Present paper intends to measure the determinants of performance of Indian financial sector. The performance variables of banking sector and MICROFINANCE INSTITUTIONS in India are studied over a study period of six years i.e. 2006-07 to 2011-12. The financial sector of India is gaining strength over the years and its contribution to growth is overwhelming. Banks are considered the main component of Indian Financial Sector. Indian banking sector is providing new and improved financial services to economy and masses over the years. The banks have achieved the above objective in some areas but failed to reach to other areas. To fill this gap of access MICROFINANCE INSTITUTIONS were established in India. The main objective of MFIs is to reach to masses to which banks are not able to provide the services. The main intention of establishing MFIs was to fill the gap of access to financial services by poor people. So, overall the mixed results are obtained from the study. The performance rotates around mainly two variables i.e. size and spread to total assets. All other variables are either negative or insignificant or both to the performance of banks and MICROFINANCE INSTITUTIONS.

What are the main success factors of MICROFINANCE INSTITUTIONS in providing financial services to poor people in a sustainable manner? In this article we try to answer this question. In one hand, we analyze the core compatibility between microeconomics of asymmetric information, transaction cost and risk, and new different operational mechanisms applied by MICROFINANCE INSTITUTIONS. On the other hand, we investigate key success factors by performance indices of MICROFINANCE INSTITUTIONS around the world. These analyses indicate that, with high emphasizing on financial sustainability, without government direct involvement and with using innovative operational mechanisms, such as group lending, applied by leading MICROFINANCE INSTITUTIONS, we can develop this industry. The results have important policy implications when MICROFINANCE is being accepted as a solution for creating sustainable access to financial services for poor and low-income people.

Micro- finance (MICROFINANCE) can be described as a tool to extend various financial services to lower income groups. Since this group of people has a low credit-worthiness, they are not regarded as good borrowers by banks and other conventional financial institutes. On the other, one of the main missions of Islamic banks is providing small loans for vulnerable groups in society. However, banks typically prefer to devote their resources to macro activities and avoid providing small loans and do not give importance to this section. This study tries to offer a pathological analysis of this bank behavior that, in turn, is the first step to design Islamic micro-financing system.The results which were obtained through using the Delphi method and analytical- descriptive method show that moral hazard, high cost of supervision, lack of proper mortgage, diversion of funds, strategic default, low productivity and lack of resources are the main challenges of MICROFINANCE in Iranian banks.