Abstract. With the help of thorough literature survey, the present study proposes that formal financial services by commercial banks in the developing countries are primarily suitable for the non-poor population and hence acts as a medium-direct channel of financial development to affect the poor whereas the semi-formal financial services by microfinance institutions specifically target the poor in developing countries and thus act as a direct channel. The paper also documents the divergent outcomes of lending through MFIs on the poor in rural areas and explains the coexistence of formal/semi-formal and informal financial markets. The paper further suggests that the future research in the area of finance-poor nexus may focus on providing comparative empirical evidence with respect to the effect of formal, semi-formal and informal finance on the poor in developing countries including the South Asian region. The result of such comparative studies would be of interest to all the key stakeholders in the development finance arena.

Keywords: financial sector; South Asia; poverty; inequality; bank credit; microcredit; economic growth.