Commercialization of Microfinance: Is the sector losing its identity by evading its original 'social service' responsibility?

Abstract

The primary mission behind the inception of the microfinance sector was to enable the poor to have access to cheaper financial services because the mainstream financial institutions would not serve them and the alternative sources of finance, such as informal money lenders, would exploit them by charging them exorbitantly high interest rate. With the paradigm shift in the sector during the early 1990s, when the donor community started emphasizing self-sustainability and profitability on the part of microfinance organizations (MFOs), the main focus of these organizations underwent a drastic shift from following a social service objective to chasing profitability in operations. In Laughlin's (1991) terminology this was an internal change in the basic coherence of these organizations, which rendered other organizational elements incompatible with their primary objectives. MFOs could not cope with their dual responsibility of ensuring their operational and financial self-sufficiency as well as serving the poor while keeping their existing organizational structure intact. This case study provides empirical evidence as to the evasion of social responsibility by MFOs after responding to the paradigm shift in the sector.