What is Microfinance? How Does it Relate to Financial Inclusion?

Microfinance is the provision of financial services to low-income people.

The definition of microfinance, which has its roots in microcredit, has evolved in recent decades. In the 1970s, social innovators from the Global South introduced the concept that small amounts of short-term capital (microcredit) can help poor people in the informal economy engage in productive activities and grow their way out of poverty. The early success of microcredit demonstrated that poor families in the informal economy are valuable customers and that it is possible to serve them in large numbers in a sustainable way.

Over the past few decades, we learned that poor households need access to the full range of financial services to generate income, build assets, smooth consumption, and manage risks—financial services that a more limited microcredit model cannot provide. Now the term “microfinance” generally refers to a broad set of financial services tailored to fit the needs of poor individuals.

The global financial inclusion agenda recognizes these broader needs. It also recognizes the importance of financial literacy, building consumer financial capabilities, and for consumer protection policies that take the conditions and constraints of poor families in the informal economy into account.