Can microfinance regulation encourage mission drift? The Italian case

Achieving both financial and social objectives has proved challenging for microfinance institutions (MFIs) operating in Europe. The European Union has traditionally played a role in supporting the social mission of many MFIs through favourable policies and financial support. However, differences in the microfinance regulatory environments in each of the European countries have contributed to cross-country variations in the sector’s evolution. However, the academic literature on this topic is scarce. Frequently, European MFIs have overcome regulation constraints by establishing partnerships with commercial banks. These partnerships are mostly intended to improve double bottom line management and achieve both financial and social objectives; however, these alliances can be hindered by regulatory changes. This paper aims to explore whether the introduction of microfinance regulation might affect the way in which MFIs manage their double bottom line. Given the recent passage of a microfinance law in Italy, we qualitatively explore the perceptions of a group of Italian microfinance stakeholders on the new regulatory framework and its effect on MFIs’ double bottom line management through establishing interinstitutional partnerships. Focusing on one of the regions with more microcredit programmes in Italy (Emilia Romagna), we generated data through qualitative in-depth semi-structured interviews with five senior managers in MFIs, two members of the Italian government who voted for the new microfinance law and one expert in the field of microcredit. Additionally, secondary data were collected for triangulation. The perceived effects of the new regulation on MFIs’ strategical partnerships and mission drift are relevant for microfinance practitioners, regulators and policymakers. Despite emerging as an attempt of market correction, regulation is perceived to undermine the ways in which MFIs can reach financially excluded individuals. These conclusions need to be taken into account to prevent unintended effects on the microfinance sector and its outreach. Although non-generalisable, the emergent saturated findings also lead to questions for academics and lay the groundwork for further longitudinal research.