Microfinance is generally defined as
financial institutions that provide financial services to the poor
unbanked population. Three-quarters of the world’s poor lack a bank
account because of poverty, costs, etc., and are denied credit by
formal financial and banking institutions as constrained by formal
rules which they have to follow to get a credit from these
institutions. Microfinance institutions provide most of the basic
services of banks to those people.
- Microfinance promotes
well-functioning financial sector, which is critical for efficient
resource allocation, leading to increased productivity, greater
investment and higher overall levels of economic growth.
- The microfinance industry has
tremendously increased its intermediation activities over the last
decade, particularly in developing countries. Their total assets
have increased by more than 2000$ from 2002 to 2015.
- Improved access to finance is
needed to ensure sustainable economic growth, so that low-income
households, that still constitute a majority, have chances to
escape from poverty. Microfinance aids in access to finance
measured by its depth and outreach.
- Microfinance envisages the
integration of the financial needs of households into a country’s
financial system and hence is expected to positively affect the
growth.
- This implies that microfinance is
an important ingredient in shaping financial inclusion, thus
promoting financial development and growth through various
channel.
- A world bank research indicated
that a high level of financial development is a powerful tool to
reduce poverty. This implies that as the financial sector deepens
it also increases its reach, providing financial services directly
to the poor.
Microfinance holds the first leading
variable to create a significant impact on growth (GDP). This can
be interpreted based on findings of various literature that
microfinance facilitates improved access to finance, which leads to
financial inclusion and improves the financial sector, therefore
effects positively on economic growth.