Microfinance is the provision of financial services to micro-enterprises and low-income households (often in emerging economies), whether through credit, savings, insurance and/or payments/remittances. Microfinance institutions (MFIs) are financial intermediaries (typically lenders), which are specialized and dedicated to micro-enterprises and low-income households.
The aim of microfinance is to build financial sectors that are closely interconnected with the local economy – thus facilitating lending to micro and small entrepreneurs, enabling payment systems to be established and, in particular, creating new savings opportunities for private households.
This approach – which is efficient in many respects – enables capital to be put to productive use in the local economy. Microfinance businesses contributes to the growth of other sectors of the economy, such as small-scale industry, retail, construction and trade. The growth in these sectors of the economy can have a significant effect in terms of improving local living standards and alleviating the effects of poverty.