Elsevier

World Development

Volume 35, Issue 10, October 2007, Pages 1721-1738
World Development

Mainstreaming Microfinance: Social Performance Management or Mission Drift?

https://doi.org/10.1016/j.worlddev.2007.06.004Get rights and content

Summary

What scope is there for the pursuit of explicit development goals in the context of increasing integration of specialized microfinance and commercial banking sectors? This question and the idea of mission drift is first analyzed using a model that distinguishes between institutions’ financial and social performance possibilities, preferences, and assessment systems. The model is used to review findings from action research with an international sample of poverty oriented microfinance institutions that suggest some simple steps for improved social performance management. It is then used to illustrate the relationship between social and financial performance more widely across the retail financial services sector, and to offer pointers for more policy analysis at this level.

Introduction

Large sums of public and private money continue to be invested in improving access to, and the quality of personal financial services. Most of this investment is profit oriented, but many investors are also motivated by social goals. For example, the Consultative Group to Assist the Poorest (the apex association of international donors who support microfinance) regards microfinance as “a powerful tool to fight poverty” that can help poor people to “raise income, build their assets, and cushion themselves against external shocks” (CGAP, 2004a, p. 1). Microfinance is defined here in relation to its users—rather than in relation to other forms of finance—as the supply of savings, credit, insurance, and payment services to relatively poor people. These services are not only provided by specialized microfinance institutions (MFIs) that belong to the “new world” of microenterprise finance (Otero & Rhyne, 1996) but also by a diverse group of state sponsored and cooperative institutions, particularly postal banks, who serve many poor clients (CGAP, 2004b) along with a growing number of “downscaling” commercial financial institutions (Marulanda and Otero, 2005, The Economist, 2005, Valenzuela, 2002). In the other direction, many “upscaling” MFIs have transformed into regulated financial institutions and/or secured better access to commercial as well as donor finance, particularly in Latin America (Drake & Rhyne, 2002).

Many commentators have welcomed the blurring of the boundary between microfinance and mainstream banking on the grounds that only with commercial capital can demand for financial services among poorer people previously excluded from retail banking services be more fully met. For example, CGAP (2004a, p. 1) states that “microfinance will only realize its potential if it is integrated into a country’s mainstream financial system”. Closer integration is also expected to promote institutional innovation and responsiveness to diverse sources of demand. However, many commentators—indeed often the same ones—have also expressed apprehension that the growing commercialization of microfinance is leading to an over-preoccupation with profitability at the expense of poverty reduction and other development goals (e.g., CGAP, 2001, Christen and Drake, 2002, Hulme and Mosley, 1996, Otero, 1999).1 Arguments for concessional finance (CGAP, 2004a, p. 10) or “smart subsidies” (de Aghion & Murdoch, 2005, p. 256) to complement private capital also remain strong, and a “quasi-market” has evolved. This provides microfinance institutions with a mix of funding from public donors, private non-profit social investors, and commercial investors to suit the perceived private and public benefits arising from the services they provide.

To the extent that microfinance is motivated by development ends the question arises how best to evaluate performance against them. Rigorously measuring the impact of microfinance institutions and policies on the multiple dimensions of poverty and related goals is technically difficult and expensive (e.g., de Aghion and Murdoch, 2005, Khandker, 1998, Morduch, 1998, Sebstad and Chen, 1996), and it is not clear how far financial institutions themselves should engage in such assessment. One view is that impact assessment is a task better left to independent researchers and oriented toward informing public policy. At the other extreme is the view that the potential of microfinance as a development tool can only be realized if financial institutions themselves systematically and routinely investigate their own development impact. An intermediate position favors a mix of more rigorous “proving” impact assessment research for public policy and less rigorous “improving” research for internal use by financial institutions (Goldberg, 2005, Hulme, 2000). But many questions remain. How far can financial institutions safely and responsibly compromise on rigor in order to improve the timeliness and cost effectiveness of impact research? And if financial institutions can find reliable ways of assessing impact for themselves, then is public policy better served by auditing and sharing such effort, rather than by funding expensive independent studies that are often limited in time and scope? The distinctions between “proving” and “improving,” rigorous and reliable research into the outreach and impact of microfinance are not as straight forward as they may appear at first sight (Copestake, 2000, Sebstad and Cohen, 2001, Simanowitz, 2001).

In the last few years, debate over impact assessment within non-profit financial institutions has converged with debate over corporate social responsibility of for-profit institutions. Both concern incentives to set and monitor social goals, and raise questions about the managerial feasibility of “multi-tasking” (de Aghion & Murdoch, 2005, p. 263) or managing a “double bottom line” (Tulchin, 2003). Both also address bigger questions of power and rationality: what political room for maneuver exists (if any) to encourage financial institutions to address wider social goals, and how far are they technically capable of doing so? Whether it entails abandoning welfare goals for profit, or vice versa, the idea of mission drift suggests a deeper problem of lack of transparency and weak performance management. More specifically, it can be argued that social performance assessment and management have failed to achieve the same clarity, consistency, and level of acceptance as financial performance assessment and management (see Table 1).

A possible danger of extending performance management into the social sphere is that it curtails an organization’s flexibility by tying it to quantitative indicators that are poor proxies of ultimate social goals and so distort performance incentives (Power, 1997). Worse still is the risk that the technical discourse of performance management and auditing obscures an organizations’ wider historical and political role (Strathern, 2000). However, social performance indicators can perhaps be used in ways that complement rather than substitute for more flexible qualitative management, and performance management can contribute to more effective achievement of wider roles, rather than obscuring them. In the absence of countervailing social performance indicators it is also possible that organizations will focus too much on financial indicators. The main emphasis in this paper is less on the desirability, or otherwise, of social performance management (an issue for potential users) than on its feasibility.

Section 2 presents a simple framework for analyzing social and financial performance management, including the widely used, but often loosely defined idea of mission drift. Section 3 uses the framework to review lessons from a multi-country action-research program (Imp-Act) into how social performance management of explicitly poverty oriented microfinance institutions could be improved. Section 4 explores the scope for mainstreaming social as well as financial performance at the sector level, particularly the scope for persuading or forcing profit oriented institutions to take explicit social performance assessment and management more seriously. Section 5 concludes.

Section snippets

Theoretical framework

Following Yaron (1992), financial performance is defined here as the extent to which the full cost of providing services is directly paid for by service users. Social performance can be defined in a large number of ways. Zeller, Lapenu, and Greeley (2003), for example, emphasize compliance with minimum operational standards, including external standards of consumer protection. This is important, but risks divert attention too much from welfare outcomes to service users. Three sets of indicators

Application to poverty oriented MFIs

This section applies the framework presented in Section 2 to non-profit MFIs, drawing on experience under a global action research program, called Imp-Act. This was launched in 2000 to explore ways of improving the measurement and management of poverty reduction by MFIs.

Toward a sector wide approach

Having suggested above that there is considerable scope for improved social performance management within MFIs, this section explores the scope for doing so more widely across a country’s entire retail financial services sector. There are two arguments for doing so. First, despite their rapid growth, poverty oriented MFIs’ are in most countries still a relatively minor provider of such services (CGAP, 2004b).

Conclusions

This paper set out to do three things: to clarify what is meant by mission drift, to review the extent to which poverty oriented MFIs are successfully able to avoid it through better social performance management, and to explore the scope for more systematic balancing of social and financial goals more widely across national retail financial services sectors. First, a simple model distinguishing between social and financial performance preferences, possibilities, and assessment systems was used

Acknowledgements

Earlier drafts of this paper were presented at the University of Complutense summer school at El Escorial in August 2005, and the Development Studies Association Conference at the Open University, Milton Keynes in September 2005. I am grateful for comments from participants at both of these events, as well as from three anonymous reviewers and from numerous colleagues at Bath and within the Imp-Act program, particularly Keith Heffernan, Susan Johnson, and Anton Simanowitz.

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