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 upgradation 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].

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, such as 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 especially for women as it not only provided microsavings and microinsurance, but also imparted training in entrepreneurial development[6]. Analysing various studies conducted by researchers on Microfinance and its advantages, it can be stated that there are two major reasons why microfinance is important: first, it provides the financial services not accessible through the traditional financial system, needed by many people to increase and diversify their economi activities; and second, it builds the self-confidence of 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.

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