Sustainability, market conditions and outreach: the vicious misconception of the win-win proposition in the microfinance industry

Abstract

The shift of the Microfinance Institutions (MFIs) from the poverty-lending approach to the financial system approach is likely to have two counterbalancing effects on the social mission of poverty alleviation and women empowerment. On the one hand–and as is desirable–financial sustainability could cause MFIs to increase the depth and breadth of their outreach. But on the other hand–and possibly at the cost of the social mission–financial sustainability may become the core objective of the MFIs. The aim of this paper is to investigate which of the two outcomes is most likely in MFIs following the financial system approach. For this purpose, the paper first develops a theoretical framework to deduce testable hypotheses. The hypotheses are then tested with data from 158 rated MFIs, using various panel data estimation techniques. Results obtained thus reveal that majority of the MFIs in developing countries hold some market power. Besides, we find that financial sustainability is at odds with the social mission of alleviating poverty and empowering women and does not translate into depth and breadth of outreach. The study also discusses some policy implications of the results.