Microfinance is the brainchild of Bangladeshi economist and banker Muhammad Yunus, who received the 2006 Nobel Peace Prize for this innovation. Microfinance involves the lending of small amounts (often as little as $100) to spur the development of small businesses in poor countries, to people who otherwise would be denied loans from conventional banks, but who nonetheless are judged to be good credit risks by microlenders. Microfinance was conceived as means to spur grassroots economic development and self-sufficiency in poor countries, while also turning a profit for microlenders.
By late 2010, press coverage of microfinance had turned largely negative, citing unduly high interest rates charged by lenders such as Yunus' Grameen Bank (often in the range of 20-30%) relative to actual default rates (kept low in part by lenders' demands for multiple co-signers on microfinance loans), as well as heavy-handed collection practices that reputedly have led to a spate of borrower suicides in India.
There are some commonalities with peer to peer lending.