Microfinance and the Challenge of Financial Inclusion for Development

This paper provides a review of the recent literature on microfinance in developing countries and a critical assessment of its effectiveness. It examines the experience of India, a country which has one of the largest microfinance sectors in the world, and particularly the unfolding of the microfinance crisis in Andhra Pradesh, a state in India. It also stresses on the importance of regulated and subsidized microfinance, and the need for actively pursuing other strategies for viable financial inclusion of poor and small producers. The paper covers the followings sections in detail:

• Introduction to the microfinance industry and its evolution since the establishment of Grameen Bank to the mushrooming growth of MFIs in developing countries;
• Microfinance model of group lending and the subsequent transfer of risk from lenders to borrowers;
• Problems and issues with the microfinance model supported by real-world examples;
• Microfinance in India and the methodology adopted by Indian MFIs;
• Case of SKS Microfinance, the Andhra Pradesh microfinance crisis, and SKS’ role in it;
• Problems related to treating microfinance as a significant poverty alleviation strategy or as a tool to achieve financial inclusion;
• Suggestions, incentives, and possible regulatory measures to ensure effective financial inclusion and sustainable development.