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:
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.
