What is Microfinance?

“Microfinance can be broadly defined as:


“The provision of small-scale financial services such as savings, credit and other basic financial services to poor and low-income people”. According to United Nation (UN)


The term “microfinance institutions (MFI‟s)” now, refers to a wide range of organizations dedicated to providing these services and includes non-governmental organizations, credit unions, cooperatives, private commercial banks, non-bank financial institutions and parts of State-owned banks.”


Poor people are not able to access loans from commercial banks normally because of lack in guarantee and collateral. But there are many other reasons also involved for which commercial banks were not willing to finance poor. These reasons are included that poor have less education, no proper experience and training, high expenses on transactions of small loans and lower rate of profit. Therefore limited option to access loan leads to push poor people in more poverty.

This situation resulted in emerging the idea of micro lending and microfinance. Microfinance, therefore, a way to finance people, those have no collateral or any property for guarantee.


Microfinance is the term of a broad range of financial services such as deposits, loans, payment services, money transfers, and insurance to deprived and low-income households and, their microenterprises.


Microfinance services are provided by three (3) types of sources:

  • Formal institutions, such as rural banks and cooperatives
  • Semi-formal institutions, such as (NGO‟s) nongovernment organizations
  • Informal sources such as money lenders and shopkeepers


Institutional microfinance is defined to include microfinance services provided by both formal and semiformal institutions. Microfinance institutions are defined as institutions whose major business is the provision of microfinance services.

Microfinance is a way of financing to poor for their business, to alleviate their poverty, empowering them, giving social benefits on sustainable way. According to Agion & Morduch, due to microfinance, there are many possibilities have emerged including extending markets, reducing poverty and fostering social change. But there is wide spread confusion that microfinance is just lending loan to poor but as we mentioned that microfinance is no more only loans but covering the issues of poverty alleviation, putting social impact on poor and educating poor to savings.

Therefore, MFIs, today, not only NGOs but serving as a complete banking system. This discussion lead to us that microfinance is a form of financial services for poor to help them for their business activities by giving micro credit.