Sustainable Development and Microfinance: The Effect of Outreach and Profitability on Microfinance Institutions' Development Mission

According to the concept of microfinance, financial institutions ought to contribute to sustainable economic and financial systems development by offering access to credit for clients who are usually excluded from the formal banking system. However, in recent decades microfinance institutions (MFIs) have often focused on their profitability rather than the support of their poor clients. In order to empirically examine this mission drift and its consequences for MFIs' performance, we propose a model of MFIs' contribution to sustainable development as dependent on their outreach and profitability focus measured by percentages of female borrowers and profit margins, respectively. Utilizing a large transnational panel data set comprised of institutional and country-specific data, we provide preliminary empirical evidence indicating that both extensive outreach and profitability are negatively related to development. The model further highlights that the problem of a mission drift is especially pronounced for non-profit-oriented MFIs.