Saturday, November 5, 2011

A Study on Microfinance Practices in Nepal


A Study on Microfinance Practices in Nepal
Shivappa1
Binod Kumar Acharya2


Abstract
Microfinance is the entire range of financial and non-financial services, including skill up-gradation and entrepreneurship development, rendered to the poor for enabling them to overcome poverty. It is recognized and accepted as one of the new development paradigms for alleviating poverty through social and economic empowerment of the poor. In this paper, we have studied the various practices of microfinance in Nepal and also the perception of users towards microfinance products offered by Microfinance Institutions (MFIs). The present study was based on both primary and secondary data. The primary data was collected from field survey with the help of questionnaire. It was found that majority of the clients are paying their dues with the help of the husbandry and agricultural income. Trends of repayment schedule are shifting weekly to fortnightly and towards monthly. Smaller Institutions have not employed experts for services and not even used software for their activities. Scarcity of fund, duplication, increasing competition, low demand for microfinance products and lacks of good software are the major problems. Microfinance institutions have to think from social angles and not only from commercial angles. They have to increase the benefits to their clients and should not increase interest and service charges to maintain long term preference from clients. It is better to expand their operations and increase the volume of loan.
Key Words: Microfinance, Microfinance Institutions, Micro-credit, Poverty Alleviation, Women Empowerment
1 Assistant Professor, Kousali Institute of Management Studies, Karnatak University, Dharwad – 580 003. Email: shivappa1973@rediffmail.com
2  Second Year M.B.A. Student, Kousali Institute of Management Studies, Karnatak University, Dharwad – 580 003
Introduction
Nepal is among one of the least developed country in the world, with 31% people below poverty line. The formal financial sector has deserted and unable to include this people. The central bank of Nepal, Nepal Rastra Bank (NRB) has attempted to assist the deprived since 1950’s, with establishment of credit cooperatives, Agricultural Development Bank, and then Small Farmer Development Program (SFDP). To reach more poor people, NRB directed commercial banks to allocate “deprived sector credit”. In 1992, Government has taken initiative with two Regional Rural Development Bank as replications of the Grameen Bank of Bangladesh. Then, NRB permitted private sector to enter in microfinance. There are 38 microfinance institutions in country for providing microcredit to poor for alleviation of poverty or endeavoring to uplift of poor peoples’ life.

Poverty and MFI relevance in Nepal:
Nepal is the fifth poorest country in the world. The National Planning Commission (NPC), Nepal is states that 22% of the population failed to meet the minimum amenities of life in 2010. Of these, about one fourth is believed to be ultra-poor. The recent poverty survey which the Central Bureau of Statistics undertook with World Bank support confirms these figures.
Nepal is predominately agrarian, with 71% of the population dependent on agriculture and 42% of the total national Gross Domestic Product (GDP) contributed by this sector. Most Nepalese are subsistence farmers, managing to grow enough to feed their families and sell a small surplus, which buys a few necessities like salt, tea, and cloth.  Rice, maize, mustard and wheat are grown in the lower elevations and millet, barley and potatoes in the higher elevations.  The minimal size of land holdings is a major aspect of rural poverty in Nepal, as land represents the major productive resource in rural areas. “Over 50% of all landholding is below 0.5 ha. Which together accounts for about 6.6% of total cultivated areas and while the top 4% of the population controls nearly half the total land.  Reliable estimates put the percentage of landless at 5-10% in the hills and 15-20% in the Terai”.  With limited land, people turn to livestock, foraging, sale of labor on a daily basis according to demand, and trade to supplement their incomes. The extreme level of poverty in Nepal affects the provision and use of microfinance. Loan sizes tend to be small, collateral is scarce or unavailable, and savings capacity is limited.
The rate of gross savings by rural household is trifle, nearly account 7%. Among the three regions, the Mountains account lowest, and then come Hills and Terai. The rural economy is thus caught by the stranglehold of low income, low savings and low investment. The infusion of microcredit can be a major key to breaking this stranglehold.

Women’s Economic Empowerment
Microfinance programs are currently being promoted as a key strategy for simultaneously addressing both poverty alleviation and women's empowerment.  Women make up 52% of Nepal’s population and have a life expectancy of 57.4 years (2001 figures), making Nepal one of only three countries in the world where females’ life expectancy is lower than that of males.  UNICEF (2010) estimates less than 38% of Nepali women are literate. Women are predominately confined to agriculture, account for the majority of unpaid family workers, and are heavily concentrated in low-paid jobs. The aggregate data depict women’s contribution to be heavily focused: 86% of all domestic work and 57% of subsistence agricultural activities. 
Providing immediate and sustained assistance to women in the field of small and micro-enterprises and microfinance is a key factor to facilitate the up-liftment and the empowerment of women. Where financial service provision leads to the setting up or expansion of micro-enterprises, there are a range of potential impacts including: increasing women's income levels and control over income leading to greater levels of economic independence; access to networks and markets giving wider experience of the world outside the home, increased access to information, and greater possibilities for development of other social and political roles; enhancing perceptions of women's contribution to household income and family welfare, increasing women's participation in household decisions about expenditure and other issues and leading to greater expenditure on women's welfare;  more general improvements in attitudes to women's role in the household and community.

Development of Microfinance in Nepal:
The earliest initiatives for establishing microfinance services in Nepal can be dated back to the 1950s when the first credit cooperatives were established. These were primarily intended to provide credit to the agricultural sector. Agricultural Development Bank Nepal (ADBN) emerged as a result of the shortfall in the supply of funds for agricultural loans experienced by these credit cooperatives. Some of the major initiatives in the area of microfinance in Nepal are as below:
·      Credit cooperatives set up in the 1950s.
·      Agriculture Development Bank Nepal (ADBN) incorporated.
·      Cooperative Bank established in 1963.
·      Priority sector lending directives to commercial banks, from 1974. Central bank directed to commercial banks to lend certain percent to cover agriculture, cottage industry and small service sectors.
·      Small farmer groups established under the SFDP program (1975). Renowned as Sana Kisan Bank, which covers entire country, aims at organizing farmer into a small group and providing credit under guarantee basis.
·      The IBP program tries to involve commercial banks in microcredit (1981). Intensive Banking Program was intended to do away with collateral requirements and to get the banks to engage in group-based lending. But failed to reach poor.
·      First Gender-based microcredit- the PCRW program (1982). Production Credit for Rural Women by Ministry of Local Development in collaboration with UNICEF and NRB, for training women for enhancing skill.
·      Two RRDBs incorporated (1992). NRB funds as replications of the Grameen Bank of Bangladesh. Focusing on extremely poor women, RRDBs use a group lending approach and a weekly repayment system.
·      Introduction of second tier institutions (RSRF, later RMDC), 1990s for regulation of microfinance system in Nepal.

Models of Microfinance in Nepal
The microfinance can be divided into two broad categories in Nepal;
i)        Commercial bank and government programs (“conventional” poverty alleviation initiatives).
ii)      Non-government and development bank programs (“alternative” programs).

(i)    Conventional Microfinance Programs
This category includes Intensive Banking Program (IBP), Small Farmer Development Program (SFDP) and Production Credit for Rural Women (PCRW). IBP involves compulsory allocation from the total portfolios of commercial banks into priority sector lending which covers both poor and non-poor segments, but the majority of the fund allocation within this program goes to the non-poor in the form of lending to small scale industry. The SFDP of ADBN is more popular and had outreach of whole Nepal.
(ii)     Alternative Models
The better performing alternative models consist of the programs of RRDBs, NGOs, co-operatives, and hundreds of savings and credit organizations. All of these models are community centered and involve group formation, with the use of peer pressure and group solidarity as mechanisms for maximizing repayment.
There are significant differences between the various institutions and programs that fall in this category. RRDBs and some NGOs use the Grameen Bank model of savings and credit promotion. Other NGOs use the self-help group model that entails a greater degree of participation in the running and operations of the savings and credit schemes.
Equally significant is the variety of funding sources for these institutions and programs. While the public sector RRDBs is capitalized mainly by equity funds and loans from commercial banks, NGOs rely mainly on a combination of member savings and donor grants. Cooperatives, on the other hand, are predominantly member financed through either equity or savings deposits. Lending by commercial banks to either NGOs or cooperatives is negligible.

Objectives of the study
This study exerts to recapitulate the various practices of microfinance in Nepal. It also takes account of people’s perception towards microfinance, microfinance institutions and other lending institutions.
Specifically, the study aims to achieve the following objectives:
·         To study various practices of microfinance with respect to products/services, time to grant loan, rate of interest, method of collection, repayment etc.
·         To study how borrower will repay the installment.
·         To examine the clients view towards Microfinance.
·         To oversee the various lending institutions and preferences of people.
·         To explore problems faced by MFIs of Nepal.
·         To understand the critical factors for success of microfinance.

Methodology
The present study is based on both primary and secondary data. The primary data were collected through questionnaires. The field survey has been carried out in four districts of Nepal. The information was collected from both clients of microfinance institutions and also from the employees/managers of these institutions. Secondary data have been collected from books, journals and websites of Central Bureau of Statistics, Nepal and Nepal Rastra Bank.   

Data Analysis and Interpretation
1.   Some of the prevailing microfinance practices in Nepal
The products offered by Nepalese microfinance are General Loan (Thulokarja), Seasonal loan (sanokarja), Livestock loan, Bio Gas, Rural housing, foreign employment and Micro Enterprise loan.
Group surety is the basis for granting loan. The original trend of weekly repayment has shifted toward fortnightly and still towards monthly. The interest rate is 20% and 1% as service fees.
There is system of forced deposit of meager amount (varies to 20-80) per month and most of MFIs allow flexible saving in personal account. All product maturity date are one year. The loan repayment rate is 97.33% and more. Both field collection and office collection are in practice in Nepal. Field collection is more in practice.
The cost of fund is 9-11%, and major sources of fund are Centre fund, Personal saving, commercial banks loan and petite or no donation. There is no trend of employing expert for their services.


2.   The way Clients repay their installments

Particulars of ways
Frequency
Percent
Cumulative Percent

Wages
23
31.1
31.1
Husbandry and Agriculture
38
51.4
82.4
Borrowing
8
10.8
93.2
Others
5
6.8
100.0
Total
74
100.0


Nearly half clients pay their installment by their income from husbandry and agricultural activities. 30% of them paying from wages and own income. Rest of them agreed, they are paying from borrowing and other sources.
3.   Clients’ Perception towards MFIs in Nepal
a)    Positive of MFI
56% of clients give priority to microfinance because of providing loan without security, where as 38% believes microfinance provides loan faster. Micro credit and flexible saving are least important on clients’ view.



b)   Negative of MFI:
High rate of interest and high service fee are the major drawback of microfinance in Nepal. Heavy penalty posed by MFIs is also listed on negative of MFIs.
4.    Clients preference towards lending institutions in Nepal


Particulars
Rank 1
Rank 2
Rank 3
Rank 4
Rank 5
Total
Money Lenders
3
0
25
15
31
74
Cooperatives
16
28
17
9
4
74
MFIs
35
27
8
3
1
74
Commercial Banks
13
17
11
17
16
74
Finance
7
2
13
30
22
74
Total
74
74
74
74
74
370

Let us give weight in ascending order; Say
Rank 1= 1 point; Rank 2= 2 point; Rank 3=3 point; Rank 4=4 point and Rank 4=5 point



Particulars
Rank 1
Rank 2
Rank 3
Rank 4
Rank 5
Total
Money Lenders
3*1=3
0*2=0
25*3=75
15*4=60
31*5=155
293
Cooperatives
16*1=16
28*2=56
17*3=51
9*4=36
4*5=20
179
MFIs
35*1=35
27*2=54
8*3=24
3*4=12
1*5=5
130
Commercial Banks
13*1=13
17*2=34
11*3=33
17*4=68
16*5=80
228
Finance
7*1=7
2*2=4
13*3=39
30*4=120
22*5=110
280

From the above, Microfinance is considered convenient for people. MFIs have secured 130 point, being least among others. The cooperatives are considered best for its member, but lacks on sufficient fund for its entire member. People have to wait long to get their turn. The popular lending institution is commercial bank and development bank. They got sufficient fund to lend and low interest rate also, but demands security and property documents to lend credit. Finance is located in urban and semi urban area and also demand for security to lend. Finance got 4th position. Money lenders are ranked last by people. It may be because of high rate of interest.
5.    Problems of MFIs in Nepal
The following are the major problem faced by MFIs in Nepal:
·      Scarcity of fund,
·      Duplication,
·       increasing competitors,
·      Low demand of product
·      Lacks of good software are the major problem and difficulties for functioning.
6.    Some of the critical factors for success of MFIs
From this study, the following are the critical factors for Microfinance success and sustainability:
·         Nearness of Office
·         Availability of loan on demand
·         Prompt services
·         Staff cooperation and behavior
·         Volume of the loan
·         Flexible product and services
·         Manager cooperation and behavior
This list is the priority of the clients. People want nearer office, so that they should not have additional cost and waste time to travel long distance. MFIs should able assist their clients with adequate amount of credit for running their subsistence. They want quick services. Clients feel cooperation with staff more than manager, because, clients are supposed to deal and have interface with staff then branch manager.
Suggestions:
Initiative I:
MFI should offer additional products like educational loan, emergency loan and consumption loan. It has been agreed that people are not utilizing the loan on what purpose they have taken. Many times people take loan on other heading, and expend on consumption, medicinal purpose and other various purpose. To reduce such problem and achieve the objective, loan should be given for the real purpose. The diversification will ensure growth of loan disbursement and reduce the portfolio risk.
Initiative II:
The MFI can introduce new product having installment of 2 month or 3 month. From the above study, Most of the clients are paying their installment from the income of agricultural activities. Thus agricultural activities generate income in season. This type of product is recommended to cater real need of people and avoid reinforcement of pressure.
Initiative III:
The volume of the loan should be increased. The increased in volume of loan will content clients need for financial deficit. This will also prevent clients to reach another lending institution, more over another MFI.
Conclusion:
Despite ongoing development efforts, poverty remains rampant in Nepal with approximately 31% of the population living below the poverty line. The incidence of poverty is highest in remote and rural areas.
Microfinance has been one of the few effective tools for poverty reduction over the past years. Through the creation of sound microfinance institutions and systems, poor people can safely deposit money and accumulate funds for future investments or emergencies as well as access loans for productive purposes leading to higher incomes. Additionally, microfinance produces an impact in other areas including good governance, participation in the political processes, women empowerment, social inclusion, and conflict transformation.
Currently, more than 2.4 million individuals in the rural population have access to microfinance services. This figure represents approximately 8% of the population and approximately 26% of the people living below the poverty line. In order to obtain more effective statistics and further diminish poverty, the outreach of sustainable and sound microfinance institutions to the rural and urban poor must be increased.
MFIs in Nepal have acquired virtuous position among lending institution, especially for below poverty line population. This will remain in the future if they will not increase hidden and direct cost to the clients.
Bibliography:
1)   Text Book:
·         Microfinance Emerging Challenges By Kishanjit Basu and Krishan Jindal, Tata McGraw-Hill Publishing Ltd., New Delhi

2)   Reports used:
·         Central Bureau of Statistics, 2008

3)   Website:
·         www.nrb.org.np
·         www.cbs.gov.np



Note: 1) This research paper was presented at National Conference on "Entrepreneurship and Business Development in India: Issues and Cases", 4-5 November, 2011by Binod Kumar Acharya.
2) Assistant Prof. Shivappa and Binod Kumar Acharya are the co-authors of this research paper.
3) This paper has bagged 2nd best paper awards in Technical session- D track, with theme of Micro finance and financial management.

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