Microfinance and Financial Development

Abstract

Close to three billion people - half of the world's population - live on less than two dollars a day. Within these poor communities, one child in five will not live to see his or her fifth birthday. To boost international development, the United Nations announced the Millennium Development Goals, aimed at eradicating poverty by 2015. Yet the Goals will prove difficult to achieve.

Domestic financial reforms have the potential to play a role in poverty alleviation by deepening financial markets and institutions that may contribute to economic growth, which can, in turn, sometimes help poverty alleviation. But the link between financial reform and poverty alleviation is not a straightforward one. This Article argues that microfinance can play an important role in financial development, and that by focusing on microfinance, development policy can strengthen the links between financial development, economic growth, and poverty alleviation. Rather than focusing exclusively on microfinance as an anti-poverty strategy, however, microfinance should be seen as an integral component of a developing country's broader financial development strategy. By demarginalizing microfinance programs serving the poor, we may be able more quickly to reach the Millennium Development Goals.

Keywords: Banking, Financial Institutions, Regulation, Law & Economics, Development, Economics

JEL Classification: D10, D60, G21, I38, K20, O16