Conflicting goals in the management of microfinance institutions: an agency theory approach

Agency theory plays an important role in explaining the behaviour of managers of microfinance institutions (MFIs). These managers face the same problem of simultaneously satisfying conflicting goals as the managers of for-profit companies. In the case of MFIs, a fundamental conflict occurs as management attempts to balance the organization’s social mission against the organization’s need for financial viability. Our paper investigates this issue. We first develop the goal conflict issue as an agency issue. We then develop quantitative measures of financial stress, wealth of borrowers, and the number of loans in the MFI’s loan portfolio. We use OLS regression to measure the relationship between these variables. The resulting regression equation is highly significant, and the variables in the equation all possess the sign predicted by agency theory.