Microfinance Evolution and Development: A Critical Exploration

No one theory accounts for the origin of microfinance because informal savings and credit unions have operated for centuries in many parts of the world. As such, the foundations of microfinance lie in traditional savings and community-based contribution schemes which are familiar to many cultures. However, the industrialisation and formalisation of these practices into regulated microfinance institutions (MFIs) brought a structured approach intended to address poverty, financial exclusion, and economic empowerment. This paper examines the effectiveness of microfinance as a development tool to promote poverty alleviation, gender empowerment, and financial inclusion, especially in the Global South. This study employs a historical and critical literature review methodology, analysing peer-reviewed articles, policy documents, and empirical studies to trace the evolution of microfinance and its impact on financial inclusion, poverty alleviation, and gender empowerment. By synthesizing diverse perspectives from academic discourse, policy reports, and case studies, the research critically examines microfinance’s transformation from a development-oriented tool to a commercialized financial sector. The study finds that the commercialisation of microfinance has reshaped its core mission, frequently side-lining social objectives for profitability and financial sustainability. This review and analysis serve as a resource for scholars, policymakers, and MFI clients alike, offering insights into the sector’s trends, challenges, and future directions.