A major constraint to the participation and contribution of poor and vulnerable households in economic growth is acess to financial credit. Access to financial services permits individuals and households to better manage the risks and uncertainties they face – to save in secure ways, to invest in a business or home, or to cope with or insure against unexpected shocks.
It has been estimated that more than 500 million people worldwide need access to financial services. However, formal financial intermediaries such as commercial banks often do not serve poor households for reasons that include the lack of traditional collateral, high costs of small transactions, and geographic isolation. Poor households’ access to financial services is generally limited to informal transfers or loans, either individually or through savings clubs, rotating savings and credit associations, and mutual insurance societies.
Following the successes of some limited micro-enterprise credit programs supported by governments and donors from the 1950s-1980s, a more specialized micro-finance industry has gradually emerged. The institutions that provide microfinance and credit services are diverse, including non-governmental organizations (NGOs), credit unions, non-bank financial intermediaries, and commercial banks. The loans and credit extended are typically small (“micro”). They are provided in varying contexts, either to individuals or groups, ranging from personal micro-credit, to small enterprise support and rural finance.
Among the continuing challenges faced by developing societies and the international community is to find ways to build the capacity of the microfinance sector to complement the existing informal and private institutions, promote access to those markets for the poor, and help ensure that they are sustainable.
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