This article is written by Sahaja, studying at NALSAR University of Law, Hyderabad. This article elaborates on Microfinance institutions and their development in the past few decades. 


International Microfinance is one of the financial concepts that has excelled over the last two decades and to which many groups and institutions trace their financial success in various developmental projects. Microfinance has been around for centuries, with savings and credit groups and various savings clubs around the world providing financial services to the poor who were often ignored by commercial banks. 

The origins of global microfinance institutions may be traced back to the mid-nineteenth century in Latin America and South Asia when numerous lending and savings societies united to build more stable microfinance institutions. These paved the way for the international microfinance business, demonstrating that it could cover a wide range of financial needs for individuals as well as the creation of a wide range of projects on a global scale. The worldwide microfinance business has grown at a rapid pace during the last two decades, sweeping the international financial market by storm. According to statistics, the sector has grown to the point where it can now serve up to 200 million clients across all of the world’s geographical regions.

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What are Microfinance institutions (MFI)

Microfinance, also called microcredit​, is a type of banking service provided to unemployed or low-income individuals or groups who otherwise would have no other access to financial services.

Microfinance enables people to take out acceptable small business loans safely and by following ethical lending principles. Even though microfinance institutions exist all around the world, the bulk of them is located in developing countries such as Uganda, Indonesia, Serbia, and Honduras. Many microfinance institutions specialise in assisting women.

Microfinance institutions (MFIs) are financial entities that offer small loans to persons who do not have access to traditional banking services. The term “small loans” is defined differently in different nations. Microloans are defined as loans of less than one lakh rupees in India.

Micro Financing organisations support a wide range of activities, from providing basic services such as bank checking and savings accounts to giving beginning funding for small business owners and teaching programmes on investing principles. These courses can cover topics including bookkeeping, cash flow management, and technical or professional skills such as accounting.

Causes of rapid developments in international microfinance

Significant demand for funds among the poorest

Microfinance’s major purpose is to help people save for their future financial requirements. These savings are important because the people are protected from the seasonality of financial flows, which is especially important for the poor in rural areas and the urban poor. 

The microfinance business has been on a never-ending mission to alleviate poverty, particularly in developing countries. Furthermore, microfinance institutions contribute to the acceleration of economic development in underdeveloped nations by providing a feasible source of funding for large groups of people who want to invest and build their financial foundation.

Microfinance outperforms other financial institutions and interventions because of two primary causes. These factors include cost-effectiveness and long-term viability.

Microfinance stands out as a more cost-effective developmental tool when compared to available alternatives such as formal rural financial intermediation and rural infrastructure development projects, according to statistics and data gathered from comparisons made between microfinance and other lending institutions such as commercial banks.

Sustainability comes along with microfinance services

Most other relevant developmental instruments cannot be sustainable once the first or first start-up funding has been provided. In most situations, these institutions find themselves in need of new inputs for the clients who join the organisation or union in the future after providing the original start-up funds. Microfinance, unlike these institutions, remains steady, requiring future consumers to overcome barriers such as initial and new inputs for the continuation of their financial services and lending endeavours.

Formation of microfinance networks in the regions across the globe

Microfinance networks serve as umbrella organisations for the functioning and well-being of multiple microfinance institutions, providing a viable avenue for their cooperation and a central for sharing ideas, experiences, and articulating solutions to the common challenges they face in their daily operations.

Constraints to the development of microfinance in developing countries 

To address the financial demands of their consumers, the international microfinance industry faces several challenges. This is especially true in underdeveloped nations, where the majority of people rely on microfinance companies for a variety of financial demands caused by a lack of capital. The restrictions or impediments to international microfinance development can be assessed in terms of their efficiency, profitability, and total reach. 

Enacting ineffective government laws that harm the welfare and operations of microfinance organisations 

The main issue with the governments is that policymakers are having difficulty developing an adequate legal framework to promote the seamless operation of microfinance institutions. Countries that have taken the initiative to design specialised microfinance legislation in their economies have aided the international microfinance industry’s growth and innovation. However, most economies around the world adopt permissive policies regarding microfinance frameworks, resulting in circumstances that only foster weak, undercapitalized institutions.

Poor utilization of modern technologies in developing countries

In areas such as Asia and Sub-Saharan Africa, there is a lack of technological investment among existing microfinance organisations. This effect can be linked to the Microfinance institutions’ limited resources as well as the failure of the management team to grasp the importance of incorporating technological improvements into the microfinance industry. 

The management information systems are either non-existent or poorly managed in the few economies that have adopted it

This, in turn, leads to inefficient loan processing and record-keeping through methods such as paperwork and spreadsheet-based solutions, restricting the efficiency of microfinance institutions to manage large numbers of clients throughout the globe and limiting their profitability and growth potential.

The lack of transparency and consistency

The lack of openness and uniformity in lending activities among various poor countries throughout the world has stifled international microfinance’s rapid growth. 

Lack of early-stage funding among numerous institutions

One of the key issues that most microfinance institutions, particularly in developing nations, are still dealing with is the reality that capital for early-stage enterprises in emerging economies is still limited. Due to a shortage of inexpensive financial sources, tiny organisations that are just getting started have had a difficult time growing and expanding their reach.

Impact of MFI on development 

The role of the MFIs in providing loans and its rapid development in the recent past has had several positive impacts on the lifestyle of people all around the world. Some of these significant impacts are:

Reduction of poverty

One of the most visible effects of international microfinance development is the elimination of poverty and vulnerability, particularly among low-income earners in developing economies and aspiring investors. People have also profited from the jobs that have been created by the many microfinance organisations that have been formed throughout the world. As a result, households can manage their bills while also improving their lifestyle in areas such as nutrition, housing, and health care. 

Reduction in rates of child poverty

There has been a dramatic decrease in the prevalence of harmful child labour, particularly in developing nations. In general, reports show that participants or members who have continuously invested their loans on a long-term basis have seen significant improvements in terms of their incomes, assets, and livelihood stability.

Empowerment of women 

Another effect of international microfinance has been on per capita expenditure, particularly among women members of the institutions, where women have been empowered to manage their development initiatives as well as their expenditure needs without relying on external assistance. Bigger specifically, the net worth of active members of microfinance organisations has increased dramatically, with more changes visible among women.

Creation of a favourable economic environment

The growth of worldwide microfinance has resulted in the formation of a favourable economic environment in the many regions where microcredit programmes have been implemented. These programmes have proven to be beneficial to members who are dealing not just with financial difficulties, but also with concerns about possible economic crises, political instability, and natural calamities. In most cases, the resources invested in the institutions are returned to the members in the form of credit loans, which they use to recover and repair their impacted projects as well as support their daily requirements in the event of such crises.

Smoothening of consumption and facilitating the reduction of the seasonality of labour supply

This is owing to the various job opportunities generated by microfinance institutions around the world, as well as the fact that members have significant amounts of money to invest and establish self-employment through business initiatives. Long-term members of the institutions can be assured of a steady stream of revenue from the various investment initiatives. They’ve already started to provide an alternate source of income.

Microfinance’s economic and social effects can go a long way toward helping the disadvantaged. Microfinance is not a remedy for all the development issues. It should not be utilised for income transfers, subsidies, or health and education services delivery. Microfinance also cannot be utilised to replace infrastructure expenditures that are required to connect isolated areas and marketplaces. To begin, decreasing poverty requires finding ways to enhance economic growth. Second, distinct institutional and other factors that may contribute to local growth must be examined and analysed. Economic growth alone will not eliminate poverty; it will be necessary to find the policy and institutional improvements that will reduce poverty directly, even if growth does not increase.

Role of Public policy in the development of MFI

In a variety of ways, the implementation of specific public policies in various countries throughout the world has influenced the rate of development of international microfinance. Some rules have had a favourable impact on growth, while others have slowed the development of foreign microfinance institutions by restricting their reach and interest rate levels, limiting their potential to grow into marginal financial institutions.

  • The monetary and taxation policies are two public policies that have an impact on the development of microfinance organisations and activities. Some tax and monetary policies devised and executed by individual governments may divert significant quantities of cash or resources away from credit and into alternative investment instruments.
  • Poor monetary policies formulated by responsible financial authorities and governments, such as inflation and economic instability, diminish the level of savings for low-income earners, who make up the majority of members of various microfinance institutions around the world.
  • Government regulation, which restricts the cash available for small enterprises to lend to their clients, is another policy that has a substantial impact on the rate of expansion of international microfinance institutions around the world.
  • Another factor affecting the effectiveness and growth of international microfinance operations is the prevalence of governmental meddling in loan markets, which is especially prevalent in poor nations. In most cases, politicians have been known to divert development funds to moribund state-owned firms and political or worse off to a few wealthy and influential personalities.

Microfinance in India

The Self-Employed Women’s Association (SEWA) in Gujarat was the first to pioneer microfinance in India, establishing SEWA Bank in 1974. Since then, this bank has been providing financial services to those in rural areas who want to start their own enterprises.

To meet the needs of India’s huge rural population, microfinance facilities are required. Microfinance’s key goals in India should be to promote socio-economic development at the grassroots level through a community-based strategy, empower women, and increase household income.


The rapid development of microfinance institutions worldwide has indeed had positive impacts on the people in alleviating property. Despite the constraints and hardships faced by such institutions, they have helped in various ways as stated in the above sections. 

The income of members has increased as a result of the services provided by these organisations, such as microcredit lending and the mobilisation of members’ savings, especially for those who have remained faithful to save on a long-term basis. 

The constraints and the counter-productive public policies do hinder the growth and development of microfinance in the modern world. 

Active non-governmental organisations (NGOs) and policy-making authorities from various economies must take responsibility for guaranteeing the adoption of favourable regulations and processes that allow for the free operation and quick expansion of international microfinance around the world.


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