Functional Microfinance

The interchangeable use of the terms microcredit and microfinance creates serious confusions and misunderstandings in both academic and policy discourses. Microcredit programmes provide mainly one kind of service, namely loan distribution and collection, while microfinance programmes provide several financial and organisational services including credit, savings, insurance, and community development. From the functional perspective, differences appear more semantic than substantive. However, the conceptual differences are fundamental because they involve both the underlying motives and the ways in which the two types of venture operate in practice. Microcredit is essentially a non-profit approach to development and depends on external support, while microfinance programmes seek to return enough profit to be self-financing. Thus, the two programs need to be treated separately in relation to their role in the alleviation of Third World poverty.