Microfinance, the long tail and mission drift

• Microfinance can be analyzed under Pareto's 80/20 Principle.
• This paper presents a model to explain microfinance and mission drift.
• The model has been tested with an international sample of microfinance institutions.
• Mission centered MFI: small NGO, with labor productivity, donations and high margins.
• The need for reducing interest rates is concluded, by using efficient technology.

Poor people were excluded from financial services until microfinance institutions (MFIs) emerged. The mission of MFIs is to alleviate poverty, contributing to women empowerment, especially in rural communities. Microcredits can be analyzed under Pareto's 80/20 Principle. Their clients are situated in the long tail of the wealth distribution function. This niche market is not very attractive, because of its high administrative costs, lack of deposits and the need for compensating low revenues with fluctuating subsidies. Some MFIs have drifted from their mission. This paper presents a model to explain microfinance mission drift, tested with hypotheses. The results from the empirical study show a pattern of mission centered MFI: a small NGO, with labor productivity, receiving donations and obtaining a high yield. It can be concluded that there is a need for reducing interest rates. According to the long tail theory, this could be done by using efficient technology, as it has been achieved in the e-commerce sector.