Social and financial performance of microfinance institutions: Is there a trade-off?

Abstract

The simultaneous achievement of financial and social objectives assigned to microfinance institutions is a challenge. Showing good financial performance (good profitability) and having a high depth of outreach (serving the poor) may be contradictory. Therefore, these banks for the poor are facing a trade-off that can lead to mission drift. To verify the existence of this fact, we have analyzed the relationship between financial performance and depth of outreach from a sample of 64 microfinance institutions of the Middle East and North Africa (MENA) region, from 2008 to 2010. Our results showed that the relationship is neutral, but we were able to confirm the presence of a trade-off that stems from the desire of microfinance institutions to reduce their portfolio at risk. However, we did not find that a higher portfolio at risk is associated with poorer clients, and hence a not justified mission drift. We can therefore conclude that microfinance institutions can well and truly achieve their double objective (social and financial) and thus fulfill their “ultimate promise”. Key words: Microfinance institutions, social performance, financial performance, depth of outreach, trade-off, mission drift, panel data, Middle East and North Africa (MENA) region.