Microfinance-On the Road to Capital Markets

In the recent and remarkable growth of microfinance, the world appears to have stumbled upon a tool for economic development in poor communities that actually works. Over a few decades, and until recently almost unnoticed, some 600 million of the world's poorest people, previously left completely behind by the financial sector, have been provided with access to capital that has allowed them to build businesses and livelihoods. At the same time, they have shown that they are good credit risks-good enough that the microfinance institutions (MFIs) that serve them have in many instances been able to grow quickly and profitably, creating the kind of virtuous circle that is any development economist's dream. This article provides an introduction to this innovative method of financing the economically active poor, along with an account of recent efforts to connect microfinance with mainstream global capital markets. The authors provide a number of case studies of microfinance in action, from the MFIs that make loans to micro entrepreneurs, to the financiers and technical assistance networks that are trying to sustain and grow them. The article also examines some formidable challenges now facing the microfinance industry-challenges that will determine whether the "quiet revolution" that has occurred to date will realize its full potential and become part of the global financial mainstream.