Microfinance and the challenge of a commercializing market

The enormous success of microfinance in the past decades has caused the microfinance market to become more and more commercialized. By using panel data of more then 1200 Microfinance Institutions (MFI’s) for the years 1995 until 2008, this study investigates whether commercialization of the microfinance market forces MFI’s to serve richer clients, at the expense of the poor, a phenomenon often referred to as ‘mission drift’. The results show that in the long run, institutions which operate on a not-for-profit approach or institutions which are not regulated, serve poorer clients on average, compared to MFI’s that operate on a commercial approach. In the short run the results show evidence for higher profitability (ROA) as a result of providing higher loans to richer people. To conclude, some evidence for mission drift showed up, however the effect is not very strong, since there is no evidence for higher profitability as a result of higher loans in the long run.