perspectives

Microfinanceisapotentiallypowerfultooltofightpovertyandhelppoorpeopleraisetheirincome,accumulateassets,andcushionthemselvesagainst

externalshocks.Atthesametimeleadersofthemove-mentrecognizetheneedforahard-nosedcommercialoutlookifitistobesustainable.Tothisendmanyspecial-izedmicrofinanceprovidershaveformalizedandscaleduptheiractivitieswhile,intheotherdirection,manyregu-latedfinancialinstitutionshaveexpandeddownstream.

Goodreasonsexisttowelcomeaboundaryblurbetweenmicrofinanceandmainstreambanking.Onlywithcommercialcapitalcandemandforfinancialservicesamongpoorerpeoplebemorefullymet.Closerintegra-tionalsopromotesinnovationandgreaterresponsivenesstothediverseclientneeds.However,thedangerthatcommercializationofmicrofinancewillleadtoanover-preoccupationwithprofitabilityattheexpenseofpovertyreductionandotherdevelopmentgoalsisgreat—missiondriftisanever-presentpossibilityforMFIsandoftenirreversible.

Becausemicrofinanceismotivatedbydevelopmentaswellaseconomicgoals,thequestionariseshowbesttoevaluateperformanceagainstmultipleandpotentiallyconflictinggoals.Themainissueisnotsomuchthedesirability ofbroaderperformancemeasurementbutitsfeasibility.Technicalperformancemanagement“bynumbers”isdifficultunderthebestofcircumstances;measuringtheimpactofmicrofinanceinstitutionsusingevencrudeestimatesofhouseholdincomeistechnicallydifficult,expensive,andperhapsbetterlefttoindependentresearcherswhocandoitmorerigorously.However,thepotentialofmicrofinanceasadevelopmenttoolwillonlyberealizediffinancialinstitutionssystematicallyandrou-

tinelymeasureperformance,andiftheydoitinresponsetointernaldemand,notinresponsetopressurefromotherorganizations.

KEY CONCEPTS

Threekeydimensionsofsocialperformancearebreadth of outreach(thenumberofpeopleusingservicesduringanyperiodoftime),depth of outreach (thesocialstatusofclientsatthebeginningofanyperiod),andimpact(thenetbenefitstoclientsandthoseindirectlyaffectedbytheiruseoffinancialservices).Financialperformanceisprimarilythepercentageoftheservice’sfullcostthatisdirectlypaidforbytheusers.

Innovationsthatreducethecostsofprovidingservicesbringimprovementinbothfinancialandsocialperformance.Butotherdecisionsentailatrade-offovertimebetweenthem.Forexample,raisinginterestratesonloansislikelytoimprovefinancialperformance(assum-inginelasticdemand)butattheexpenseofcurrentsocialperformance(duetoreducednetbenefitperclientandpossibleshort-termreductioninbreadthanddepthofoutreach).Mostbenefitsoftrade-offsonlycomeovertimebecausefuturesocialperformancedependsonbothcur-rentsocialperformanceandonhowfinancialperformanceaffectsthecapacitytosupplyservicesinthefuture.

AnotherexampleisthegrowthrateoftheMFI.ManyMFIshaveemphasizedtheprimeimportanceofservingmoreclientsthroughgrowth.Thecostofinvestinginnewcapacityhasanegativefinancialeffectintheshortterm,butthismayeventuallybeoffsetbyeconomiesofscale.Improvedfinancialperformanceisalsonecessaryforgrowthinordertomobilizeresources;thereinliesthecaseforloweringcurrentsocialperformancetoenhancefuture

By James Copestake • i l lustrat ions by tyler pack

Mission Drift—Understand It, Avoid It

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socialperformance.Incontrast,otherMFIshaveoptedforaslowergrowthstrategy:puttinggreateremphasisoncurrentdepthofoutreachandimpact.Suchdecisionsreflectvariationintimehorizonsand,moreimportantly,path-dependentjudgmentsabouthowcurrentperformanceislikelytoaffectfuturesocialperformanceopportunities.

Figure1providesagraphicalframeworktoaidthinkingaboutsuchstrategic“win-win”optionsandtrade-offsbetweenfinancialandsocialperformance.ThepreferencesoftheMFI,oritsmission,arerepresentedbyasetofindifferencecurves(C1,

C2,andC3).Thetoppreferenceisatthetoprightcornerofthebox,sincethisisthepointatwhichbothsocialandfinancialperformanceareattheirhighest.Conversely,thelowestprefer-enceisatthebottomleftcorner.Theindifferencecurveseachrepresentasetofpointswhosecurrentsocialandfinancialperformancesareequallyattractive.Movementupwardandto

theright,ortoahigherindifferencecurve,thusrepresentsamovetoapreferredlevelofoverallperformance.

Fromanygiveninitiallevelofactualperformance(pt),anMFIislimitedinhowitcanchangeitspositionwithinthenexttimeperiod.LinePPt+1reflectsthisroomtomaneuverandisdeterminedbythescopeforpolicychange,operationalreforms,investments,innovationsandgrowth.Changepossibilitiesoveroneperiodareillustratedbythefivearrows:

1. Thehorizontalarrowrepresentsagrowth-firststrategy,subjecttotherulethatcurrentsocialperformanceshouldnotgetanyworse.

2. Theverticalarrowrepresentsacurrent clients-firststrategy,subjecttotherulethatfinancialperformanceshouldnotgetanyworse.

3. Thearrowpointingupwardandtotherightrepresentsaninter-mediatestrategy.AssumingtheMFIissuccessfulinreachingthePPt+1

line,thenthisstrategyisoptimal;inthecaseshown,itispt+1*.

4. Thearrowmovingupandtotheleftrepresentsatrade-offstrategyofimprovedcurrentsocialperfor-manceattheexpenseoffinancialperformance.

5. Thedownwardslopingarrowalsorepresentsatrade-offstrat-egy—thistimetoenhancefinancialperformancebyreducingcurrentsocialperformance.

Inadditiontoillustratingstrategicoptions,thediagramclarifiestherealityofmissiondrift:anunplannedorhid-denchangeinpreferencesandresultingbehaviors.Missiondriftis,attheheart,aresponsetopastperformance—lessrationalthanaconsciouschangeinpreferencesbutmorethanignorantofactualperformanceoutcomes.

Asanexample,assumethatanMFItakesactionsintendedtotakeitfrompointpttopt+1*,butactu-allyendsupatpt+1#.Thisinitselfisbetterdescribedasmissionfailure

�� ESR— Fall 2007

perspectives

thanmissiondrift.FromthisnewstartingpointitisunlikelytheMFIwouldcontinuetoaimforpt+1*inthesecondperiod—pt+1*mightevenfallcompletelyoutsideanyrealisticassessmentofwhatispossible.Insuchasituation,choosinganewtargetoutcomeforthenextperiodwithoutachangeinunderlyingpref-erencesisbetterdescribedaspragma-tismthanmissiondrift.

Attheoppositeextreme,anMFIcouldredefineitspreferencesinordertoprovidearetrospectiverationalizationoftheactualperfor-manceoutcome.Inthisexample,theMFIcouldexpressastrongerpreferenceforfinancialperfor-manceoversocialperformance(i.e.,makingtheindifferencecurvessteeperuntilpt+1#becomestheopti-maltargetratherthanpt+1*).Thisisclosertotheideaofmissiondrift,butitwouldalsobeacaseofself-servingopportunismandisbetterregardedasaspecialcase.

Ageneraldefinitionofmission driftisthatthestepstakentoachieveagivenperformanceoutcomedirectlyinducechangesinpreferences.Managersusecurrentperformancetoresettheirdesiresandpreferencesforwhatispossibleinthefuture;theychangetheshapeandslopeoftheindifferencecurvestoreflectwhattheyseeasthenewreality.

Inamythicalworldofperfectinformation,thedirectorsofanMFIwouldsetperformancegoals,themanagerswouldmakedecisionstoachievethem,employeeswouldsystematicallymonitoroutcomes,andeveryonewouldlearn.Unfortunately,leadersofMFIsarehandicappedbythelackoftimelyandreliableevidenceaboutperformance.Missiondriftoccurswhentheirgoalsandpreferencesforthefuturesubcon-sciouslychangeinresponsetoactual

performanceoutcomesratherthanbeingafixedpointagainstwhichper-formancecanbeguidedandassessed.

APPL ICAT ION

Sinceanimportantkeytoavoidmis-siondriftisanaccurateassessmentofperformance,thissectionblendstheframeworkpresentedabovewithourresearchexperiencewithnonprofitMFIsthroughtheImp-Actprogram.WefollowthisdiscussionwithotherlessonswehavelearnedregardingorganizationalleadershipamongsuccessfulMFIs.

Revising Social Performance AssessmentThreebroadpointsofconsensusemergedfromourresearchastowhatanysystemofsocialperfor-manceassessmentshouldinclude.First,MFIswithanexplicitpovertymissionshouldroutinelymoni-torbreadthanddepthofoutreach.Althoughitwasnotpossibletoagreeonastandardsetofindicatorsforthis,therewasmethodologicalconvergencebetweenmanyMFIsandtheirsponsorstoadoptacom-binationofproxypovertyindicators.

Leadersinthefielduseasimplebuttransparentscorecardcalibratedagainstnationalhouseholdsurveydataandpovertyestimates.

Second,MFIsshouldroutinelymonitorclientexitandturnover.Ifclientschoosenottoleaveandarenothoodwinkedorcoercedintousingservices,thenthisisausefulindica-tionthattheimpactoftheservicesislesslikelytobenegative.Itfollowsthatoutreachdatashould,attheveryleast,besupplementedbystatisticsonexit,includingroutinereportsonwhyclientsleave—particularlythosewhoonlyrecentlyjoinedandwhoseunderstandingofthetermsofservicecouldhavebeeninadequate.

Third,MFIsshouldinvestincapacitytoassessprogresstowardsocialgoalsbygivingvoicetoloyalclientstoo,throughappropri-atemarketandimpactresearch.Questionnaire-basedsurveys,semi-structuredinterviewsofkeyinfor-mants,andfocusgroups—allwiththeprioritytotest,update,andaugmentexistingorganizationalknowledgeofclients’experiencesratherthantoproviderigorousproof

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targetedandnon-poverty-targetedservicesalongsideeachother.Thisenablesittovarythebalancebetweensocialandfinancialperformancegoalsthroughstrategicreallocationofresourcesbetweenthem.

Second,anevenmorepowerful,yetindirect,targetingmechanismisproductdesign.MostMFIsbeganbyreplicatingproductspioneeredbyothers—solidarityloansofGrameenBankorvillagebankingservicesontheFINCAmodel,forexample.However,mosthavebecomemoreflexible,havediversifiedtheirservices,andoftenhavesimplifiedproducttermsandconditions.Thesechangesexertapowerfulinfluencenotonlyonprofitabilitybutalsoonthekindsofclientsattractedandtheextenttowhichclientsbenefit.

Third,internalorganizationalchanges(e.g.,front-linestaffrecruit-ment,training,andperformanceincentivesystems)arecritical.PerformancecontractsthatseektoalignfinancialrewardsofstafftothoseoftheMFIhavebecomestandardpractice,butbettersocialperformanceassessment(particularlyofstaff-andbranch-wiseexitrates)createsopportunitiesforaligningstaffincentivestosocialgoalsaswell.Socialperformancemanagementcansignificantlyimprovestaffmotivation,retention,andproductivity.

Fourth,anMFI’sroomtomaneu-verdependsupontheiroperatingenvironment—particularlytheextentofunrealizeddemand,opportunitiesforinnovation,theextentofregula-tion,andaccesstodifferentformsoffinance.WhileindividualMFIshavelittleinfluenceoverthesechanges,therangeandqualityoftheexternalrelationshipstheyforgewithothercommercialandnon-commercialorganizationsisacriticaldeterminantoftheirsocialperformance.Inmany

ofimpact—canaccomplishsuchpurposes.

ReturningtothetheoreticalframeworksummarizedbyFigure1,thesepracticallessonsamounttodefiningtheY-axis(socialper-formance)asthenumberofactiveusersadjustedforloyaltyandclientsatisfaction(asaproxyofservicequality)andpovertystatus(withgreaterweightgiventopooreroroth-erwisedisadvantagedclients).Socialperformanceisimprovedbyserv-ingmoreclients,byservingpoorer

clients,bybroadeningtherangeofservicestheyreceive,byservingthemforlongerperiods,andbyensuringthatservicesdonoharm.WhilethisdefinitionfallswellshortofcapturingallaspectsofanMFI’ssocialmission(e.g.,community-wideimpact),itdoesprovideabaselineforassessment.

Performance Possibilities Withoutdenyingthescopeformana-gerialwizardry,themajordetermi-nantsoffinancialperformancearewellunderstood:realisticpricingofproducts(particularlyinterestrates),strongcostcontrolandproductiv-ityenhancement,riskandliquid-itymanagement,portfolioqualitycontrol,andcontinualinnovationinresponsetocustomerrequirementsandmarketconditions.ThekeyquestionconcernshowmuchscopeMFIshavetosystematicallyimprovesocialperformancewhilehandlingthesefinancialpressures.OuranalysisofMFIsparticipatingintheImp-Actprogramhighlightedfourareas.

First,targetinghasacriticalbear-ingondepthofoutreach.Servinggeographicallydefinedpoorerareasdoesnotnecessarilymeanlowerprof-itsbecausesuchareasmayhavelim-itedcompetition,butitoftenresultsinsignificantlyincreaseddepthofoutreach.SomeMFIsdirectlytargetpoorerclientsbyusingapovertymeanstestinsteadoffocusingsolelyongeography.Thisismorecontrover-sial;deliberatelyexcludingbetter-offclientscanreduceopportunitiesforcross-subsidizationandgrowthandcanweakenanMFI’scompetitiveness.Butaswithgeographicaltargeting,suchtargetingcanalsohelpanMFItodevelopitscomparativeadvantageinaspecificmarketsegment.SmallEnterpriseFoundationinSouthAfricaisaparticularlyinterestingexamplebecauseitoperatespoverty-

Imp-act stands for “Improving the Impact

of Microfinance on Poverty: an action-

research Program” and was sponsored

by the Ford Foundation. It was launched

in 2000 to explore ways of improving

the measurement and management of

poverty reduction by MFIs. twenty-two

organizations successfully bid for support

to carry out their own action-research

over a three-year period, ending in april

2004. these comprised sixteen direct

providers of microfinance services, three

NGo promoters of user-controlled savings

and credit groups, and three MFI networks.

one premise of the program was that

debate over the social performance of

MFIs was dominated by external interests

(e.g., governments, donors, and research-

ers) at the expense of MFIs themselves.

Participants were therefore given freedom

to explore ways of improving their social

performance assessment systems to meet

their own needs rather than externally-

dictated ends. For more information, see

copestake, Greeley, Johnson, Kabeer, and

Simanowitz’s book, Money with a Mission,

Volume 1: Microfinance and Poverty

Reduction, published in 2005 by ItdG

Publications. or visit www.imp-act.org.

�4 ESR— Fall 2007

countriesascissors-likecombinationofincreasedcompetitionandmorestringenttermsofaidhavereducedshort-termroomformaneuvering,forcingmoreradicalcost-savinginnovations.WhileMFIscompetewitheachother,theyalsocollaborateextensivelythroughbothinformalandformalnetworks.Theyseekflex-iblefinancialandtechnicalsupportfromdonorsandgovernmentsbutarealsowaryofbeingoverlycontrolledbythem.Strongfinancialperfor-manceandagoodunderstandingofthewiderfinancialsystemhaveopenedupopportunitiesforsometomobilizeequityandfinancedebttopermitfastergrowth.

AlthoughtheveryexistenceofMFIsmaybeasymptomofthemainstreamfinancialsystem’slimitedoutreach,thequalityofanMFI’srelationshipwithitneverthelessremainscriticaltoitsperformance.Meanwhile,donorsandspecialistintermediariesprovideMFIswithfinancialandtechnicalsupportthatcanhelpsoftenthetrade-offbetweengrowthanddepthandqualityofoutreach.ThemainchallengefacingMFIsistomakegooduseofsuchsupportwithoutbecomingoverlydependentonitorallowingittounderminetheirfinancialdisciplineandautonomy.Performancepos-sibilitiesorstrategicoptionsfacedbyMFIsmayhavenarrowedsomewhatduetoincreasedcompetitionandtoughertermsofdonorfunding,buttheyremainsubstantial.

Leadership ImplicationsOurImp-Actprogramresearchrevealedthatmissionandvisionstatementscoveredallaspectsofoutreach,butthattheirsignificancedependsonhowmuchweightMFIleadersandboardsactuallyattachtothemindecisionmaking.Tension

oftenexistsbetweenboardmem-bersandseniormanagers—thosewithstrongercommercialbusinessorbankingbackgroundsandthosewithstrongersocialorvolunteeringbackgrounds,respectively.

Thephenomenonofmissiondriftisalsomanifestintheseterms.Theappointmentofthosewithmorecommercialexperienceinaquestforimprovedfinancialperformancemaybeseenbyotherboardmembersasameanstoimprovelong-termsocialperformance,butleavesopenthequestionwhethertheywillbeabletoretaincontrol.InthecaseofMFIsaimingfortransformationintocom-mercialbanks,newboardmembersalsobringfinancialresponsibilitiestocommercialinvestorsandprivatefor-profitshareholders.Thesechangescanbecomeself-reinforcingifnew-comersalsoperpetuatefurtherthesimplisticunderstandingofthenatureofpoverty(i.e.,simplyalackofaccesstocredit).IntermsofFigure1,suchdrifttakestheformofacumulativeflatteningoftheindifferencecurves.

LargerMFIshavebeenabletoavoidsuchdangerbycombiningtheacquisitionoffinancialexpertisewithsustainedinvestmentinimprovingandupdatinginternalunderstandingofthenatureofpovertyatalllevelsoftheorganization.ThiscanbeharderforsmallerMFIsforwhomthebiggerdangermaybemoremissionlock-inthandrift—beingunabletocontrolorlimittheprocessofcommercializa-

ABOUTTHEAUTHOR

James Copestake teaches development economics at the university of

Bath, uk. he has researched and written about microfinance, develop-

ment strategy, and poverty in south asia, africa, and latin america for

twenty years. he has researched and supervised doctoral students in the

fields of agrarian change, microfinance, poverty, social protection, and aid

management.

a more detailed version of this paper is published in the october edition

of the WorldDevelopment journal.

tiononceithasstarted.Leadersalsohaveavestedinterestinlackoftrans-parencyaboutsocialperformancetotheextentthatuncertaintyandambiguitygivethemmoreroomtomaneuverinthestruggletoreconcilemultipleinternalandexternalexpec-tationsanddemands.

CONCLUS ION

Mission driftcanmostpreciselybedefinedasretrospectivechangesinstatedpreferencestofitunplannedperformanceoutcomes.ThisismorelikelywhenanMFI’sgoalsetting,performanceassessment,andman-agementsystemsareweak.EvidencefromImp-ActsuggeststhatmanyMFIsdohavestrongsocialandfinancialperformancepreferences,significantroomformaneuveringtomanagethem,andscopetobetterdoso.Improvedgoalsettingandstrategicplanning,routinemonitor-ingofthepovertystatusofclientsandex-clients,acapacityforfollow-upresearchintothereasonsbehindobservedchanges,andperiodicinternalandexternalreviewsoftheseactivitiesandsystemscanallbecarriedoutmorecost-effectivelyandsystematically.Thiscanhelpacceler-atethepaceofinnovationandgrowthinamorepoverty-andgender-awaremannerandhelpreducemissiondrift.Itcanalsohelptomoderatesomeofthemoreextravagantclaimscon-cerningthepotentialofmicrofinanceasadevelopmenttool.

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perspectives