1. Transformation or Distortion?
Comments on “MFI Transformation:
the LAC Experience”
By David S. Gibbons, CASHPOR India

2. Impressive Transformation, but ….
• NGO MFIs with a strong social missions have
become financially-sustainable formal financial
institutions, with large portfolios and significant
outreach, and converted to regulated deposit-
taking financial institutions
• IFC has played a major role in this transformation,
both as consultants and investors
• But at what cost to the original social missions of
the NGO MFIs?

3. Mission Drift, an Ever-Present Danger
• Transformation requires • Take the cases of Mibanco and
capital Confinanza MF Bank quoted
• NGO MFIs are normally short by the author
of capital • After transformation,
• With the help of consultants Mibanco’s ROE was 28%, for
they turn to investors to which it needed a YOP of
supply the capital 27.6%
• Investors normally expect a • The average loan outstanding
return on their investment of of Confinanza MF Bank, which
at least 25% had the original mission of
• This makes transformed MF lending to poor women in the
expensive, and threatens the Peruvian Highlands, after
original social mission transformation was US$2,081!
Can poor women in the
Highlands repay such loans?
Or have they been displaced?

4. Can Mission Drift be Prevented?
• The author says that it • No data, such as the
must and can be proportion of the
• Small loans will still be transformed MFIs’ new
profitable for efficient, clients that are below
transformed MFIs, he the international
argues poverty-line of US$1.25
• NGO MFIs can retain per person/per day,
ownership control to that would show the
prevent MD absence of MD, are
presented

5. The Litmus Test
• There is a direct trade-off between the rate of
interest charged to the poor and the degree that
they benefit from MFI loans
• Poverty-focused MFIs should offer the lowest-
possible interest rate to clients, that is consistent
with institutional financial sustainability
• Economies of scale should be shared periodically
with clients, in the form of reductions in the
interest rate
• Both are difficult, if not impossible, for MFIs
transformed in the LAC manner

6. Transformation without Mission Drift
• To reach scale and to offer • ASA Bangladesh , probably
the lowest possible interest one of the most efficient
rate to the poor, NGO MFIs MFIs in the world, has
need to become efficient reached scale with over 7
financial institutions, but million clients, without MD;
depending upon prevailing is financially-sustainable
financial regulation, it is not with substantial retained
always necessary to be earnings and a YOP of 25%.
transformed into for-profit, Savings finance only about a
regulated financial third of its portfolio, and the
institutions that depend rest is financed from
mainly on private capital retained earnings and
and mobilization of savings borrowing from the PKSF at
for their loan funds reasonable but financially-
sustainable rates

7. Why Risk Mission Drift?
• Given the apparent MD in LAC and its ever-
present risk, given the current crisis in Indian
microfinance that has accompanied LAC-type
transformation and given the existence of a
viable alternative path, why take the risk of
Mission Drift?
• Thank you!