THE ENVIRONMENT OF MICROFINANCE INSTITUTIONS: THE ROLE OF ECONOMIC FREEDOM

Microfinance provides saving and lending services to the poor. It is not conceptually different from banking in the USA. People are able to save money at and borrow money from microfinance institutions. They are compensated for saving and charged for borrowing by an interest rate that compounds on savings or loans. It is different primarily in the magnitude of the financial transactions. Loans to the poor are much smaller on average than loans traditionally given by banks; these loans can be as small as $71. Also, because of their poverty, borrowers tend to have little or no collateral to secure loans (Murdoch, Dec. 1999).