microfinance institutions” they must seek to alleviate poverty. Therefore, any decline in focus on poverty alleviation, or any attention to non-impoverished clients, is concrete evidence of mission drift. Hishigsuren proposes to evaluate these tendencies through three measures of mission drift: depth of poverty outreach, quality of outreach, and scope of outreach. Depth of outreach can be measured by demographic statistics, such as clients’ income levels, interest rates, and loan sizes. Quality of outreach refers to “levels of satisfaction with services and products,” and is often evaluated through the client-employee ratio (Hishigsuren 207). Scope of outreach refers to the types of services offered; most NGOs offer nonfinancial services in addition to typical financial services. In all of these measures, mission drift can be evaluated by comparing the changes before and after commercialization; in this study, we will compare the NGO PRODEM with BancoSol. It becomes evident that BancoSol does in fact exhibit some mission drift tendencies.
With regard to the quality of its poverty outreach, specifically looking at target clients’ income and demographics, PRODEM’s target groups were typical of other NGOs in that they provided access to credit for those under the poverty line. Their savings program was even actively exclusionary to higher income clients. Although BancoSol still claims to be dedicated to the poor, 20 percent of their clients are in fact not poor and the remaining 80 percent are not exclusively under the poverty line.
An additional factor within the depth of outreach is interest rates. BancoSol’s interest rates after the transition period turned out to be decisively higher than their NGO counterparts, making their loans less accessible to lower-income clients. After some time, the bank also allowed rates to fluctuate with the market, which inevitably excludes some clients when they rise. However, BancoSol’s savings interest rates still remained accommodating to lower-income clients.
BancoSol’s average loan size, however, provides more concrete evidence of mission drift. Although first-time loan sizes did not change significantly, the average size grew exponentially as BancoSol expanded, increasing from US$326 in 1992, at the time of the transition, to $904 in 1997 (Rhyne citing BancoSol 128). This suggests that borrowers are from a higher income level, since poorer clients cannot afford such large loans. While the bank is earning greater profits from large loans, its original purpose of alleviating poverty would be better served by a large number of small loans. Thus BancoSol’s acknowledged “loan size creep” indicates mission drift.
One variable used to determine quality of outreach is the ratio of loan officers to clients. When PRODEM decided to expand in 1988 and later commercialize, this ratio increased, eventually doubling by 1995. By qualitative standards, its staff is on a par with NGOs, since employees are well educated and dedicated to poverty alleviation. Mission drift, while still a possibility, is not as evident in this aspect of the bank’s performance
Mission drift is also very clear in evaluating the scope of outreach. While PRODEM worked to mitigate poverty through nonfinancial services such as health education, in addition to its financial loans, BancoSol’s activities are limited to strictly financial services.
Overlooking the Poor
BancoSol’s rhetoric of alleviating poverty and providing credit to the poorest of the poor has not changed since the PRODEM days. However, in its actions, BancoSol behaves more as a real bank, creating a dichotomy between rhetoric and implementation that seems to indicate significant mission drift. BancoSol “has decided to enter a more upscale market, but senior managers argue that this involves the addition of new markets, not subtraction from the original focus” of helping the poor (Rhyne 162). But after analyzing Hishigsuren’s measures of mission drift, it seems that attention to non-poor clients has in fact negatively affected microfinance performance for impoverished clients.
The implications of this trend of mission drift could be problematic for the future of the microfinance scheme. If many people realize that there is money to be made in the microfinance industry, it is possible that the altruistic characteristics of microfinance will disappear in favor of profit motives as more and more NGOs commercialize. If commercialization becomes the final goal of these organizations, it can be assumed that microfinance will no longer cater to the lowest-income sectors of society, because these sectors are not necessarily of value when the main goal is profit.
In sum, “rapid growth and large size have forced BancoSol to revise its original organizational design” (Gonzalez-Vega 27). PRODEM could have become financially independent and sustainable without commercializing, but it would not have been able to expand on such a large scale and so quickly. It can be concluded that with time, microfinance NGOs have the distinct capacity to grow, expand and eventually meet the large and growing demand for low-cost credit. In contrast, the rapid growth associated with commercialization may reach more clients and therefore generate greater returns, but it also tends to encourage banks to drift from their goal of poverty alleviation and to ignore those who need microfinance the most.
For an analysis of another microfinance institution, please see “The Women’s Development Bank in Venezuela: Creating a Caring Economy,” by COHA Research Associate Kristen Walker.
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good draft but can you send me a copy of this draft on my email
thanx Moses in Uganda