the risk of mission drift of microfinance: a case study of...
TRANSCRIPT
The Risk of Mission Drift of
Microfinance: A Case Study
of the UKKOSEKI, Takashi
Meiji University, Japan
1. Introduction Issue of Self-sufficiency vs. Social mission of Microfinance
In developing countries…
NonprofitMicrofinance
Institution
SHIFTFor-profit
Microfinance
Institution
Features• Social mission oriented:
non-profit organization
• Depth of outreach:
targeting the poorest
(more costly)
• Not self-sufficient: relying
on grant income
Features• Profitability oriented: for-profit
company
• Breadth of outreach: targeting
the less poor (less costly) with
big capital
• Self-sufficient: relying on earned
income and investment
1. Introduction
Mission Drift: “an over-preoccupation with profitability at the
expense of poverty reduction and other development goals”
(Copestake, 2007)
In developing countries, it is likely that a Microfinance Institution
(MFI) becomes profitable.
At the expense of social mission…
1. Introduction Different characteristics of MFIs in developed countries
Focusing on technical assistance/business support
Not scalable
Lower interest rates
Individual lending scheme etc. (Servon, 2002)
MFIs are not usually self-sufficient and need grant income to be
sustainable in developed countries
Total
income
Government
grant
Foundation
grant
Philanthropy
Interest and fee
income
Other earned
income
Loans
1. Introduction
What will happen if grant income fades out?
Risk of Mission Drift
Not led by profitability, but driven by the continuity of organization
SustainableMicrofinance
Institution
SHIFTSelf-sufficientMicrofinance
Institution
Features• Social mission oriented
• Depth of outreach:
targeting the poorest
(more costly)
• Not self-sufficient: relying
on grant income
Features• Self-sufficiency oriented
• Breadth of outreach:
targeting the less poor
(less costly)
• Self-sufficient: relying on
earned income
2. Purpose and methods
Purpose: to examine the risk of mission drift of MF programs in
developed countries
Case study of Community Development Financial Institutions (CDFIs) in the United
Kingdom
Method: In-depth research interviews / References and Data collection
12 CDFIs and government officials (July 2013)
• North London Community Finance
(NLCF)
• Big Issue Invest(BII)/ The Social
Enterprise Loan Fund (TSELF)
• Greater London Enterprise (GLE) one
London
• The Prince’s Trust
• Community Development Finance
Association (CDFA)
• Capitalise Business Support
• Aston Reinvestment Trust (ART)
• Fredericks Foundation
• London Rebuilding Society (LRS)
• Black Country Reinvestment Society
(BCRS)
• Street UK
• Start-Up Loans/ Ministry of Business,
Innovation and Skills (BIS)
3. Overview of recent policies on financial
inclusion and CDFIs in the UK(1) Tackling with financial exclusion by Labor party (1997-2005)
Year For businesses For consumers
1997 Labor party administration started
1999 -PAT3 (enterprise) report with recommendations
-The Phoenix Fund created
-PAT14 (financial services)
report with recommendations
2000 -Social Investment Task Force recommendations
2002 -Community Investment Tax Relief (CITR) introduced
-Community Development Finance Association (CDFA)
founded
-Credit Union Act amended to
deregulate credit unions
2004 -Report “Promoting Financial
Inclusions”
-Financial Inclusion Fund (FIF)
2005 -Financial Inclusion Taskforce
founded
3. Overview of recent policies on financial
inclusion and CDFIs in the UK(2) Slightly changing the policies of Labor party (2006-2009)
Year For businesses For consumers
2006 -The Phoenix Fund ended, and delegated into Regional
Development Agencies (RDAs)
-Small Firms Loan Guarantee Scheme (SFLG) became
available for CDFIs
-Local Enterprise Growth Initiative (LEGI) started
2008 -The leftover of the Phoenix Fund ended
-Financial Crisis: SMEs faced difficulties of raising capital
2009 -SFLG switched to Enterprise Finance Guarantee (EFG)
to introduce the annual cap
3. Overview of recent policies on financial
inclusion and CDFIs in the UK(3) After Conservative & Liberal Democrats coalition (2010-present)
Year For businesses For consumers
2010 Conservative and Liberal Democrats coalition started
2011 -Local Enterprise Growth Initiative (LEGI) ended
-Regional Development Fund (RGF) started
-New Enterprise Allowance (NEA) started
-Financial Inclusion Taskforce
ended
2012 -Regional Development Agencies (RDAs) closed
-Local Economic Partnerships (LEPs) started
-Start-Up Loans (SUL) pilot started
-Financial Inclusion Fund (FIF)
ended
4. Findings(1) Overview of CDFI sector in the UK
Community Development Financial Institutions (CDFIs)
CDFA website: “Community development finance institutions (CDFIs) lend money
to businesses and people who struggle to get finance from high street banks.
They are social enterprises that invest in customers and communities.”
Four sub-sectors of CDFIs
Business, 69.8%
Social
Ventures,
30.2% Individuals,
18.9%Homeowners,
15.1%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
Business Social Ventures Individuals Homeowners
CDFI sub-sectors in the UK, 2013
Source: CDFA,
“Inside
Community
Finance: The
CDFI Industry in
the UK 2013”,
February 2014,
p.9.
4. Findings(1) Overview of CDFI sector in the UK
Rapid growth after 2000 and reduction since 2005
Source: CDFA, “Inside
Community Finance:
Annual Survey of CDFIs
in the UK”, June 2012,
p.10.
1999
The Phoenix Fund
started
2002
CITR started
CDFA founded2004-2005
Financial Inclusion
Taskforce started
Financial Inclusion
Fund created
2006
The Phoenix Fund
ended2009
Guarantee
scheme switched
from SFLG to EFG
2011-2012
Financial Inclusion
Taskforce closed
Financial Inclusion
Fund ended
LEGI ended
80
2005
10
1993
53
2013
4. Findings(1) Overview of CDFI sector in the UK
Percentage of earned income (self-sufficiency) has increased since
2007
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
0
5
10
15
20
25
30
35
2007 2008 2009 2010 2011 2012 2013
Percentage of earned income of CDFIs,
2007-2013
Earned income
Grant income
Percentage of earned income
Source: CDFA, “Inside
Community Finance:
The CDFI Industry in
the UK 2012”, March
2013, p.15.
4. Findings(1) Overview of CDFI sector in the UK
Average loan size of microloans grew up and dropped down
(focused on start/microloans only)
5,085
7,509 8,148
8,943 9,804 10,185
13,734
10,484
7,334
4,226
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: CDFA,
“Inside Community
Finance: The CDFI
Industry in the UK
2013”, February
2014, p.19.
2006
The Phoenix Fund
ended2008
Leftover of the
Phoenix Fund
ended
2009
Guarantee
scheme switched
from SFLG to EFG
2011
Regional
Development Fund
started
New Enterprise
Allowance started
2012
Start-Up Loans pilot
started2013
Start-Up Loans
started on a full
scale
4. Findings(1) Overview of CDFI sector in the UK
Personal loan CDFIs: interest rate increased to become self-sufficient
31%
39%
69.90%
38.3%
84.0%
75.7%
2011 2012 2013
APR Percentage of earned income
Source: CDFA, “Inside
Community Finance:
The CDFI Industry in the
UK 2013”, February
2014, p.45.
2011
Financial Inclusion
Taskforce closed
2012
Financial Inclusion
Fund ended
4. Findings(2) Case Studies
Shift from/ to microfinance
Micro-
enterprises
SMEs
Micro-
enterprises
Home-
improvement
Micro-
enterprises
Unfriendly Policies
promote to target
other markets
Supportive Policies
provide incentives to
target micro-
enterprises
4. Findings(2) Case Studies
Aston Reinvestment Trust (ART)
£2,000
£10,000
£25,000
£50,000
£100,000
Microloan
Up to £10,000
Small business loan
£10,000- £50,000
Since 1997
Maximum loan size
Minimum loan size
* Omitted exact time when the loan sizes were
changed to show the change simply
4. Findings(2) Case Studies
London Rebuilding Society (LRS)
Home Improvement Scheme
Launched in 2013 (pilot since
2005)
Improve homes of seniors
using mortgage loan
Empty Homes Fund
Empty home repair loan to
lease to local authorities
Other businesses
Energy management
Pre-paid account service
Mutual Aid Fund (MAF) project
Launched in 2005 (pilot
since 2002)
Group lending model
LRS lends a group up to
£10,000
Funded by grant-aid
foundations
Service was stopped
4. Findings(2) Case Studies
Fredericks Foundation
Founded in 2001
Continues to provide microloans
Loan size: £5,000 - £20,000
Has rapidly enlarged its operating areas
Working with community foundations by ‘Hub’ model
SurreyHeadquarter
Hub
Hub
Hub
Hub
Hub
4. Findings(2) Case Studies
Street UK
Founded in 2000
Originally microloans to microenterprises
Changed its business model and split into Street UK and Street NE in 2004
Provides personal loans (=consumer loans)
Self-sufficient, not relying on grant income
Loan size: £200- £1,000
APR: 95%
5. Discussion
MF programs are likely to be affected by policy changes
In terms of loan size, interest rate and target market
Planning of public grant should…
Be well-considered to avoid mission drift
Have a long span vision to disseminate and stabilize MF system
Total
income
Government
grant
Foundation
grant
Philanthropy
IF grant income only…
• May cause moral hazard of
MFIs
• May ruin public resource
5. Discussion
Balance of risk-taking and cost coverage among all of the
stakeholders
The government
Grant-aid foundations
Financial institutions
Investors
Philanthropists
MFIs
Customers
Total
income
Interest and fee
income
Other earned
income
Loans
IF earned income only…
• May cause mission drift of MFIs
• Disadvantaged customers will be likely to be excluded
6. Conclusion
The reduction of government’s support can cause the risk of mission drift
Under the reduction of CDFI support by UK government, CDFIs
increased self-sufficiency. This study found that UK CDFIs experienced
significant changes in terms of their target clients and business models.
Thank you so much for your attention.
Ask me any questions.
Takashi Koseki
Associate Professor
School of Business Administration
Meiji University
Tokyo, Japan