Although intended to serve the poor, microfinance is a business operation that must run on business principles. This means that a microfinance institution should make decisions based upon sound business rules, not on charitable sentiment. If an institution’s managers and board members do not share a business-like perspective, the MFI will be extremely vulnerable to commercial mission risk.
It seems counter-intuitive that an organization dedicated to helping the poor needs to charge high interest rates and strive for profitability. The commercial approach makes sense, however, if you adopt a long-term view. Many of CARE’s development initiatives are shortterm projects with a specific end date. Microfinance, on the other hand, has the unique ability to provide developmental services on an ongoing basis if it is designed and implemented properly. With microfinance activities, it is critical to adopt a long-term perspective because clients do not just want loans for the next three to five years. They want—and deserve—a safe place to save their money and a convenient place to borrow funds indefinitely. The only way to provide them with this extremely valuable service over time, and generate its important development benefits, is by fulfilling the commercial mission of microfinance.
Controls for commercial mission risk include: setting interest rates, designing the capital structure, planning for profitability, and managing for superior performance.