Since the Mexican Microfinance Institution (MFI) Compartamos went public in 2007 – whereby promoting NGOs and private investors earned about USD 425 million – leading journals and magazines have repeatedly run rather sceptical articles about microfinance. They are mostly inspired by antagonists of MFIs growing into market driven enterprises. This antagonism has been blended with contemplation about assumed “subprime issues” of microfinance. However, the sector showed a steady performance, different from most other segments of the financial sector. The unholy blend of these two lines of thought risks to create an unwarranted image of microfinance.Microfinance; Mission Drift; Subprime; Sustainability

Ramana, N. V.

Schmidt, Oliver

English

Research Papers in Economics

Mission drift of large MFIs?  
 
Shortened version published under “Size Matters” in Development and Cooperation, February 2010 
 
Since  the  Mexican  Microfinance  Institution  (MFI)  Compartamos  went  public  in  2007  – 
whereby promoting NGOs and private investors earned  about USD 425 million – leading 
journals and magazines have repeatedly run rather sceptical articles about microfinance.
i They 
are  mostly  inspired  by  antagonists  of  MFIs  growing  into  market  driven  enterprises.  This 
antagonism  has  been  blended  with  contemplation  about  assumed  “subprime  issues”  of 
microfinance. However, the sector showed a steady performance, different from most other 
segments of the financial sector. The unholy blend of these two lines of thought risks to create 
an  unwarranted  image  of  microfinance.  As  Gonzales-Vega  (2009)  put  it:  “[T]he  larger 
numbers  of  poor  household-firms  have  been  reached  by  organizations  that  care  about 
sustainability imply a substantially greater social welfare impact than the effects associated 
with  weak,  transitory,  non-sustainable  efforts  of  organizations  with  limited  breadth  of 
outreach. Thus, sustainability has done more for achieving social goals than any other effort 
in this area. […] The number of those among the poor still without access to finance are so 
huge,  that  one  should  be  very  worried  about  experts  who  preach  against  growth  and 
sustainability." 
 
Indeed, the vast majority of microfinance clients around the world is reached by 300 or so 
large MFIs. Large MFIs offer a wider choice of microfinance products at lower cost, and thus 
lower interest rates and fees (annex 1). They serve a larger proportion of women than smaller 
MFIs. They pay their staff better and offer them better prospects of a professional career (see 
Schmidt 2010, in this volume).  
 
Large MFIs are able to do so because economies of scale diffuse fixed costs, and thus allow 
investment in robust, IT-driven back offices, which again drives standardising of processes 
and thus realises further economies of scale.  
 
Large MFIs are able to do so because professional acumen and convincing business models – 
largely replica of market leaders’ models, particularly Bangladesh’s Grameen Bank – attract 
commercial capital, i. e. private equity and commercial credit. This fuels steady growth of the 
organization to reach ever more poor household-firms (widening) and to offer them a wider 
choice of microfinance products (deepening). 
 
Exemplary, for a sample of 223 Indian MFIs, it is found that large MFIs charge less per client 
(interest plus other charges) than medium MFIs and access funding at lower cost than medium 
and small MFIs. They channel more funding from banks – i. e. MFI-borrowing from banks – 
to their average client than the average client of small and medium MFIs. For large MFIs, the 
financial cost per client – i. e. the rate at which the average client accesses bank-funding – 
equals 6.5%, as compared to 8.9% for medium MFIs and 11.5% for small MFIs. Reason 
being that large MFIs operate more efficiently, mainly for economies of scale, and borrow at 
up to 5%-points more favorable rates than small and medium MFIs.
ii 
 
There is no evidence of mission drift, as far as the indicators “female clients”, “loan size” or 
“staff pay” are concerned. It is true, though, that “till very recently, there was little rigorous 
evidence on either side — is microcredit transformative or ruinous? However this is changing 
now, thanks to the courage and vision of a few leading MFIs  […] at one level the results are 
remarkably similar. The effect on businesses is not dramatic but some clearly benefit. […] to 
actually blame microcredit for not promoting the immunization of children is no different from  blaming  immunization  campaigns  for  not  generating  new  businesses.” 
(Banerjee/Duflo/Karlan, 2009).  
 
Leading practitioners have, with different nuances, come to argue that it takes about 8-10 
years for microfinance clients to move to considerably improved levels of wellbeing. Over 
this period, clients are faced with socio-economic choices – health care, settling old debts, 
schooling  and/or  marrying  off  children,  improving  housing,  participating  in  issues  of  the 
community,  acquiring  skills  and  establishing  household-firms  –  each  of  which  must  be 
complemented by specific microfinance products (see exemplary Sa-Dhan 2009).  
 
This points to the dire need of innovation of a much larger range of microfinance products, 
much  beyond  “one-size-fits-all”,  “meant-to-be-for-business”  loans.  MFIs  have  not  done 
enough  to  diversify  their  credit  products,  and  they  have  not  been  enabled  enough  by 
governments  and  regulators  to  offer  savings,  money-transfers  and  insurance  products, 
including access to equity-based products. However, large MFIs have done more than others 
in these areas.  
 
Sure, large MFIs will always only reach a certain segment of the unbanked and poor, which 
may not be “the poorest”. Through the equity and commercial credit that large MFIs, the 
segment served benefits indirectly from the opportunities of capital markets. As more MFIs 
will be listed at the stock market, they may consider flowing some “micro-equity” directly 
into the portfolios of their clients.  
 
If this admittedly still thin access to the capital markets was capped, it would be a gross 
disservice to the huge number of unbanked households. To avoid such, it is the responsibility 
of MFIs to avoid undue risk of growing wide without growing deep; as it is the responsibility 
of experts (and/or jornalists) to avoid undue risk of painting an image of microfinance that is 
not validated by facts.  
 
Annex 1:  
a)  Mean of selected characteristics for large and small MFIs
1 
Indicator  Large MFIs  Total Sample  Small MFIs 
Number of MFIs  273  1,084  553 
Number of active borrowers  248,232  69,277  3,194 
Total Assets (US-$)  150.9m  47.6m  6m 
Gross Loan Portfolio (US-$)  118.3m  34.9m  3.5m 
Number of depositors  250,112  72,133  7,552 
Voluntary deposits (US-$)  76.1m  21.9m  2m 
b)  Mean of selected performance indicators for large and small MFIs
1 
Indicator  Large MFIs  Total Sample  Small MFIs 
Portfolio at Risk, >30days (%)  4.4  5.7  6.5 
Cost per borrower (US-$)  148  267  389 
Yield on Gross Loan Portfolio (%)
2  24.8  29.1  27.4 
Number of staff  1,280  391  47 
Average Salary/GNI per capita
3  6.4  5.9  5.0 
Female borrowers
4  69.8  61.4  55.8 
Loan over GNI
5  95.5  81.4  59.3 
1   Large MFIs: > 30,000 active borrowers; small MFIs: < 10,000 active borrowers. 
2   Financial Revenue (interest and fees) from the loan portfolio, divided by gross loan portfolio, corrected   
     for inflation.  
3   Multiplying factor; i. e. how many times of Gross National Income (GNI) per capita of the respective country represents 
average salary of MFI-staff. 
4   Women as % of all active borrowers.  
5   %, calculated by dividing Average Loan Balance per Borrower through GNI per capita. 
Source: MixMarket (2009)  
References 
Gonzalez-Vega, C (2009): Contribution to "the king is naked – discussion" on the "DevFinance-email-
list" of the Ohio State University, [devfinance@ag.ohio-state.edu], posted on 17
th May 2009.   
MixMarket  (2009):  MicroBanking  Bulletin:  2008  Benchmarks,  under:  www.mixmarket.org 
[11.12.2009]. 
Sa-Dhan (2009): National Microfinance Conferene 2009 — Microfinance Ecosystem: Equilibrium 
Between Growth and Effectiveness, New Delhi. 
Schmidt,  O.  (2010):  Trends  and  Opportunities  in  developing  Microfinance  Human  Resource;  in: 
Development and Cooperation (this issue). 
Banerjee, A. V. / Duflo, E. / Karlan, D. (2009): The Role of Microfinance, in: Nicholas Kristof New 
York Times Blog, 28. Dec. 2009, http://kristof.blogs.nytimes.com/author/nicholas-kristof. 
 
The authors:  
 
N. V. Ramana (nvramana@isapindia.org) has been leading and advising providers of 
livelihood services, microfinance and/or agribusiness for over 3 decades. Among others, he 
isthe chairman of the board of the Indian Society of Agribusiness Professionals. 
 
Oliver Schmidt (www.linkedin.com/pub/oliver-schmidt/b/73/374) has been working and 
teaching in the Microfinance sectors of Uganda and India for 5 years. 
                                                 
i In 2008, The New Yorker discussed “What Microloans Miss” (by J. Surowiecki, 17
th March). The New York 
Times documented that “Microfinance’s Success Sets Off a Debate in Mexico” (by E. Malkin, 5
th April), which 
was also reflected in The Economist “Doing Good by Doing Very Nicely Indeed“ (28
th June). The Financial 
Times reviewed “The Battle for the Soul of Microfinance” (by T. Harford, 6
th Dec.). In 2009, the Economist 
noted cautious findings of the latest random-trial findings as “A partial marvel” (16
th July). The Wall Street 
Journal reported “A Global Surge in Tiny Loans Spurs Credit Bubble in a Slum” (by K. Gokhake, Aug.), which 
caused a heated debate, among other documented by The Economist as “Froth at the Bottom of the Pyramid” 
(25
th Aug.). 
ii Analysis based on portfolio yield, financial cost and volumes that MFIs borrowed from commercial banks; in 
relation to the number of clients served by respective MFI peer group. Peer groups based on portfolio volume: 
<1.25m US$ = small; >1.25m<12.5m US$ = medium; >12.5m US$ = large (Exchange Rate of 31
st March 2008, 
US-$:INR 39.9:1). Data source: Sa-Dhan Quick Survey 2008; for details on the dataset, see Sa-Dhan’s The 
Bharat Microfinance Report – Quick Data 2008, New Delhi.  

Contribution to &quot;the king is naked – discussion&quot; on the &quot;DevFinance-emaillist&quot; of the Ohio State University,

MicroBanking Bulletin:

National Microfinance Conferene

The New Yorker discussed “What Microloans Miss”

The Role of Microfinance, in: Nicholas Kristof New York Times Blog,

Trends and Opportunities in developing Microfinance Human Resource; in: Development and Cooperation (this issue).

Mission Drift of large MFIs?

Mission Drift of large MFIs?

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