Commercialization of microfinance – Is the sector losing its identity by evading its original ‘social service’ responsibility

Abstract

The primary mission behind the inception of the microfinance sector was to enable the poor to have access to cheaper financial services. Mainstream financial institutions would not serve them and the alternative sources of finance, such as informal money lenders, would exploit them by charging exorbitantly high interest rates. A paradigm shift in the sector occurred during the early 1990s, when the donor community started emphasizing self‐sustainability and profitability on the part of microfinance organizations (MFOs). At this time the main focus of these organizations underwent a drastic shift from following a social service objective to chasing profitability in operations. In Laughlin's (1991) terminology this was an internal change in the basic coherence of these organizations, which rendered other organizational elements incompatible with their primary objectives. MFOs could not cope with their dual responsibility of ensuring their operational and financial self‐sufficiency as well as serving the poor while keeping their existing organizational structures intact. This case study provides empirical evidence as to the eluding of social responsibility by MFOs after responding to the paradigm shift in the sector.