Reverting Mission Drift: A plead for Social Investors

This is a guest post from Juan Arambarri, Director of Capace (www.capace.org.ar)

Microfinance is financial services for the poorest which includes microcredit, micro savings and microinsurance. Back in 2006 at the Global Microcredit Summit, the microfinance sector set two goals by 2015 :1) reach 175 million of the world’s poorest families with microfinance and 2) help 100 million families lift themselves out of extreme poverty. By 2013, the microfinance community stated they have reached 114 million of people living in extreme poverty but they remarked that the number of poorest clients continue to fell for a third straight year. They said that growth in microfinance has been on those who live above U$1.90 a day. The microfinance community was going through the well referred “Mission Drift” as they were moving upwards in the economic level of their average clients. This opposes to the sector’s original goal of servicing the poorest families in the world.

Disbursing smaller loans to the poorest is more expensive and riskier than those who are better off. Many microfinance institutions are likely to reduce risk and pursue higher level of profits. There is nothing wrong with this as long as they state clearly that their mission is to service not the poorest but low income families in order to have better financial results. This shift may be motivated by the leaders of the organizations as they would like to grow and reach a larger amount of people in low income areas with a decent level of financial yield. Nothing tell us they are not doing good as they are giving people with few or none credit guarantees access to funding so they can accomplish their life goals.

Juan Arambarri

Now, why are the organizations who were supposed to be serving the poorest shifting away from this population? Funding is the answer to this question. What are the real incentives of your organization? Is it your social mission or is it the evaluation standards by which you can access to further investments funds? In case you are looking for double bottom investors, that is those who invest both for a social impact and a decent level of profit, you would be worried about your financial indicators. In the end, as a director of a organization you are being evaluated by specific financial performance indicators and maybe some social performance indicators. However social impact is hard and costly to measure while financial results are very straightforward. In this sense, it is expected that you would worry about them more than the social ones. Once these external incentives are formed, the whole organization is structured to follow them by means of internal incentives all the way to the credit officials which are encouraged to increase portfolio yield by giving larger loans to better of clients. The mission drift is on its way.

Now, what’s left for the poorest? Who can service them in a way that is both convenient for them and promotes financial sustainability for the organization? We believe we need another type of funding that is fully compromised with the social mission. It’s not enough to have a double bottom objective, social mission should prevail. This does not necessarily mean jeopardizing financial sustainability, as this is prerequisite for social impact. The microfinance sector needs Social Investors, those who invest fully aligned to the organizations social mission with no major concern to the financial yield. It is recommended that financial return is capped in a way that there is no incentives of any kind to improve it. Social Investors would only focus on the institution’s social impact and know that they will not receive more than a specific amount of financial interest. That is, in our opinion, the truly meaning of social investment. In this context, the organization can comfortable concentrate on working on better products and services in social terms and attending those who need it the most for a better social service. It is highly expected that one day the standards of the sector would shift towards more social performance indicators allowing organizations to pursue them as an incentive to receive more of these social investments and increase its outreach in those living in extreme poverty. Hopefully with these changes the sector would return to its original goal and revert its mission drift for the benefit of the poorest.

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