Microfinance and Enterprise Development

Governments have an important role in addressing inequality, as well as in creating an environment conducive to broad-based growth. Governments can do this by adopting an approach that balances the need to achieve high levels of growth against the need to ensure the benefits of growth are shared with the poor.

This kind of approach may involve, for example, eliminating conflict, maintaining macroeconomic stability, providing key infrastructure and creating an attractive investment framework and well-functioning markets.

In addition, to ensure that the poor can share in the benefits of growth, barriers to their participation in the economy need to be removed. These include a lack of access to health and education, a lack of essential infrastructure and, in some cases, a lack of access to financial markets.

Microfinance attempts to address the lack of access to financial markets. It focuses on providing microcredit - small, collateral-free loans - to the very poor for self employment.

It also provides other financial services such as savings and insurance (known as microfinance).

Access to microcredit can enable the poor to turn existing skills and market opportunities into income. If they lack these skills or opportunities, they may need to be developed before access to credit is appropriate.

Microfinance is not appropriate in all contexts. For extremely poor people in particular, providing essential infrastructure and basic health and education and reducing other barriers to economic participation may need to take place before microfinance has a role.

Also, investment in productive infrastructure, employment programs and training in business development can help to build social capital and skill levels within communities where microfinance would be inappropriate or unsuccessful.

For further information see our publication Australian aid: Approaches to microfinance and enterprise development.

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