Journal of Economics and Development Studies

A Model of Microfinance Regulation in a Mission Drift Context
Kouakou Thiédjé Gaudens-Omer

Abstract
This paper analyzes the problem of mission drift of risk averse microfinance institutions (MFIs) facing exogenous regulatory constraints. We develop a static portfolio model generalized to MFIs whose objective function has a double financial and social dimension. This model highlights a solidarity-return trade-off and allows us to determine the degree of mission drift of the MFI as the optimal proportion of the poorest in its micro-credit portfolio. The regulatory constraints lead to mission drift of MFIs by increasing the perceived risk of the poorest and the risk aversion of IMF, and/or by decreasing the loan return on the poorest. In order to curb mission drift in microfinance, regulatory inflection measures are recommended: the perceived risk reduction in microfinance sector, promoting certain financial innovations (quasi-capital, subsidized loans) and organizational innovations (two-headed structure of co-production) that strengthen the pro-social behavior of IMFs.

Full Text: PDF     DOI: 10.15640/jeds.v6n1a6