Contractual arrangements in microfinance are designed to overcome the problems of adverse selection and moral hazard that are prevalent in developing and low income countries. Micro credit lenders use “innovative” lending methods such as group lending, contingent credit and use of collateral...

We suggest an explanation for the existence of “mission drift”, the tendency for Microfinance Institutions (MFIs) to lend money to wealthier borrowers rather than to the very poor. We focus on the relationship between MFIs and external funding institutions. We assume that both the MFIs and...