While grappling with the challenge of alleviating poverty, development economists have gone through the whole spectrum of conceivable instruments that could be feasibly thought of without triggering a disruption. By the seventies, however, the strain of financing poverty alleviation started to tell heavily on the government resources. Keeping in mind the fact that the nations that suffered the most from the ills of poverty were themselves poor, it was an expected outcome. It was so because most of the instruments depended upon were like doles, e.g. subsidies.

Problem with such dole dependent system is that it tends not to create capacities. Take for example the case of subsidies. Its larger application is found in food. By subsidizing food prices the government concerned tries to make it suit the pockets of the poor. The problem here is that though it takes some care of the problem of hunger, it squarely fails to create capacity and surplus that is needed to bring the poor out of their poverty.

Although the search had been going on for some time for a sustainable solution none really clicked. Then Muhammad Younus, who later won the Nobel prize for his contribution, found a possible answer in microfinance. He started experimenting with microloans for capacity creation. With his experiment, empowerment became the keyword in the fight against poverty.

As the microfinance started to deliver results, microfinance institutions as social enterprise began to spread. It slowly became apparent that it was a win-win situation for all. The microfinance institutions (MFIs) were given the right to claim a spread on the interest thereby allowing it to cover the cost and make a profit and grow.

On the other hand, the compulsion of ensuring that the customers returned the loan with interest made the MFIs hold hands of the borrowers so that they put the funds to productive use. It indeed was an interesting development. The MFIs, in search of raising profits – a commercial motive, kept expanding their operations, and with their spread more and more people started benefiting from the expansion which is the ultimate goal. This was the efficiency argument that the development pundits were looking for.

The MFIs, whatever may their regulatory structure be, are in essence financial instrument delivery organisations. As such, therefore, they need strict regulatory oversight so that they do not turn usurious and defeat the purpose for which they are set up. In 2011, the Reserve Bank of India sub-committee set up to address the issues related to MFIs submitted its report. This report defined the roadmap for the MFIs.

The microfinance operations, thus defined, created a legally endorsed framework for capacity creation that married commercial motive with social welfare. Commercial motive for the microfinance institutions and economic empowerment – social welfare – for the masses.