Microfinance is ‘the provision of economic services to
low-income poor and extremely poor self-employed people’ (Otero, 1999).
Ledgerwood (1999) defines microfinance as, ‘certain monetary services that
principally include savings and credit, but may comprise of alternative
financial services such as insurance and payment services’. As outlined by
Schreiner and Colombet (2001), microfinance is an effort to improve access to
small deposits and credit for poor households that are neglected by banks. Hence,
microfinance also includes monetary services such as savings, loans and
insurance to poor people who live in both urban and rural settings who are not
capable of obtaining such services from the formal business sector.
It is very important that if this topic is to be discussed
in detail, a distinction must be made between microfinance and microcredit;
words which are often used interchangeably but have contrasting definitions.
Microcredit is limited to the provision of a small loan to the poor (Sinha,
1998), while microfinance is a large umbrella, under which is also included
non-credit financial services such as savings, insurance, pensions and payment
services (Okiocredit, 2005). As a result, it can be said that microcredit is a
component of microfinance.
Supporters of microfinance believe that it has a very large
role to play in development. They believe that microfinance helps the poor in
meeting basic needs and protecting themselves from risk, improving their
household economic welfare, and also helps to empower women by supporting women’s
economic participation (UNCDF, 2004). Otero (1999) states that microfinance
creates access to capital for the poor, and when this is combined with human
capital, education, training and social capital, it allows people to move out
of poverty. The aim of microfinance in line with Otero (1999) isn’t just concerning providing
capital to the poor to combat economic condition on a private level, it
additionally incorporates a role at an institutional level; it seeks to form institutions
that deliver monetary services to the poor.