Microfinance

Introduction

Microfinance has garnered attention of development economists because it answers some of development’s most beleaguering questions and issues on topics such as: improvements on the role and status of women in society; effective policies for improving lives of the poorest; and, its the impact of aid – foreign or private - on developing countries (Smith 2012).

Since microfinance came into existence in the 70’s it has created significant income and employment opportunities for the poor in developing countries. Disadvantaged or would-be microentrepreneurs and those who find work in the informal sector find leverage through microfinance that they otherwise would not have. How does microfinance address the issues in economic development? As a whole, and general definition, microfinance can be looked at as an antipoverty approach that plays on the poor’s strengths (rather than their deficiencies). The microfinance community includes governments, private enterprises, and donors that try to get a niche in this new market of financial customers. One of the many groups that is proactively fostering and nurturing this area of development is the Microcredit Summit Campaign whose mission is to reach 175 million poor families and lift them out of poverty, and to bring 100 million families above the $1.25 threshold by 2015 (microcredicreditsummit.org).

To see how MFIs are providing to the poor we need to look at their business structure. Are they for or non-profit? Does this structure allow them to effectively target those in poverty?

There are two fundamental structures considered for this article:

* Formal MFIs – regulated by formal authority (commercial banks, development bank, credit unions, etc.)

* Informal MFIs (ROSCA’s – Rotation Savings and Credit Ass., ASCFA – Accumulation Savings and Credit Ass., SHG – Self Helping Groups, PG – Peering Groups, door step collectors)

Today, many MFIs are converting from informal to formal institutions....