Critical evaluation of the Working of the Micro Finance industry, The problem of Mission drift

Microfinance industry, aimed at extending financial services to the underserved, faces the critical challenge of mission drift—a shift from social goals toward profit maximization. Originally, these institutions sought to empower economically marginalized communities by providing loans, savings opportunities, and financial education. However, as some microfinance institutions (MFIs) pursue growth and profitability, there’s a risk they might prioritize financial performance over their foundational social objectives. This drift can lead to practices that may not align with the sector’s core aim of financial inclusion, such as targeting less needy, more profitable clients or imposing higher interest rates to ensure financial sustainability. The challenge lies in balancing the dual objectives of financial stability and social mission, ensuring that efforts to remain economically viable do not overshadow the commitment to empower the financially excluded segments of society. Addressing mission drift is crucial for maintaining the integrity and societal impact of the microfinance sector.

Critical evaluation of the working of the Micro Finance industry

Microfinance industry has emerged as a pivotal player in promoting financial inclusion, targeting underserved and unbanked populations by providing access to financial services such as credit, savings, insurance, and money transfers. Its role in empowering economically disadvantaged groups and fostering entrepreneurship is well-recognized. However, a critical evaluation reveals both its strengths and areas of concern.


  1. Poverty Alleviation:

Microfinance has been instrumental in providing financial resources to those traditionally excluded from the banking sector, enabling them to start or expand small businesses, thereby contributing to poverty reduction and economic development.

  1. Women Empowerment:

A significant focus on women borrowers has led to enhanced economic participation of women, fostering gender equality and enabling women to make more informed decisions affecting their lives and families.

  1. Financial Inclusion:

By offering tailored financial products and leveraging innovative distribution channels, microfinance institutions (MFIs) have played a crucial role in broadening financial inclusion, especially in rural and remote areas.

  1. Entrepreneurship and Employment:

Access to microloans has spurred entrepreneurship, leading to job creation and income generation opportunities, which contribute to community development and economic growth.


  1. High Interest Rates:

To cover operational costs and credit risks, MFIs often charge high interest rates on loans, which can burden borrowers, leading to over-indebtedness and negatively impacting the very communities they aim to serve.

  1. Focus on Loan Recovery:

Some MFIs prioritize loan recovery over the welfare of borrowers, employing aggressive collection practices that can exacerbate the vulnerability of clients.

  1. Limited Regulation:

The microfinance sector’s regulation varies significantly across countries, with some markets experiencing lax oversight. This can lead to malpractices and endanger the sector’s integrity and sustainability.

  1. Sustainability and Scale:

Balancing sustainability with social objectives is a constant challenge. While scaling up is necessary for impact, it must not come at the cost of neglecting the social mission of microfinance.

  1. Product Diversity:

Despite advancements, the product range offered by many MFIs remains limited. Expanding beyond credit to insurance, savings, and other financial products could enhance the impact of microfinance.

  1. Impact Assessment:

Measuring the long-term impact of microfinance on poverty alleviation and economic development remains complex and contentious. There are concerns about the effectiveness of microloans in bringing about substantial economic improvement for borrowers.

Moving Forward

To address these concerns and enhance the positive impact of microfinance, the industry needs to focus on transparent pricing, responsible lending practices, comprehensive regulation, and the development of a broader range of financial products tailored to the needs of the underserved. Additionally, leveraging technology can improve service delivery and operational efficiency, reducing costs for both MFIs and their clients.

The problem of Mission drift:

The problem of mission drift in the microfinance industry refers to a shift away from its original social objectives—such as poverty alleviation, financial inclusion, and empowerment of marginalized groups—towards prioritizing financial performance and profitability. This shift can lead to practices and policies that may not align with the sector’s foundational goals of serving the underserved. Mission drift poses significant concerns and challenges for the sustainability and social impact of microfinance institutions (MFIs).

Causes of Mission Drift

  • Commercialization:

As MFIs seek capital to expand, they may tap into commercial funding sources, including equity investments and public listings. This often brings pressures to generate returns for shareholders, potentially overshadowing social objectives.

  • Regulatory Environment:

Regulations favoring financial stability and profitability over social impact can encourage MFIs to focus more on financial metrics than on their social mission.

  • Market Competition:

Increased competition in the microfinance sector can lead to a greater focus on profitable client segments and products, sidelining the financially marginalized populations the sector initially aimed to serve.

  • Institutional Growth:

As MFIs grow and scale, maintaining a focus on social objectives can become challenging. The complexity of operations and the need for financial sustainability can overshadow the original mission.


  • Client Over-Indebtedness:

In pursuit of growth and profitability, MFIs may extend credit beyond clients’ repayment capacities, leading to over-indebtedness and financial distress among borrowers.

  • Neglect of Marginalized Groups:

Focusing on more profitable, less risky clients can lead to the exclusion of the very poor or marginalized communities, contradicting the principle of financial inclusion.

  • Erosion of Trust:

Deviating from social missions can lead to a loss of trust among clients, communities, and even within the organization, as stakeholders perceive a shift in values.

  • Loss of Social Capital:

The social capital built through community relationships and trust can erode if clients and communities feel that MFIs prioritize profits over people.

Addressing Mission Drift

  • Strong Mission Statement and Governance:

MFIs should have a clear mission statement emphasizing their social objectives, supported by governance structures that prioritize these goals.

  • Performance Metrics:

Alongside financial indicators, MFIs should adopt social performance metrics to monitor and ensure alignment with their social mission.

  • Client Protection Principles:

Implementing and adhering to client protection principles can help MFIs balance financial sustainability with responsible lending and client welfare.

  • Stakeholder Engagement:

Regular engagement with clients, communities, and employees can provide insights into the needs and impacts of MFI activities, helping to realign operations with social objectives.

  • Innovative Financing:

Exploring funding sources that align with the MFI’s social mission, such as social impact bonds or grants for specific initiatives, can reduce pressures to prioritize profitability over social impact.

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