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Over the last twenty-five years, microfinance has become a powerful development tool, raising the incomes of millions of families in the developing world through supporting self-reliant entrepreneurs often excluded from the formal sector. That's just one reason why The United Nations has designated 2005 as The International Year of MicroCredit.

Microfinance institutions (MFIs), however, have been viewed with mistrust and wariness by the financial world, since they are often undercapitalized and operate in a niche unattractive to mainstream institutions. Conventional wisdom dictated that a financial institution couldn't make a profit lending small amounts to the poor because of high overhead, losses, and low yields on the loans. Fortunately, this "wisdom" has proven unfounded. For example, MicroRate, a microfinance rating group, documented that 30 of Latin America's leading MFIs have an average return on assets far better than local and international banks.  Similar results were obtained from other rating agencies confirming the abilities of MFIs to generate profits.  These MFIs have perfected new underwriting techniques and monitoring systems that effectively reduce overhead and losses while maintaining gross yields that are more than double that of commercial banks.

This highly specialized financial business has learned to make a large number of low value, unsecured loans to the working poor. Microfinance is not close to reaching its potential due to a lack of funding resources. In most cases, MFIs are not authorized to take deposits and do not have access to local capital markets. Government and private donors have attempted to finance the industry but are unable to keep up with the rapid growth of the microfinance institutions' portfolios. To date, local capital markets simply have been unable to believe that MFIs are creditworthy institutions, a market imperfection that leaves many MFIs with chronically restricted funding and many small-scale entrepreneurs with little hope of receiving empowering loans.