Microfinance and development

This chapter defines the concept of microfinance and focuses on the supply side of microfinance. It discusses two main objectives of microfinance institutions (MFIs), outreach and financial sustainability. The antecedents of microfinance, as well as the modern microfinance movement, rely heavily on group lending systems, where borrowers self-select into groups to discuss issues related to borrowing, saving, and repayment. There is a wide variety of group lending systems. The two best-known systems are the Grameen Bank Solidarity group lending system and the village bank system. The main objective of MFIs is to provide financial services to poor households that are excluded from the formal financial system. This objective is usually referred to as outreach. The impact of microfinance has been studied since the 1990s. Most of the early studies suggest positive impacts of microcredit. Impact studies on microcredit have started using better methodologies to control for self-selection and programme placement biases.