Microfinance institutions fill a needed gap within the financial services industry by offering small loans, or micro-loans, to people unable to access to conventional loan services.
Microfinance institutions vary in size and function with some organizations focusing entirely on microfinancing. The most obvious group of finance providers both in developed and developing countries is represented by the well-known traditional banks. HOWEVER, These institutions never (or hardly ever) provide financial services to beginners that lack a strong credit history.
The other source of finance is represented by microfinance institutions, which could be classified into three main categories, depending on the regulatory thresholds of their organizational structures:
Informal institutions properly they do not have the status of institutions. They are providers of microfinance services on a voluntary basis and are not subject to any kind of control or regulation. For example: self-help groups, credit associations, families, individual money lenders.
Semi-formal institutions are usually registered entities, subject to all relevant general laws. They can be defined as microfinance financial intermediaries (MFFIs). Within this category, it is possible to include different types of institutions with different structural and organizational complexity (financial NGOs, financial cooperatives, credit unions, postal saving banks).
Formal institutions can be further classified into three main categories: microfinance banks (MFBs), microfinance oriented banks (MFOBs) and microfinance sensitive banks (MFSBs). They can all offer credit and they are all deposit-taking institutions: for these reasons, they are all under banking regulation. Within MFBs, it is possible to list a limited number of pure microfinance banks (PMFBs), cooperative banks and development banks.
Within any society, financial services provide a means for people and businesses to obtain credit and manage available assets on a continuous basis. They are important becuase they give access to financial services that enables existing businesses to grow and provides the starting capital for starter businesses.