projects, rural people often found themselves in a poverty trap, with the only option being
local money lenders who charge very high interest rates. The advent of microfinance has
seen a considerable shift in access to financial services by rural people in many
developing countries that some have called “local revolutions” (Madajewicz 2003).
The phenomenal developments in microfinance in the last two decades have
sparked interest in multilateral lending agencies, bilateral donor agencies, developing and
developed country governments, non-government organizations (NGOs) and a variety of
private banking institutions to support its development (Asian Development Bank 2000).
The 2006 award of the Nobel Peace Prize to Muhammad Yunus, founder of the Grameen
Bank in Bangladesh and a pioneer of microfinance, attests to the place microfinance has
reached in poverty alleviation and the economic development of developing nations. In
awarding the prize, the Nobel Foundation stated that the prize was being awarded for the
recipients’ “efforts to create economic and social development from below” (Nobel
Foundation 2006).
A wide range of studies have been conducted to understand the specific features
that have enabled microfinance institutions to lend profitably to the poor and record
usually very high loan recovery rates while fostering growth in the real net worth of the
borrowers. Morduch (1999) examines some important mechanisms used by microfinance
institutions by comparing institutions diverse in the type of models used and the target
groups. The study largely features the Grameen Bank of Bangladesh, Bancosol of
Bolivia, Bank Rakyat of Indonesia, Kredit Desa of Indonesia and the FINCA village
banks throughout Indonesia and Latin America, thus drawing a diverse set of
microfinance institutions both geographically and operationally. Morduch identifies five