Since 1983, when Grameen Bank was established in Bangladesh as a model of
microfinance banking, microfinance has grown at an exponential rate worldwide;
today, more than 200 million people are direct or indirect beneficiaries.Microfinance
resolves the market failure of formal financial institutions by reaching out to the
poor, women, and other disadvantaged groups of society not covered by the commercial
banks. By easing liquidity constraints, microfinance helps to generate
employment, income, and assets, as well as improve children’s schooling.
Since the advent of microfinance, the premise of its improving access by the
poor to financial services for consumption smoothing has never been a subject of
controversy. What has been controversial is whether microfinance can alleviate
poverty, in part, because of the high interest rates charged by microfinance institutions
(MFIs), which offer borrowers little scope for accumulating assets.
Controversy also abounds over the methods and alternative statistical assumptions
used to measure benefits. That the poor lack an effective and affordable
alternative financing mechanism to support income and employment generation
does not necessarily mean that microfinance is a panacea—it involves the entrepreneurial
skills of borrowers, which many of the poor may lack.