The Business of Microfinance

This paper discusses the concept of microfinance, its current functions and its future prospects.Microfinance is an umbrella term that describes the provision of banking services by poverty focused financial institutions to poor segments of the population that are not being served by mainstream financial services providers. Features of microfinance include:

• Provision of microcredit to the working poor;
• Initial focus on rural areas;
• Increasing focus on the urban poor;
• Provision of other financial services such as microdeposits and microinsurance;
• Bottom-up model of development that promotes entrepreneurship and gives people the means to fight poverty;
• Focus on women with the belief that they are more reliable debtors due to stronger social and family ties and conservative investment strategies;
• Predominant use of the self help group or group lending model.

The increased demand for microfinance and the returns it offers has attracted a number of players into the segment such as international financial institutions, private investors and commercial banks. Finally, microfinance is an attractive investment proposition because it is based on sound industry fundamentals and has high social impact.