Nepal: Selected Issues and Statistical Appendix

This Selected Issues paper and Statistical Appendix reviews agricultural productivity in Nepal and examines its links at the regional and aggregate levels to the amounts of available inputs such as chemical fertilizers, irrigation water, and improved seeds, as well as rainfall, rural credit, and foreign aid. The paper highlights factors that are statistically correlated with agricultural productivity and, as importantly, those that are not. The paper examines causes for the recent export slowdown. The bottom-heavy civil service structure is also described.


This Selected Issues paper and Statistical Appendix reviews agricultural productivity in Nepal and examines its links at the regional and aggregate levels to the amounts of available inputs such as chemical fertilizers, irrigation water, and improved seeds, as well as rainfall, rural credit, and foreign aid. The paper highlights factors that are statistically correlated with agricultural productivity and, as importantly, those that are not. The paper examines causes for the recent export slowdown. The bottom-heavy civil service structure is also described.

V. Microfinance as a Poverty Alleviation Tool in Nepal5l

A. Introduction

1. Poverty reduction has been a key objective of the government and donors in Nepal. Poverty incidence is higher in rural areas, and highest in the remote areas of the mid-and far-western regions and the northern mountain belt. The rugged geographical terrain and low population density in remote areas complicate the delivery of public services and development of commercial activity.

2. The government and donors have supported microfinance as a key tool in fighting rural poverty for the last three decades. A range of institutions and programs provide microfinance services in Nepal.52 What distinguishes microfinance institutions (MFIs) from conventional banking activity is their commitment to providing financial services to poorer households and microenterprises. Such households often lack negotiable assets to use as collateral, represent higher risk, and require substantially higher operational costs. Innovative schemes are utilized by MFIs worldwide to overcome these obstacles.

3. The primary justification for government intervention in directing credit to, among others, the poor lies in asymmetric information in capital markets.53 Banks’ reluctance to lend to the poor is often due to lack of information on the borrowers’ ability to pay. In addition, they are often restricted from charging the higher interest rates needed to overcome higher risk and the cost of servicing clients in remote areas. Government intervention can help in overcoming these informational asymmetries either through start-up subsidies or targeted and transparent interest rate subsidies.

4. MFIs have had mixed success world-wide with respect to sustainability and impact on the poor, but there is now an emerging consensus on best practice. The failures have to do with poor program design, skill limitations, faulty implementation, and inadequate incentives and accountability. Political interference leads to waste and substantially reduces incentives for MFI sustainability. A number of academics and donors have analyzed the impact on the poor to determine how best to apply short-term subsidies, if needed, without interfering with the objective of sustainability. There is an emerging consensus as to what constitutes more effective design and the optimal role of donors and government support. Nepal could apply more of this consensus in its policy making.

5. Moreover, there is a growing recognition that microfinance may not be the best form of government intervention to assist the poorest. Borrowing by the hard-core poor, and destitute groups in severely disadvantaged rural areas, could lead them to become debt ridden without improving their prospects. In the absence of basic infrastructure and access to market services and opportunities, alternative intervention mechanisms may be better suited to expand the economic options of the hard-core poor.

6. This paper explores the effectiveness of MFIs in Nepal drawing on recent studies in Nepal and elsewhere. Section B reviews the sector’s institutional setup and the role of the central bank and commercial banks. Section C discusses the effectiveness of programs in Nepal in reaching the poor and achieving sustainability. Section D outlines lessons learned about best practice design for MFI and reform efforts in the sector. Section E concludes.

B. The Microfmance Sector in Nepal

7. There are three types of MFTs in Nepal—informal, private and public—and the central bank plays a key role in the sector.54 The informal sector consists of money lenders, pawnbrokers, and savings and credit groups. The formal sector consists of government-owned institutions and private-owned institutions, including local NGOs. There are also a number of international NGOs and sector associations that provide support services and grants. In addition, the central bank plays a key role in the promotion and development of microfmance.

Main microfmance institutions

8. In the informal sector, traditional money lenders are increasingly replaced by thousands of unregistered groups engaged in microfmance. The traditional rotating saving and credit associations (ROSCs) are community-based groups referred to in Nepal as “Dhikuties”, typically with 20–50 members contributing an equal amount of Nr 10–100 that are lent out on rotation. In addition, tens of thousands of newly formed unregistered savings and credit groups (SCGs) of 5–25 members rely on member funding, but these do not operate on a rotating basis. Lending interest rates of village money-lenders are reported to be between 35-60 percent, while those of SCG are 24–36 percent.

9. Formal arrangements with public support began in the late 1960’s. Public sector institutions, accounting for over one half of microcredit, consist of the Agricultural Development Bank of Nepal (ADBN), the five regional development banks (RRDBs) and the Rural Microfmance Development Corporation (RMDC). The ADBN is the 3rd largest deposit taking institution, established in 1968, to provide agricultural and rural credit. It operates a commercial wing and an agricultural development wing, in addition to managing the Small Farmer Development Program which targets low income farmers. SFDP was launched in 1975, to extend credit to the poorer farmers on a group-guarantee basis. It has 380 offices serving 600 of the 4,000 Village Development Committees (VDCs) areas in the country. The five RRDBs were established between 1992 and 1996 and cover about 40 out of 75 districts. The RMDC was established in 1998 to act as an apex institution to distribute donor funding and provide training and other support services.

10. Most of the formal private sector is dependent on some form of public or donor support. The largest two institutions, Nirdhan and the Center for Self-Help Development (CSD), receive funding and technical support from donors. Both were registered under the Society’s Registration Act (SRA) as NGOs, but transformed to development banks partly to facilitate savings mobilization. NRB has licensed a total of 25 NGOs and 34 cooperatives for providing financial services. Several microfinance development banks have only started operations in 2002, with some forty additional applications pending approval. There are many smaller microfinance institutions. An unknown number of the estimated 25,000 NGOs registered under the SRA are engaged in microfinance; of these, about 70 receive some form of NRB support. An estimated 2,000 out of 6,000 cooperatives registered under the Cooperatives Act operate as savings and credit institutions.

Involvement of NRB and commercial banks

11. NRB has had a dominant and growing role in the promotion and development of microfinance in Nepal. From its inception in 1956, NRB’s mandate included the delivery of credit to the rural poor.55 NRB’s promotional role includes encouraging the establishment of coops and NGOs, and in recent years, development banks.

12. NRB has also supported microfinance programs in several direct ways. Its involvement has included equity participation, program administration, management, board representation, guarantees, refinancing, and directed lending (Annex Table V.1) NRB has provided refinancing from donor funds to the two largest commercial banks for a number of development programs, including two gender-based programs and irrigation and livestock projects (Annex Box V.1.). It also administers the government-funded Rural Self-Reliance Fund which provides funds at 6 percent interest to registered coops and NGOs for on-lending to micro-entrepreneurs.

13. NRB is an equity shareholder in a number of microfinance institutions, including the Credit Guarantee Corporation (CGC), the five RRDBs and RMDC. CGC is majority owned by NRB and is to absorb 75 percent of the risk incurred by banks in lending to priority sectors. Although banks have rarely filed claims, this remains a significant contingent liability. NRB is also a majority shareholder in the RRDBs and most of the senior managers were, until this year, NRB officers. It also holds 26 percent of the equity in RMDC.

14. By NRB directive, commercial banks are required to provide microfinance.56 priority sector lending was introduced in 1974, and initially required all commercial banks to lend 5 percent of their “loanable funds” to priority sector borrowers, i.e., small borrowers in agriculture, cottage industries, and services. Later, this amount was increased to 7 percent, and then to 12, percent. One quarter of priority sector loans must go to the poor referred to as “deprived sector” in amounts up to a maximum of Nr 30,000 ($375) per borrower.57 The definition of priority sector and limits have been gradually relaxed. To satisfy the priority sector lending requirement, banks provide equity participation in RMDC and on-lend funds they cannot invest directly in small loans to the RRDBs and other MFIs.

C. Effectiveness of Microfinance Programs in Nepal

15. There has been a growing recognition that microfinance has not developed into the hoped-for panacea for poverty alleviation. This section outlines the sector’s main weaknesses and summarizes available information on its effectiveness in terms of (i) outreach, (ii) targeting, (iii) sustainability, and (iv) the regulatory and supervisory framework. Although quantitative analysis is limited, a number of recent donor-supported studies provide partial assessments.

Outreach—proportion of the poor served

16. The microfinance sector remains relatively small in Nepal. After decades of promotional and developmental activities, microcredit accounts for less than 5 percent of total credit and of total deposits (Annex Table V.2, Figures V.1, and V.2) Microfinance services have increased at a relatively slow rate in spite of the rapid increase in a number of institutions.

17. There remains considerable unsatisfied demand for micro-credit in Nepal. Estimates vary widely in terms of both the size of effective demand and actual microcredit outstanding and to date there has been no in-depth study of demand, outreach and targeting. An NRB study estimated effective demand at Nr 18 billion in 1999 (½ percent of GDP). An AsDB study estimates effective demand for microcredit at around Nr 10 billion in 1998, compared to an estimate of Nr 4 billion in outstanding microcredit at the time and total outstanding loans of commercial banks of Nr 70 billion.58

18. Program outreach is lower than in other countries and lower in the poorer regions of the country. The World Bank estimates that while on average 30 percent of the poor in Nepal have access to microcredit, only about 15 percent of those living in the hills have access to microcredit. This compares to 60 percent access in Bangladesh. Outreach is much higher in the southern and eastern Terai, where there is easier accessibility.

Targeting the poor and hard-core poor

19. Not all microfinance programs were designed to target the poor. Besides poverty alleviation, the government aims to facilitate microcredit schemes for cottage industries, export finance, and rural finance. Unlike other countries, there has been no study dedicated to identifying the income levels of microfinance borrowers and the impact of microfinance on their income. The largest program, the directed priority sector lending of commercial banks, is not targeted to the poor. There are no income tests for loans classified as part of priority sector lending, and the current limit of $375 for the deprived sector lending is substantially higher than Nepal’s per capita income level. This suggests that less than 25 percent of total priority sector lending goes to the poor.59


20. The majority of programs report a high repayment rate but nearly all are accumulating losses. Many programs report repayment rates of 95–100 percent. The publicly funded SFDP program has the lowest reported recovery rate, of around 50 percent. But a high repayment rate does not ensure financial viability because of the extremely high operating costs, typical of MFIs worldwide. The low interest rates charged in Nepal preclude coverage of operating costs. Moreover, there are few incentives to minimize operating costs. The RRDBs have high transaction costs due to a complex organization, bloated staff, and unspecialized management. Four of the five banks have had their equity eroded by losses. Recent reviews found that virtually no institution has achieved financial sustainability and all are dependent on grants and/or eroding their capital.

21. The price of micro-credit is very low in Nepal and is an important impediment to financial viability. MFIs around the world typically charge high interest rates, often in the range of 30–50 percent per annum. Self-sustaining MFIs charge higher interest rates than the average for all MFIs.60 This is because operating costs typically amount to 30 percent of the value of assets, with two thirds going to pay for salaries. Microfinance credit rates in Nepal range from 2–25 percent per annum.

Outreach and Reported Loan Recovery of Main MFIs

(In millions of Nepalese rupees, unless otherwise stated)

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Souses, Sinha (1995), based on mid-1997 data, and World Bank (2002)

Conventional model of lending (based on collateral or comnunity based group lending model

Basic on AsDB’a Saiha (1999) study estimates.

Based on WB (2002) study estimates.

12 percent of commerical banks’lending portfolio in January 2002.

22. NRB’s policies contribute to repressively low interest rates. Although the provision of low cost credit is not a stated objective of the NRB, it is a de facto outcome of its various interventions. The effective interest rate on lending from RSDF is as low as 2 percent per annum; it lends to NGOs and coops at the low interest rate of 8 percent per annum, with a 6 percent rebate for on-time repayments. The Financial Intermediary Society’s Act (FISA) gives NRB the right to review and alter the interest rate charged by NGOs engaged in micro-finance. The RRDBs generally charge around 10 percent interest on loans. Commercial banks who provide funding to microfinance institutions to meet their priority sector requirement are obliged to maintain low interest rates in order to maintain a reasonable repayment rate and compete with the low rates charged by the state-owned RBB and NBL to the same institutions.

Regulation and supervision

23. MFIs’ effectiveness is limited due in part to overlapping legislation, including the Development Act, the Cooperatives Act, and Society’s Registration Act. Coops and NGOs, even those that are also NRB-licensed, cannot accept public deposits. All microfinance NGOs are governed by FISA. Until the recent 2002 amendment, the Act assigned NRB the responsibility for the repayment of loans by the approved MFIs in case of the default of the organization, and in exchange it requires the organization to seek prior NRB approval for each loan or grant received by the MFI. Amendment to the Cooperatives Act and the Development Act are under consideration, and these will hopefully set clear and consistent guidelines for MFIs.

24. At this time, regulation is limited to NRB licensed MFIs and a supervisory framework is largely lacking. In practice, the application of the regulations to NRB-licensed NGOs and cooperatives is perfunctory and the large number of MFIs remain outside the scope of NRB regulation and supervision. NRB does not have the capacity to collect and review financial data and effectively supervise these institutions.

D. Lessons Learned and Reform Initiatives

25. Weak performance results from the sector’s ad-hoc development with overlapping objectives and institutional roles. Programs simultaneously target agricultural credit, export and microenterprise finance, and poverty alleviation. NRB’s direct involvement in the sector is inconsistent with its supervisory role. No distinction is made in program design between the needs of different target groups (poor households, farmers, microenterprise, exporters, and hard-core poor) and the financial services best suited to them. There has been no stated NRB policy that explains the shift away from issuing licenses for coops and encouraging new development banks. A large number of MFIs fall outside any regulatory or supervisory framework.

Best-practice program design considerations

26. There is broad consensus on best practice in MFI design. Successful programs are those that achieve sustainability, greater outreach, and higher income impact. These three objectives have implications for the role of state-owned development banks and commercial banks, for the role of public and donor support, and for optimal regulation.

27. The key features of programs that have achieved financial sustainability are:

  • repayment incentive structures. Material incentives to borrowers and lending staff help to maximize repayment. Also, group-based lending and more intensive collection of loans repayments increases the repayment rate.

  • market-based pricing. Higher interest rates ensure sustainability and weed out low-return projects and less-poor borrowers who have access to other sources of finance.

  • cost containment. A lean structure, skilled staff, accountability, and innovative schemes (group self-monitoring) help maintain low operating costs. Larger, more established MFIs on average have lower administrative costs and cost of funds.

  • availability of voluntary savings and insurance facilities. The potential to mobilize savings also helps to reduce the dependence on public and donor support.

Financial Indicators for Average and Best-Performing MFIs

(Average in percent, except where noted)

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Sources: the MicroBanking Bulletin, November 2001, reprinted from Hardy et al. (20021).

Best refers to those that are financially self-safficient

28. Financially sustainable institutions have had a better impact on reducing poverty.61 A study of 300 microfinance borrowers showed that the income impact on the poor is higher for the best performing institutions. This has been attributed to the use of best-practice design features where the higher interest rates, more frequent loan installments, and savings programs tend to screen out less-creditworthy borrowers.62

The role of public and donor support

29. The availability of public funds to bail out loss-making MFIs reduces incentives to achieve self-sustain ability. Support is best provided in the form of training and transfer of know-how. Lack of coordination between government and donor sponsored programs can slow down progress in providing such services to MFIs, One-time start-up grants have also been used successfully to assist in financing equipment and training. If budgetary interest rate subsidies are used to expand coverage to remote areas, they should be limited to covering the cost differential incurred in servicing remote areas by otherwise operationally efficient MFIs. In this case, the subsidies should be transparent.

30. Alternative intervention mechanisms should be considered for the hard-core poor. Borrowing by the hard-core poor in severely disadvantaged rural areas, could lead them to become debt ridden without improving their prospects. The remote hills and mountain areas, where 50 percent of Nepalis live, have proven particularly challenging for the delivery of microfinance services. Sustainable microfinance requires the existence of basic infrastructure, access to market services and opportunities, and a minimum of entrepreneurial skills. When these conditions are absent, alternative intervention mechanisms may be better suited to expand the economic options of the hard-core poor. These include employment programs, marketing assistance, provision of human capital development (education, training and health services), infrastructure projects (access to roads, water, electricity), and, in some instances, direct income support (micro-grants).63

The viability of state-owned development banks for microfinance

31. Private-owned institutions operated on a commercial basis are more likely to achieve sustain ability. However, reform of state entities may be necessary as a transitional stage until private entities can take over. State-owned development banks tend to be politicized and place greater emphasis on credit flows than on recovery. The most critical factors behind the failure of state-owned DBs in the delivery of microfinance are the lack of political autonomy and the inadequate financial and human capital to carry out their mandate.

32. Reforming state-owned development banks is a challenging task. There are few examples of self-sustaining state-owned development banks. The most often cited example is that of Bank Rakyat Indonesia (BRI), outlined in Annex Box V.2. The BRI underwent a rigorous reform program in the mid-eighties as part of deregulation and financial sector reform. Key reforms included staff training and accountability, higher interest rates to allow sustainability and screen out wealthier borrowers, and introducing clear and transparent reporting.64

33. The NRB has recently initiated reforms in ADBN and the RRDBs. ADBN is undergoing an external audit to determine the operational performance of its commercial and development activities. Being the major shareholder of the RRDBs, the NRB presented a reform strategy in June 2002 that aims to restructure the banks in order to prepare them for privatization within 1–5 years, depending on their financial state. The NRB aims to reduce its share in these institutions to I6½ percent, consistent with the new NRB Act. The strategy focuses on implementation of action plans for each institution to reduce staff, conduct training (through RMDC), select more experienced management, improve loan recovery, and increase transparency of reporting.

Why don’t commercial banks provide needed microfinance services?

34. Commercial banks will voluntarily increase their involvement in microfinance under certain conditions. Commercial banks’ operational designs may be ill-suited for the delivery of microfinance without significant investment in altering their services to cater to small borrowers. The best strategy is to eliminate repressive financial regulations, such as interest rate ceilings and targeted credit schemes.65 This would allow microfinance lenders to compete in open markets, create incentives to reduce operating costs and provide innovative products, and cover their risks and the opportunity cost of capital.

35. NRB recognizes that the development objectives of the priority sector lending program conflict with the goals of sound commercial banking practices. NRB officials completed a study of priority sector lending in 2000 to identify the burden on commercial banks and the impact of its removal.66 The study reported that 60 percent of total borrowers benefiting from priority sector lending programs believed they could find alternative financing through the development banks and other MFls. Nevertheless, NRB officials concluded that elimination of the requirement should be preceded by the establishment of adequate rural banking institutions and other microfinance programs and that this was likely to require about five years. As a first step, however, NRB reduced the penalty for noncompliance with the priority sector requirement by 25 percent in July 2002. It also announced its intention to remove the penalty entirely within four years.

How much regulation and supervision?

36. The rapid spread of MFIs has prompted reconsideration of how they should be regulated. Regulators must strike a balance between the benefits and costs of regulation, and determine the appropriate degree of regulation depending on the nature and size of an MFI.67 For small microfinance institutions, non-prudential regulation is sufficient Non-prudential regulation is that which applies to all business (not only financial sector), and typically includes, registration, account keeping, labor relations, disclosure, and bankruptcy procedures. All businesses, including NGOs, should meet these basic requirements. In the case of donor-funded NGOs engaged in micro-finance, and small savings and credit cooperatives that only cater to members, no other form of supervision should be required.

37. Larger MFIs that depend on public deposits and borrowing should be subject to stringent regulatory and supervisory scrutiny. A system of gradated regulation and supervision is required, with guidelines that require MFIs to re-register as they change the nature of their operation or grow in size. Non-donor-funded MFIs that collect non-member deposits represent particular risk as they lack the capacity to augment their capital when needed.

38. The NRB is preparing new regulations for microfinance NGOs and development. New directives were recently issued to NRB-licensed cooperatives. A preliminary draft manual has been prepared for inspection of NGOs and of cooperatives. However, NRB officials have expressed their reluctance to take on the role of supervising NGOs and Coops as they consider them too small to be of systemic importance and too many for their limited staff resources. There has been some discussion of the merits of a second tier supervisory institution, but it is not considered a priority reform area. NRB is also considering approval of a proposed National Cooperative Bank to facilitate financing of coops, which would compete with RMDC, and which could take over regulation and supervision of cooperatives.

E. Conclusions

39. In spite of the priority accorded to microfinance in Nepal, it remains limited in outreach and virtually no institution has succeeded in achieving sustainability. Significant steps are required, both in the design and governance of MFIs, as well as in reducing the dominant role of the central bank and commercial banks, if the microfinance sector in Nepal is to achieve its potential. In particular, greater focus is needed on achieving long-term sustainability through market-based interest rates and an incentive structure that reduces operating costs. Extending the outreach of microfinance to the poor and rural communities requires that MFIs are run on financially sound and self-sustaining basis. A supervisory framework must be established with adequate resources and reform of state microfinance institutions should proceed without delay. The elements of NRB’s reform strategy are summarized in Box V. 1. Donors have a role to play in coordinating their efforts to support this strategy.

40. Nepal can benefit from lessons learned from other countries’ experiences in microfinance. Short-term public or donor support can facilitate coverage of initial start-up costs and training, and the transfer of know-how, but perceived long term support will reduce efficiency and provide room for waste and mismanagement. Programs that receive public support should be monitored to ensure they target the poor. Any subsidies provided to MFIs will have limited impact on the poor if microfinance programs continue to have multiple objectives, including export finance and microenterprise development. Experiences have also shown that microfmance may not be the best tool to target the hard-core poor and that alternative government interventions should be considered.

Key Elements in a Microfinance Reform Strategy

A comprehensive micro-finance strategy is being developed in Nepal, in collaboration with donors involved in microfinance. The strategy needs to include the following elements:

  • Political commitment to best practice for MFI. For microfinance to be effective, public officials need to be committed to the goals of commercial sustainability and targeting the poor (not the hard-core poor) without political interference. Best-practice MFI designs should be encouraged. Alternative assistance mechanisms need to be considered for the hard-core poor.

  • Change NRB’s role. NRB should provide a conducive environment for MFI development and withdraw its equity participation in MFIs, including RRDBs and refrain from involvement in the administration of and representation in MFIs. NRB could encourage, but not be directly involved in, rating and guaranteeing of MFI activities.

  • Develop supervisory framework. NRB needs to establish an adequate supervisory framework for larger MFIs while allowing smaller, own-funded, and donor-supported MFIs sufficient flexibility. Compliance with the newly issued regulations should be monitored and enforced. Minimal reporting requirements to NRB and/or the public are needed. If a second-tier supervisory institution is to be developed, this should be initiated without delay.

  • Legislative change. The legislative framework needs to be rationalized. The by-laws for the FISA need to be modified in line with the 2002 amendment of the Act. Guidelines should be set for the type of financial services and size that require NRB licensing, and those which can be undertaken by entities registered under the Cooperatives or Societies Act.

  • Reform development banks. NRB needs to demonstrate its ability to effectively supervise existing development banks and to enforce remedial measures on existing ailing institutions.

  • Rationalize public programs and support services. The multitude of publicly-sponsored micro-finance programs should be rationalized. Programs that target the hardcore poor should be separated from those that target the less poor and small enterprise. Special “microfinance plus” models may need to be developed for hilly regions. Public and donor support for technical assistance, training, and other services should be coordinated with transparent subsidies for income transfer programs. Additional resources will be needed if RMDC is to provide the training facilities for MFIs and to serve as a wholesale institution to channel donor support.

Annex V.1

Microfmance Institutions and Public Programs

  • Informal Community-based Institutions

    • Money lenders and pawnbrokers.

    • Traditional rotating savings and credit associations (ROSCA’s) include Dliikuties, Dharam Bhakari (grain storage associations), and Guthies (cultural heritage associations).

    • New informal savings and credit groups (SCGs). A 1997 survey by the development bank, Deprosc, estimated some 20,000 SCGs serving 320,000 households.

  • Public Institutions

    • Five regional rural development banks (RRDBs) with NRB equity modeled after Grameen banks.

    • ADBN established in 1968 to specialize in agricultural and rural credit.

    • Rural Microfmance Development Center (RMDC) established in 1999 as a development hank to act as an apex institution for donor funds.

    • Small Farmers Development Bank (SFBD) established in 2002 as an apex institution.

  • Private Sector Institutions

    • Center for Self Help Development, (CSD) is the largest private sector MFI, set up in 1991 as an NGO, receives support from Women’s World Banking.

    • Nirdhan, initially established as NGO, now a development bank, receives support from CGAP.

    • Some 25,000 NGOs registered under the Societies Registration Act (SRA) of 1977. The proportion engaged in microfmance is not known. Twenty-five are also NRB-licensed.

    • About 2,000 out of an estimated 6,000 savings and credit coops (SCC) registered under the Cooperatives Act. Twenty-eight are also NRB-licensed cooperatives for microfmance.

    • An additional twelve development banks with some microfmance activity.

  • Associations and Federations

    • Microfmance Association of Nepal (MIFAN) established in 1999 under SRA.

    • Center for Microfmance (CMF), established in 1998 as a USAID project.

    • National Federation of Savings and Credit Cooperative Unions Ltd (NEFSCUN) established in 1998 to act as an apex institution for savings and credit coops, and to promote the credit union movement.

    • National Cooperative Federation (NCF) registered in 1993 to develop the cooperative movement.

  • NRB-Supported Programs

    • Small Farmer Development Program (SFDP) operated by ADBN since 198 lwith refinancing from donor funds and NRB. Under a GTZ-sponsored program, 100 of the 380 SFDP have been transformed into locally managed MFls with the purpose of becoming sel-sustaining.

    • Priority Sector Lending (PSL) program, introduced by NRB in 1974, requires all commercial banks to lend 12 percent of their “loanable funds” to priority sector borrowers, and of this one quarter to the “deprived sector”, up to a maximum of Nr 30,000 ($375) per borrower.

    • Intensive Banking Program (IBP) introduced in 1981 to target rural finance as part of PSL.

    • Production Credit for Rural Women (PCRW) funded by IFAD since 1982, administered through RBB, NBL with support from UNICEF and Min Local Development, has 60,000 borrowers in 36 districts.

    • Micro-Credit Project for Women (MCPW) funded by AsDB is an extension of PCRW from 1994 2002 that uses NGOs and coops to carry out work in 12 districts

    • Self-Reliance Rural Fund (RSRF) established by NRB in 1990 to provide funds at 8% interest to NRB licensed MFIs and 70 non-licensed NGOs for onlending to micro-entrepreneurs.

    • Banking with the Poor, a program launched by RBB in 1992 and implemented in 20 districts.

    • Third Livestock Development Program, launched in 1999/2000 with AsDB support, operating in 26 districts. The program provides participating banks with NRB refinancing at 6 percent rate.

    • Community Underground Irrigation Project with AsDB support, with refinance facilities at 5 percent.

    • The Poverty Alleviation Fund (PAF) established in 1999 but has not yet received any donor funding. PAF is expected to have a microfmance component.

Country Experiences

Unit Desa of Bank Rakyat Indonesia

The Unit Desa system is a unique example of a successful public-owned rural finance development bank. The Unit Desa or village banks were established in 1984 as a separate profit center within the Bank Rakyat Indonesia. The system is based on a large network of village units (over 4,000) and relies heavily on village agents that have substantial knowledge and access to information on borrowers. The Unit Desa also provide a wide range of financial services, including flexible savings schemes, convenient banking hours, and a range of incentives including bonuses.

The system was aimed at the replacement of directed credit to agriculture by broad based credit for any kind of rural activity. The focus was not limited to targeting the poor but to increase access of financial services in rural areas. The system has been profitable with both low-income and more conventional loans. Profitability is promoted through an incentive structure that links staff compensation to loan recovery with penalties for default and a low base salary and large potential incentive payments.

The success of the system has resulted in a significant increase in the use of financial services by the poor. Deposit mobilization has been especially successful and this has made the system independent of state or other donor funds. New branches receive a one-time capital subsidy to assist in equipment and set-up costs.

Banco del Trabajo in Peru

The success of Peru’s Banco del Trabajo is based on the availability of an active credit information system. A computerized information system on VAT payments, including in the informal sector, was made available to commercial banks to identify creditworthy prospective borrowers. The Superintendency of Banks also compelled commercial banks to make available information on credit histories to their customers, and this assisted in the establishment of three credit bureaus. The credit information system has assisted the development of commercially-oriented microfinance lenders, including the Banco del Trabajo.

The Banco de Trabajo has earned returns on equity and assets that are above the average for commercial banks in Peru. The bank focuses exclusively on small borrowers (average loan size of S400) and makes about 20,000 loans per month. The portfolio is split between consumer credit and microenterprise loans, and the interest rates chafed are between 50 and 50 percent on an annual basis (compared to a discount rate of 14 percent). It has developed a computerized credit rating system that allows decisions on loan applications to be made within 48 hours and which appears to predict the likelihood of repayment with a high degree of accuracy. Default rates are reported to be below 4 percent. A significant proportion of the loan portfolio is unsecured, and all loans include life insurance on borrowers so that the loan can be repaid in me even of death.

Grameen Banks in Bangladesh

A recent study evaluating the Grameen Banks suggested that the impact of programs is substantially overstated. The programs provide loans to households who own less than ½ acre, with innovative loan schedules. Programs served 4 million poor and are reported to have been quite successful. In earlier studies, me that top quartile of borrowers from the Grameen Bank were found to consume 15 percent more and have almost twice as high proportion of sons in school and much higher proportion of daughters compared to the bottom quartile. However, an evaluation based on a survey of 1800 households in 87 villages, surveyed three times between 1991–92 suggests these early results were over-stated. In particular, the study found that impact is significantly greater for the less poor borrowers. One implication has been that programs should target borrowers that are immediately above the poverty line.

Figure V.1.
Figure V.1.

Nepal: Distribution of Deposits and Credit, 2001

Citation: IMF Staff Country Reports 2002, 206; 10.5089/9781451829952.002.A005

Source: NRB - Nonbank statistics.
Figure V.2.
Figure V.2.

Nepal: Deposit and Credit Growth, 1995–2001

Citation: IMF Staff Country Reports 2002, 206; 10.5089/9781451829952.002.A005

Source: NRB, Non-bank Financial Statistics Bulletin.
Table V.1.

NRB’s Role in the Development of Microfinance in Nepal

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Sources: Sinha (1999). and NRB.
Table V.2.

Growth of Financial Institutions Since 1995

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Source: NRB-Nonbank Financial Statistics, 2002.

The 11 Development Banks, exclude data on the 5 Grameen Replicas, ADBN and NIDC, and two of the newly established DBs. Include: Nepal Development Bank (NDB), Enterprise Development Bank (EDB), Malika Development Bank, Sidhartha Development Bank. Development Credit Bank, Nepal CSI Development Bank (CSI), United Development Bank (UDB), Nirdhan Uttan Bank, Narayani Audyogik Bikas Bank, Chhimek Development Bank, RMDC.

Table V.3.

Regulatory Requirements for MFI Compared to Banks and Finance Companies

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Sources; Sinha (1999) and NRB.
Table V.4.

NRB-Licensed Companies Serving Rural Microfinance: Sources and Uses of Funds

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Source: NRB, Nonbank Financial Statistics, 2002.

The 11 Development Banks, exclude data on the 5 Gramecn Replicas, ADBN and NIDC, and two of lhe newly established DBs.

Include: Nepal Development Bank (NDB), Enterprise Development Bank (EDI1), Mahka Development Bank, Sidhartha Development Bank, Development Credit Rank, Nepal CSI Development Bank (CSI), United Development Bank (UDB), Nirdhan Ullan Bank, Narayani Audyogik Bikas Bank, Chhimek Development Bank, RMDC.

Development wing of ADBN

Table V.5.

Deposits and Loans of Development Banks, 2002

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Source: NRB, Nonbank Financial Statistics, 2002.

Statistical Appendix

Table 1.

Nepal: Nominal Gross Domestic Product by Sector, 1995/96–2000/01

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Sources: The Central Bureau of Statistics in Nepal; and Nepal Rastra Bank.
Table 2.

Nepal: Real Gross Domestic Product by Sector, 1995/96–2000/01

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Sources: The Central Bureau of Statistics in Nepal; and Nepal Rastra Bank.
Table 3.

Nepal: Gross Domestic Product by Expenditure Components, 1995/96–2000/01

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Sources: The Central Bureau of Statistics in Nepal; and Nepal Rastra Bank.

Exports and imports of goods and services reflect the revised coverage of the balance of payments.

Table 4.

Nepal: Saving and Investment, 1995/96–2000/01

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Sources: The Central Bureau of Statistics in Nepal; and Nepal Rastra Bank.

Defined as revenue less regular expenditure and estimated recurrent costs of development expenditure until 1997/98.

Table 5.

Nepal: Agricultural Production and Yields, 1995/96–2001/02

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Source: The Central Bureau of Statistics in Nepal.

Private sector has participated in fertilizer trading activity since November 1997.

Areas cultivated with more than one crop are included under each crop.