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This paper attempts to explore the role and importance of microfinance in reducing poverty by generating the income of the poor. Microfinance has been emphasized for poverty reduction in developing countries through executing dual activities such as collection of domestic saving and investment of small loan. In this connection, this paper suggests microfinance practitioners and MFI to follow certain principles for making the microfinance services more sustainable in the long run and sheds light on the problems and challenges of microfinance.MICRO LOANS ARE OF key importance in alleviating poverty. Prof. Yunus realized this with his work in Bangladesh and set up the Grameen banking system. In the search of practical measure to alleviate poverty, the microfinance movement offers a set of powerful tools for social and economic development. Whether in terms of addressing problem of malnutrition and disease, flight from rural to urban areas in the search of work, environmental degradation or the breakdown of families and communities, programs that provide small scale loans and economic training to resource-poor people are one of the brightest spots in the new development paradigm (Yunus 1980). The underlying success of microfinance programs stems, in part, from the fact that the principles are based not only on sound economics but also the practical application of spiritual principles. The sounding principles of the movement is a belief in the inherent nobility of humankind-of the integrity innate capacities and commitment of the resource-poor to work hard , take responsibility for their own lives , and repay credit. From those principles and from other essentially spiritual values like trust and self-reliance, the methodologies of successful microfinance programs worldwide have emerged (Lidgerwood 1998).

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