Importance of microfinance

Research from across the world today suggests that inclusive and developed financial systems are related to better income distribution and faster economic growth [1].

 Microfinance is one such concept that gives the masses and underprivileged section of the society, access to business opportunities and the power to overcome ossified social structures. Apart from the benefit of creating social equality in business arena, finance (particularly microfinance) acts as an extraordinarily effective in eradicating poverty [2]. Microfinance is defined as an entire range of financial and non-financial services including skill up gradation and entrepreneurial development, rendering to the poor for enabling them to overcome poverty. Financial assistance is provided in the form of small loans, acceptance of small savings and provision of other financial products and services to the poor [3].

Role of the Government in promoting microfinance

The Indian government has always emphasized on promoting equitable growth through finance. Especially since an overwhelming majority of the country’s population resides in rural areas. The policies have focused on mobilization of financial institutions’ savings to small scale industries and agriculture sector [4]. A number of institutions across Asia have emerged that increased awareness about microfinance as an instrument for reducing poverty. Some of which are Grameen Bank, the ASA and the BRAC which have been successful so far in alleviating poverty [5]. Some researchers call the advent of this concept as a “major breakthrough” in the world of finance. To women it has not only provided microsavings and microinsurance, but also imparted training in entrepreneurial development [6].

Importance of microfinance

Analyzing various studies conducted by researchers on microfinance and its advantages, it can be stated that there are two major reasons why microfinance is important:

  1. It provides the financial services not accessible through the traditional financial system, needed by many people to increase and diversify their economic activities.
  2. It boosts self confidence among the poor.

CGAP sees microfinance as a strategy that combines a possible high outreach with far fetching impact [7]. However, they claim that microfinance is also embedded with a major disadvantage. It does not help the poorest of the poor, as the money can be used for food and medicine instead of entrepreneurial activities.


  1. For example, Beck, Demiguc-Kunt and Levine (2004); Honohan (2004) as expressed in Karmakar (2008). The works explore the benefits of microfinance and empowerment. Research by Beck, Demiguc-Kunt, Laeven and Levine (2005) indicates that financial sector development leads to the relaxation of constraints on small firms the most.
  2. Similar opinions are voiced by most researchers: for example, Basu (2006); Karmarkar (2008) and Ahmad (2009). Basu (2006) has conducted the research on the role of microfinance in improving access to finance in India’s poor.
  3. Pandey (2009); Getubig, Gibbons and Remenyi (2000); Anderloni, Llewellyn and Schmidt (2009).
  4. Mohan and Prasad (2005); Karmarkar (2008) have exemplified Reserve Bank of India’s (1954) Report on All-India Rural Credit Survey of 1951-52.
  5. Rathakrishnan (2009) in his study gives numerous examples. A study conducted by the UN in 1998 led it to proclaim the year of 2005 to be the “International year of Microcredit” as microcredit programs have contributed to alleviate poverty.
  6. As voiced by Christabell (2009) in her work on “Women Empowerment through capacity building: the role of microfinance.
  7. CGAP (Consultative Group to Assist the Poorest) is an organization consisting of public and private development agencies.

Abhinash Jena

Partner at Project Guru
Abhinash has worked in various marketing, sales, branding, and marketing functions for GPS companies including MapmyIndia Navigators ( In addition to writing for Knowledge Tank articles, he also writes the expert's advice for Thesis & Dissertations and Power Designs.

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