The role of informal microfinance institutions in saving

incomes, build assets, and reduce vulnerability. It also translates to better nutrition and
improved health and improved health outcomes. These experiences suggest that providing
affordable financial services to the rural population deserves high priority in development.
Direct interventions have failed
Direct interventions in rural finance to stimulate growth and reduce poverty through a blend
of targeted credit programmes, interest subsidies, and other government policies became
widespread in the 1950s, when Keynesian economics inspired many governments to design
fiscal interventions at the macroeconomic level. But these direct interventions have generally
been disappointing and have tendered to retard, rather than promote the development of
financial services in the rural areas.
Institutional and policy Design stands a better chance of success
A recent development in the provision of rural financial services ( Both savings and credit)
have demonstrated that proper institutional design and adherence to appropriate policies pays
off handsomely and have the potential to generate substantial achievements in terms of both
sustainability and greater institutional outreach. There are an increasing numbers of successful
micro-finance institutions that provide financial services in a sustainable manner. Various
quantitative and qualitative studies indicate increase in income and assets and decrease in
vulnerability of micro-finance clients.
Although the new approach focuses on income expansion and poverty reduction, the
perceived challenges and ways of addressing them are strikingly different. The principal change
involves promoting deep and efficient rural financial markets by creating a favorable policy
environment, improving the legal and regulatory framework that supports rural financial
markets and addressing specific market failures in cost effective ways through well designed,
self sustaining interventions. Successful rural finance institutions are all located near their
clients; utilize lending technologies that are simple and inexpensive for both the client and
lender and most include savings.
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