Zero Interest Microfinance Bank

Detecting When Microlending Shifts to “Microloan-sharking”?

By Long Le

How do we detect when microfinance institutions (MFIs) experience mission drift?

In general, MFIs have dual missions: 1) being financially sustainable; and 2) providing loans to low-income borrowers. Because of these above dual missions, MFIs have become vivid demonstration of the fundamental belief within the field of social entrepreneurship. That is, private value and social value can be complementary rather than contradictory. However, mission drift is said to occur when MFIs deviate from its social mission in order to achieve financial sustainability.

In a comprehensive research based on 379 MFIs in 74 countries spanning from 1998-2008, Roy Mersland and R. Øystein Strøm found that mission drift is correlated when the MFI seeks higher profitability as well as when the MFI’s average cost becomes higher. But, overall, the research finds that its measure of average loan size, which is thought to be a proxy to mission drift, has not increased across the industry as a whole; nor is there a tendency towards more individual loans or a higher proportion of lending to urban costumers. For Mersland and Strøm, the focus should be on the reduction costs per client (rather than on criticisms of MFIs’ commercialization), and that better management may provide MFIs with good economic reasons to stay in the poorer customer segment.

Notwithstanding, the “consensus” of whenever possible microfinance should be done in a commercially based and financially sustainable manner has come under heavy fire. That is, the global average interest rate since 2008 have stopped declining. The global average in interest rates/service fees for microfinance in 2010 has surged to about 37 percent, and in countries such as Mexico and Nigeria the average was above 70 percent due mostly to the absence of regulations.

In particular, practitioners of the more socially oriented microfinance, such as Grameen Bank’s Founder Muhammad Yunus, are very concerned. That the microfinance industry, with over $60 billion in assets, has unquestionably outgrown its socially oriented roots with focus on social impact maximization. According to Yunus, the ideal “spread” between the cost of the fund and the lending rate should be between 10 to 15 percent. For instance, Grameen Bank charges 20 percent to its borrowers – 10 percent is the cost to fund and the other 10 percent is to cover operational costs and contribute to profit.


Still, no one can claim the “soul” of microfinance and the above debate appears to be continuing on. In fact, on the one hand, recent indicators show that since 2011 profit on interest rates, returns to shareholders’ equity, and operating expenses have fallen, but too many clients of too many commercialized microfinance institutions have taken on too much debt on the other.

For ZiMBank, our concern relating to mission drift is the ability to assess individual MFIs, including our own. In exploring, we are utilizing Ana Maria Peredo and Murdith McLean’s framework to place commercial exchange along the continuum of social goals. Doing so, we hope to detect when a microfinance institution moves from one end to the other on this continuum. By implication, it also leads to an important question: at one point does a MFI’s social value and private value become contradictory or when it shifts from microlending to “microloan-sharking”? However, this framework also leaves open the potential for MFIs who have high interest rates — particularly those from Central America and Sub-Saharan Africa — to efficiently reduce their operational costs and implement thorough assessments to minimize their clients’ likelihood of default and over indebtedness.

The below table attempts to identify a continuum of possibilities. The continuum ranges from microfinance institutions that see social goals as exclusive in which commercial exchange is to directly support its social mission to those that see social goals as one of the objectives but subordinate to other goals where commercial exchange is to primarily generate profits. In this table, we also list an actual microfinance institution for each point on the continuum, not as a matter of fact but as an exploration to discuss implications for each point on the continuum.


For us, ZiMBank is open to commercial exchanges, specifically those exchanges in which profits, in part, go to social investors who for various reasons expect a lender return. For us, we would cap a lender return of about 6 percent. As a microfinance that is founded and managed by a professor and students, our zero interest loans can be sustainable because we don’t have administrative overhead costs; in addition, we collaborate with seasoned operative partners. However, we do need seed capital to develop more high-end socially responsible products for our ZiMBusiness in order to generate revenues for zero interest loans.


In general, the more effective and efficient that ZiMBank is at capitalizing on social investment, the sooner we can return to our original belief. Specifically, any profits from commercial exchange would go directly to the operation of our social enterprise, so that we are able to uphold and expand our zero interest loans to poor working individuals — both abroad and at home.


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