Revealed objective functions of Microfinance Institutions: Evidence from Bangladesh

Abstract

This paper discerns between two alternative objective functions for not-for-profit Microfinance Institutions (MFIs): profit maximization and poverty targeting. I use the strategic branch location choices of the two largest MFIs in a mature, concentrated market to reveal their objectives. I consider location decisions to be the pure-strategy Nash equilibrium outcome of a one-shot game where the MFIs simultaneously choose markets in which to locate as well as how many branches to open in each. Applying the duality principle, I nest fully a pure profit-maximization objective within a poverty targeting motive. I test the model using comprehensive data from Bangladesh in 2003. Structurally estimating profit and impact functions, my MSM estimates suggest that pure profit maximization cannot explain the branch placement pattern for Grameen Bank or BRAC: they both deviate towards poverty alleviation. Targeting one higher standard deviation of poverty headcount costs Grameen 35.2% of its potential profits and BRAC 51.4%.