Microfinance involves the provision of financial services such as savings, loans and insurance to poor people living in both urban and rural settings who are unable to obtain such services from the formal financial sector. Microfinance has a very important role to play in development according to proponents of microfinance. UNCDF (2004) states that studies have shown that microfinance plays three key roles in development.
v Helps very poor households meet basic needs and protects against risks,
v It is associated with improvements in household economic welfare,
v Helps to empower women by supporting women’s economic participation and so promotes gender equity.
The Centre for Microfinance (CMF) Nepal was established in July 2000 to strengthen the capacity of microfinance institutions and enable them to provide savings, credit, and other financial services to the poor, with women as a focal point. CMF runs a wide range of programs designed to meet the emerging needs of microfinance institutions and its members. CMF engages in training, technical assistance, advisory services, research, knowledge management, policy advocacy, publication and documentation, dissemination of best practices, and networking among its shareholding, strategic, and associate members in partnership with national and international development organizations to promote and strengthen the microfinance sector. CMF’s Articles of Association 13 (f) states that the surplus earned by the organization shall not be distributed as dividends to the shareholding members. Rather, such profits shall be deployed for the development of the microfinance sector and poverty alleviation programs and CMF shall remain a not-for-profit organization.
Originally, CMF was a project implemented by the Canadian Centre for International Studies and Cooperation (CECI) funded by USAID and the Ford Foundation in 1998-2000. CMF has transformed from the project to an autonomous, privately owned national network organization that works to strengthen the microfinance sector and its member associations, institutions and individuals with a vision of “sustainable access to microfinance services for the poor”.
Microfinance creates access to productive capital for the poor, which together with human capital, addressed through education and training, and social capital, achieved through local organization building, enables people to move out of poverty. By providing material capital to a poor person, their sense of dignity is strengthened and this can help to empower the person to participate in the economy and society.
The aim of microfinance according to Otero (1999) is not just about providing capital to the poor to combat poverty on an individual level, it also has a role at an institutional level. It seeks to create institutions that deliver financial services to the poor, who are continuously ignored by the formal banking sector. Little field and Rosenberg (2004) state that the poor are generally excluded from the financial services sector of the economy so MFIs have emerged to address this market failure. By addressing this gap in the market in a financially sustainable manner, an MFI can become part of the formal financial system of a country and so can access capital markets to fund their lending portfolios, allowing them to dramatically increase the number of poor people they can reach (Otero, 1999).