The primary difference between microfinance and traditional finance is the scale of the loans provided. Microfinance provides small loans typically to entrepreneurs and small business owners who lack collateral and credit history. Traditional finance, on the other hand, provides larger loans to established businesses and individuals who have the necessary collateral and credit history.
Another difference is the focus on social impact in microfinance. Microfinance institutions often prioritize serving marginalized communities and promoting financial inclusion. Traditional finance institutions prioritize profitability and shareholder returns.
Microfinance also typically operates in developing countries or low-income communities, while traditional finance operates in developed countries and serves a wider range of customers.
Lastly, microfinance institutions use alternative methods of assessing creditworthiness, such as community-based lending and group lending, as opposed to traditional finance, which relies on credit history and collateral.