Microfinance is ‘the provision of economic services tolow-income poor and extremely poor self-employed people’ (Otero, 1999).Ledgerwood (1999) defines microfinance as, ‘certain monetary services thatprincipally include savings and credit, but may comprise of alternativefinancial services such as insurance and payment services’. As outlined bySchreiner and Colombet (2001), microfinance is an effort to improve access tosmall deposits and credit for poor households that are neglected by banks.
Hence,microfinance also includes monetary services such as savings, loans andinsurance to poor people who live in both urban and rural settings who are notcapable of obtaining such services from the formal business sector.It is very important that if this topic is to be discussedin 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 includednon-credit financial services such as savings, insurance, pensions and paymentservices (Okiocredit, 2005). As a result, it can be said that microcredit is acomponent of microfinance. Supporters of microfinance believe that it has a very largerole to play in development. They believe that microfinance helps the poor inmeeting basic needs and protecting themselves from risk, improving theirhousehold economic welfare, and also helps to empower women by supporting women’seconomic participation (UNCDF, 2004). Otero (1999) states that microfinancecreates access to capital for the poor, and when this is combined with humancapital, education, training and social capital, it allows people to move outof poverty.
The aim of microfinance in line with Otero (1999) isn’t just concerning providingcapital to the poor to combat economic condition on a private level, itadditionally incorporates a role at an institutional level; it seeks to form institutionsthat deliver monetary services to the poor.