Microfinance and microfinance institutions – development directions and prospects

Abstract

In the EU terminology, microfinance is defined as a tool to provide impoverished people with a basic access to financial services in the form of loans, savings, money transfers and microinsurance. From the economic point of view, the idea of microfinance should not be any substantial problems with sourcing the capital to support the poorest people who are excluded from the society. If the capital market were ideally flexible, the poorest people should not suffer from lack of capital. The factor that contributes to the fact that capital is not invested in the poorest regions of the world is also the substantially higher cost related to investments made by the poor and unequal access to information (information asymmetry), which leads to negative selection, moral hazard and difficulties with monitoring. In many EU countries, microfinance institutions have been functioning successfully, while the number as well as the value of granted microloans has been rising. Summing up the deliberations regarding the idea and operation scopes of microfinance institutions, it may be said that they are gaining importance not only on the financial market, but first and foremost in social and economic development of many countries and regions, in the developing countries as well as in Europe and in Poland. To enable further growth of microfinance, in view of the achievements made so far by the sector, it is possible to propose scenarios and directions of development with regard to the source of the loan capital. The solution appears to consist of the three scenarios of microfinance institutions development: commercial scenario, social scenario, mixed scenario. The scenarios may neglect some aspects of their operations. Still, they indicate the directions which microfinance institutions may follow and point to those that are the most desirable from both social and economic point of view, also taking into account the local development aspect.