ABSTRACT
With the failure of top-down (trickle down) development policies for a few decades to alleviate poverty in most developing countries, financing microenterprise is considered a “new paradigm” for bringing about development and eradicating absolute poverty. Growth in small and microenterprises can be an important means for employment generation and development in poor countries. High population growth rate and limited employment opportunities in the agricultural and modern manufacturing sectors leave a vast majority of the labor force without productive employment. Microenterprises can play an important role in employing the surplus labor force productively. 2 An important factor that determines the development of the microenterprises is the availability of finance for acquiring the necessary inputs and capital. Due to lack of collateral and asymmetric information problems, however, poor microentrepreneurs cannot obtain financing from conventional institutional sources. Before the advent of microfinance institutions (MFIs), most microenterprises were financed by non-institutional sources that charged exorbitant interest rates.
