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Microfinance’s Macro Potential

LONDON – Microfinance is, at its heart, an effort to provide financial services to people who are not served – or are under-served – by the formal banking system. With appropriate, accessible, and fairly priced financial services, people can build their savings, cover the costs of unexpected emergencies, and invest in their families’ health, housing, and education.

The International Finance Corporation estimates that microfinance has reached some 130 million people worldwide in the last 15 years. Over this period, microfinance has been lauded for its potential to advance financial inclusion and enable people to escape poverty. But it has also faced harsh criticism, with some lenders being accused of profiteering.

Despite the industry’s widely publicized pitfalls, its potential to improve the lives of the poor cannot be ignored. The question now is how to ensure that microfinance becomes the industry that the world needs. To this end, three important steps must be taken.

The first step is better regulation. Microfinance institutions (MFIs) come in many forms – mainstream banks, specially licensed banks, non-financial companies, finance and leasing companies, non-governmental organizations, cooperatives, and trusts – and follow a variety of business models. All of these intermediaries must be recognized and regulated according to the needs of the economies in which they operate.