Microfinance has become a significant global phenomenon, as an effective means of providing financial services to poor and low-income people who don’t generally have access to these services from formal financial institutions. In recent years the concept of Financial Inclusion has become increasingly widespread in the realization that the underserved population requires a broad range of such services, not merely savings and credit, to enable them to conduct their financial lives more efficiently.

Microfinance assists poor people in gaining access to usefully large sums of money which they require for different purposes. It does so by means of innovations in loan contracts, which allow microfinance institutions (MFIs) to limit losses despite lacking good information on borrowers, and without requiring collateral as security. The main innovation is the “group lending” mechanism, to apply social pressure for contract enforcement. Another vital factor that strongly influences repayment is the promise of access to future loans and services.