Microfinance and the Challenge of Financial Inclusion for Development

Within a relatively short time, perhaps just a decade, microfinance has gone from being hero to zero in the development discourse: from being lauded as the silver bullet to solve the problems of development and poverty reduction, to being derided as the progenitor of financial instability and enhanced vulnerability among the poorest people. The mushrooming of microfinance institutions of both non-profit and profit varieties was very quickly followed by crises in many of the same developing countries that were earlier seen as the most prominent sites of success. In this context, it may well be argued that it is fine to reject microfinance as the means for either poverty reduction or economic diversification, but then how do policy makers address the problems of the exclusion of the poor from formal financial institutions? Since it is clearly not the silver bullet to solve development problems, microfinance needs to be treated as one small element of a broader set of financial strategies for development.