Microfinance Institution Essay

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Microfinance institutions  (MFIs) provide financial services to the poor, who are normally excluded from the formal banking sector. The failures in reaching out to the poor by government  schemes had generated a group of MFIs to engage in income-generating activities due  to  inadequate  provision  of savings, credit, and insurance facilities in several countries, especially in Bolivia, Bangladesh, and Indonesia. In 2006 Grameen Bank—the first microcredit  institution,  started with loans of less than  $1 each to 42 destitute  Bangladeshis—had grown to reach 7 million clients. Over the years, Grameen Bank is credited with proving that “the poor are bankable,” and the Grameen model has been copied in more than 40 countries.

Currently,  there are 3,316 MFIs reportedly  reaching over 133 million clients by the end of 2006, and loans to 92.9 million poorest clients benefit a total of 464.6 million people, including both clients and their family members. In terms of ownership patterns, the microfinance institutions  provide different structures such as government-owned (rural credit cooperatives in China), socially minded shareholders (transformed NGOs in Latin America), member-owned (credit unions in west Africa), and profit-maximizing  shareholders (microfinance banks in eastern Europe).

In the early stages, the MFIs had only concentrated their activities on micro credit, but changed to a range of services in due course. The MFIs introduced concepts such as group-lending contract, character-based lending, short-term repeat  loans, and incentives for loan repayments. The extensive Microcredit  Summit Campaign Report 2007 argues that although  microfinance is not a panacea, it is still a powerful tool to fight global poverty and works well with other development interventions  that promote  health, nutrition, housing, democracy, and education,  offering dignity and empowerment to the very poor.

The flexibility in  repayment  options  allows borrowers to repay out  of existing income, freeing the borrower to invest the loan in relation to their needs. Many  microfinance   institutions   permit   people  to access useful lump sums through loans and allow borrowers to repay the loan in small, frequent, manageable installments, which is further supported by quick access to larger repeat  loans. Most of these institutions are successful financially due to high repayment rates and an enhanced awareness of the levels of subsidy. These features  make microfinance  institutions different from small-scale commercial  and informal financial institutions  and from large government sponsored  schemes,  and  are either  independent of government  and/or  have a high degree of autonomy from bureaucrats  and politicians. However, a better understanding  of  the  financial  service  preferences and behaviors of the poor and poorest is still required to expand the scope of microfinance in addressing the concerns about welfare implications of MFIs.

In the  1990s a debate  emerged  around  two leading  views in  microfinance  services  available to  the poor—financial systems approach  and poverty lending approach,  both of which share a commitment to make these services available to the poor. The financial system approach framework is based on the principles of financial self-sufficiency, as seen in institutions  such as Banco Solidario (BancoSol) in Bolivia and the Bank Rakyat Indonesia (BRI). The poverty lending approach focuses on credit and other services funded by donor and concessional  funds as an important mechanism for poverty reduction.  This approach  is interested  in improving the well-being of participants  and their families. The examples of this category are Bangladesh Rural Advancement  Committee  (BRAC) and FINCAstyle village banking programs in Latin America. However, this debate is largely resolved now and the microfinance sector  is adopting  operating  on commercial lines or  systematically  reducing  reliance  on  interest rate subsidies and/or aid agency financial support. This is evident by the experience in Bangladesh where the Grameen Bank has shifted from its classic “Grameen I” group—lending to the poor model—to “Grameen II,” which is much closer to the financial systems model.

Recently,  the  growth  in  new  products   such  as smart  cards  and  the  use of technology  in developing new points of sale has been helping microfinance institutions  to enhance their outreach. Even the conventional banking institutions  have entered  into the provision  of microfinance  in a big way. The private sector has built a significant presence in microfinance operations and the microfinance institutions  are successfully raising commercial  funds from the  capital market and social investors.


  1. Denis T. Carpio, Financing Micro, Small, and Medium  Enterprises: An  Independent  Evaluation  of IFC’s Experience With Financial Intermediaries in Frontier Countries (International Finance Corporation, World Bank Group,  2008);
  2. Daley-Harris, “State of the Microcredit Summit Campaign Report 2007,” (Microcredit Summit Campaign, 2007);
  3. Hulme and T. G. Arun, eds., Microfinance: A Reader (Routledge, 2008);
  4. Ingrid Matthäus-Maier and D. Von Pischke, New Partnerships for Innovation in Microfinance  (Springer,  2008);
  5. Craig McIntosh,  Alain de Janvry, and Elisabeth Sadoulet, “How Rising Competition Among Microfinance Institutions  Affects Incumbent Lenders,” Economic Journal (v.115/506, 2005);
  6. Morduch, “The Microfinance Promise,” Journal of Economic Literature (v.37/4, 1999);
  7. Maria E. Pagura, Expanding the Frontier in Rural Finance: Financial Linkages and Strategic Alliances (Practical Action, 2008);
  8. Rutherford, The Poor and Their Money (Oxford University Press, 1999).

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