The Transformation Process in Microfinance Institutions
This article analyzes the difference between informal and formal MFIs. It also highlights the advantages and disadvantages of transformation.
About 80 percent of the working poor still do not have access to microfinance services after more than 30 years since the beginning of microfinance. The microfinance industry must grow to scale for microfinance to achieve its potential as a global poverty alleviation tool. The attempt to accelerate transformation from informal to formal microfinance has been relatively intense in the last six to eight years. Differences between formal and informal microfinance include:
- Domination of formal sector in urban areas and informal sector in rural areas;
- Formal sector is transparent and professional, but not accessible to the poor, whereas the informal sector is very accessible to the poor;
- Informal financial services reach the landless poor who are the majority in developing countries and who live in remote areas with bad infrastructure.
The paper identifies the transformation process as the next step in financial development and recommends that it should to go hand in hand with socioeconomic development and increase in the standard of living.
