Introduction
Nepal is one of the poorest country in the world and the poorest in the South Asia region. Its poverty reduction rate is low. The main reasons for this low poverty reduction rate are: (i) low per capital income, (ii)
concentrated urban growth, and (iii) high population growth rate. Out of a population of 23 million, 38% are in below the poverty line. Most of the poor people live in rural areas and have little opportunity. Micro-finance could help poor people who have no collateral, but a willingness to work and a desire to do some business activities from which he/she will acquire employment as well as income. Although many programmes have been implemented for poverty alleviation in Nepal, only micro-finance programs are seen as a poor targeted and rural based. InNepalagriculture based co-operatives were initiated in the 1950s as a first step in 
micro-finance. Poverty alleviation rural based programs were initiated through the small farmers development program (SFDP) on a pilot test basis in 1975 by the ADB/N. The success of the pilot tests in Dhanusa and Nuwakot districts encouraged policy makers to expand formal rural based micro-finance programs. The SFDP is now being transformed into several autonomous, self-help organizations called Small Farmers Cooperatives Limited (SFCLs), which are managed by farmers themselves. Other micro-finance development programs, such as Priority Sector Lending Program (PSLP), Intensive Banking Programme (IBP), Production Credit for Rural Woman (MCPW) and Rural Self-Reliant Fund (RSF) have been implemented. After studying the pros and cons of various microfinance development programs government began to rethink the delivery mechanisms of micro-finance.
In 1992, government set-up two Grameen Bikash Banks as a replication of the Bangladesh Grameen model of micro-finance delivery. Government also created a situation to encourage participation in the micro-finance by the private sector. Subsequently Nirdhan, CSD, Chhimek and other organisations came into existence. RMDC was also established to support micro-finance institutions by giving wholesale credit, initiating training and other necessary support to the MFIs. Some Government directed Programs (TLDP, Bishweshwor with poor, PAPWT, Community Ground water project, etc.) have been implemented in coordination with NRB.
MFIs are dependent on small savings from group members. As a definition Micro-finance is, as a part of development finance, rural or urban, targeted towards specific groups of people, male or female, falling in the lower bracket of society. Financial services include savings, credit and other services such as micro money transfer and micro-insurance. This service is differentiated by types of service employment and income orientated objectives, target group, target community, target area and credit at home.
In the past decade, micro-finance has been recognized as a particularly effective development intervention for three basic reasons:
The services provided can be targeted specifically at the poor and poorest of the poor.
These services can make a significant contribution to the socio-economic status of the targeted community.
The institutions that deliver these services can develop, within a few years, into sustainable organizations with steadily growing outreach.
In this context, it is important to make a couple of distinctions:
Micro-finance is more than the provision of credit. It involves the provision of other financial services (most usually savings and insurance) and recognizing that even the poor have a variety of needs, not just credit.
Securing sustainable access to micro-finances for low-income communities involves building (or reforming) micro-finance institutions- not just the delivery of time-bound micro-finance programs (such as offering short-term revolving funds)
The Regulatory Status
Microcredit institutions are regulated by various laws. These are: Nepal Rastra Bank Act (2002), Agriculture Development Act (1967), Cooperative Act (1972), Finance Company Act (1985), Development bank act 1996 Social Welfare Act (1991), Company Act (1947), Financial Intermediary Act (1998) and Insurance Act. It appears to be over regulated but in reality the situation is just the opposite. There is some difficulty to regulate all micro-credit institutions because there are many MFIs established under different acts doing micro-finance activities. The ultimate responsibility to develop, regulate, monitor and supervise is of NRB. Recently, on February 24, 2003, NRB issued regulations for the development banks which are engaged in micro-finance, as a guide line to develop MFIs activities.
Challenges in Micro-Credit Delivery in Nepal
Nepalhas a varied topography at varied development stages, a mix of different cultures and different ethnic groups, which challenges the successful delivery of micro-finance. The major challenges are:
Formulating a micro-credit delivery mechanism that is better suited to the people in hills and mountains.
Successfully extending the outreach to the hills and mountains.
Redesigning existing programs of the formal MFIs to better target the poorest.
Unsustainable delivery mechanisms of government initiated MFIs and programs.
Evolution of Micro-Finance
The earliest initiatives for establishing micro-finance inNepaldate back to the 1950s, when the first credit cooperatives were established. For providing rural financial services, this was the first step. These cooperatives primarily intended to provide credit only to the agriculture sector. The next milestone was SFDP in 1975 within ADB/N. This program covers the entire country and aims to organize farmers into small groups to provide credit without collateral.
In 1981, NRB introduced the Intensive Banking Program (IBP) and compelled to the commercial bank to finance at least 7 percent on the priority sector, which was further increased to 12 percent in 1990. Now this compulsion is being phased out gradually.
In 1992, Grammen Bikash Banks were initiated by the government sector, crossing a milestone in rural micro-financing in Nepal and NGOs started grameen banking activities in certain areas.
The evolution of the micro-finance sector inNepal
Credit co-operatives were established in the 1950s.
Co-operative bank was established in 1963
Small farmer groups were established under SFDP (1970s)
SFDP was established under ADB/N (1975)
Commercial banks began to follow priority sector lending directives (1974)
The IBP program tries to involve commercial banks in micro-credit (1981)
Gender based micro-credit - PCRW (1982)
Gender programs refined - MCPW (1994)
Replication of Grameen Banking model (1992)
Co-operative act was established to support the credit cooperatives (1992)
Government-run MF programs - Bisheswor with the Poor, Women's Awareness program, government peace movement, etc.
The MF Sector in Nepal
Within Nepal there are a wide range of institutions active in the micro-finance sector, each with its own way of going about the task of making financial services accessible to the poor. Some writers distinguish between the so-called informal and formal sectors, but given that many of the informal organizations are in fact registered societies, the preferred terms to use are community-based sector and institutional sector.
The Institutional Sector
Nepal Rastra Bank (NRB)
NRB is a central bank and an apex institution of the financial system. It has placed various efforts to develop the micro-finance system inNepal. It introduced the priority sector (small sector) lending program in 1975 and the intensive banking program in 1981. Further, in 1992, NRB participated in equity and management to develop the Grameen Banking system by introducing regional rural banks as a replication of Bangladesh Grameen Banking model. NRB plays a vital role to develop the micro-finance system inNepalthrough introducing policy, systems and institutions as well.
Micro-finance Wholesale Apex Institutions
RSRF (Rural Self Reliance Fund)
In 1990, HMG/N introduced a fund of NRs. 10 million to provide a wholesale fund for small cooperatives and rural based NGOs to on lend to micro entrepreneurs. Further in 1999, government provided additional support of NRs. 10 million to the RSRF. Since the beginning, the fund has been handled by NRB. Up to mid July 2002, RSRF sanctioned loans to 48 NGOs and 129 cooperatives amounting to NRs. 18.15 million and 34.21 million respectively.
RMDC
Under the financial support of ADB, Manila, NRB, banks and financial institutions together injected equity to form the micro-finance apex institution Rural Micro-Finance Development Centre' (RMDC), incorporated in 1998 mainly to extend wholesale fund to the micro-finance institutions. As of mid July 2002, RMDC had approved NRs. 204.8 million in loans to 17 MFIs and disbursed NRs. 107.8 million. Its mandate includes capacity building for MFIs and ultimate borrowers in addition to providing a fund for on lending to them.
RMDC, a micro-finance apex wholesale institution, it has provided wholesale loans to MFIs as follows;
According to the NRB directive, commercial banks need to extend at least 3 percent of their total loan outstanding to the deprived sector. CBs are extending the 3 percent fund in equity and also providing wholesale loans to MFIs. At present, 17 commercial banks are extending credit to the deprived sector, amounting to NRs. 3482.6 million. Small Farmer Development Bank (SFDB) SFDB was established in 2002 under the development bank act of 1996 to provide wholesale funds to Small Farmer Co-operatives Ltd. (SFCLs). SFCLs were developed by the SFDP of ADB/N to make groups of small farmers self-reliant and sustained. Until now, the total number of SFCLs affiliated with the SFDB is 35 and the total number of groups within the SFCL is 3,434. The total loans disbursed to the group members amounts to NRs 25.4 million.
Development Banks
Some development banks formed under the development bank act 1996 are implementing micro-finance activities in rural areas. Prior to becoming development banks, some institutions were active as NGOs in the field of social development, as well as in micro-finance. Among these banks, 5 are regional rural development banks in the government sector and 6 are micro finance development banks established by private sector.
The Community Based Sector
FINGO (Financial Intermediary Non-government Organization)
Normally, NGOs inNepal(at least those registered under the Societies Act) have not been entitled to undertake profit-oriented activities, such as financial intermediation. However, the rapidly growing engagement of NGOs in social development has created a need for extending some basic financial services such as micro-finance services. To address the lack of institutions providing MF services in many areas of the country, the Central Bank of Nepal (NRB) has provided a mechanism by which selected NGOs can engage in financial intermediation activities. These activities are defined as the borrowing and on-lending of funds, but do not include direct deposit taking from the public. Currently, a couple of dozen NGOs have already been licensed by NRB. The last session of parliament approved changes in the Financial Intermediary Act of 1998, which now allows FINGOs to collect savings from the members of groups. Those NGOs that are operating in financial services transactions and opting for an NRB license are referred to as FINGOs.
As a replicator of Grameen Model, some NGOs were established to extend credit facility to the rural poor: Nirdhan (1991), CSD (1991), Chhimek, Deprosc (1994). In 1996, the development bank act came into existence and the above-mentioned NGOs became development banks. Since the financial intermediary act was implemented in 1998, 37 NGOs have received permission to extend credit and collect savings from the rural poor in group-based activities. The main objectives of these NGOs are to extend micro credit activities and help towards raising the living standard of the poor.
Saving and Credit Co-operatives
SACCOS are member owned, controlled and capitalized organizations, which provide financial services to members. There are more than 2,300 SACCOS registered with the Co-operative Department in Nepaland approximately 400 of these are a member of the national federation, NEFSCUN.Savings and Credit Groups
There are tens of thousands of unregistered SCGs in Nepals, some of which are quite large even though they are not registered either as NGOs or co-operatives. The vast majority of these SCGS grew out of assorted development initiatives (literacy programs, water and forestry user groups, mother and child programs, etc.) into which a savings component had been introduced, if only to strengthen the likelihood that the group would continue to meet and be active, after the specific program intervention had been competed. Given the limited prospects of such smaller groups, and the problems that promoting agencies face in maintaining outreach to large numbers of scattered, small groups, considerable attention is being paid nowadays to mechanisms for federating and institutionalizing these groups.
Traditional Savings and Credit Groups
Nepalhas a long history in the operation of traditional savings and credit associations, often referred to in the literature as a rotating savings and credit associations (ROSCAs), but known locally as Dhukuti or similar terms. These tend to be non-registered, but quite formally structured in terms of membership rights and obligations, etc.
Outreach
InNepal, traditionally there were many programs developed by government and government agencies in the formal micro-finance sector and by private organizations in the private and informal sector. The present status and estimated micro-finance outreach of various programs is as follows:
Status of Major Micro-Finance Service Outreach
Main Issues
In rural financing and especially in providing microfinance services there are some major issues, which have emerged from the operation of existing MFIs inNepal. Those issues are the following:
Dominance of the government and its agencies in micro-credit.
Need for restructuring and privatize the GBB to reduce the public sector dominance. Limited outreach in the hills areas. Diffused or not concentrated focus. Role of INGOs, MFIs, Apex wholesale institutions.
Sustainability and interest rate.
Conclusion
During the last decade of the 20th century it has become accepted that micro-finance is one of the most significant contributors for poverty alleviation. In Nepal, although the poverty reduction rate is slow, if a proper model is used the hill and Terai regions the standard of living could be raised very quickly. The diversity of regulatory acts shows that it is necessary to cater to all MFIs under one act for licensing, regulating and supervising and needs to make National Policy in micro finance. InNepal, experience shows that private sector managed MFIs are better off than government owned MFIs. So, it has become necessary to handover all Grameen Banks to the experts of micro-finance.
The micro-financing area inNepalincludes largely participation of private sector. So the role of government, NRB and micro-financer should be defined as early as possible. Now our ultimate challenge is poverty. This is the challenge of the government and private sector. For the fair implementation of micro-finance inNepal, the government’s role should be as a guardian and referee so that all players can play fairly
Nepal is one of the poorest country in the world and the poorest in the South Asia region. Its poverty reduction rate is low. The main reasons for this low poverty reduction rate are: (i) low per capital income, (ii)
concentrated urban growth, and (iii) high population growth rate. Out of a population of 23 million, 38% are in below the poverty line. Most of the poor people live in rural areas and have little opportunity. Micro-finance could help poor people who have no collateral, but a willingness to work and a desire to do some business activities from which he/she will acquire employment as well as income. Although many programmes have been implemented for poverty alleviation in Nepal, only micro-finance programs are seen as a poor targeted and rural based. InNepalagriculture based co-operatives were initiated in the 1950s as a first step in 
micro-finance. Poverty alleviation rural based programs were initiated through the small farmers development program (SFDP) on a pilot test basis in 1975 by the ADB/N. The success of the pilot tests in Dhanusa and Nuwakot districts encouraged policy makers to expand formal rural based micro-finance programs. The SFDP is now being transformed into several autonomous, self-help organizations called Small Farmers Cooperatives Limited (SFCLs), which are managed by farmers themselves. Other micro-finance development programs, such as Priority Sector Lending Program (PSLP), Intensive Banking Programme (IBP), Production Credit for Rural Woman (MCPW) and Rural Self-Reliant Fund (RSF) have been implemented. After studying the pros and cons of various microfinance development programs government began to rethink the delivery mechanisms of micro-finance. In 1992, government set-up two Grameen Bikash Banks as a replication of the Bangladesh Grameen model of micro-finance delivery. Government also created a situation to encourage participation in the micro-finance by the private sector. Subsequently Nirdhan, CSD, Chhimek and other organisations came into existence. RMDC was also established to support micro-finance institutions by giving wholesale credit, initiating training and other necessary support to the MFIs. Some Government directed Programs (TLDP, Bishweshwor with poor, PAPWT, Community Ground water project, etc.) have been implemented in coordination with NRB.
MFIs are dependent on small savings from group members. As a definition Micro-finance is, as a part of development finance, rural or urban, targeted towards specific groups of people, male or female, falling in the lower bracket of society. Financial services include savings, credit and other services such as micro money transfer and micro-insurance. This service is differentiated by types of service employment and income orientated objectives, target group, target community, target area and credit at home.
In the past decade, micro-finance has been recognized as a particularly effective development intervention for three basic reasons:
The services provided can be targeted specifically at the poor and poorest of the poor.
These services can make a significant contribution to the socio-economic status of the targeted community.
The institutions that deliver these services can develop, within a few years, into sustainable organizations with steadily growing outreach.
In this context, it is important to make a couple of distinctions:
Micro-finance is more than the provision of credit. It involves the provision of other financial services (most usually savings and insurance) and recognizing that even the poor have a variety of needs, not just credit.
Securing sustainable access to micro-finances for low-income communities involves building (or reforming) micro-finance institutions- not just the delivery of time-bound micro-finance programs (such as offering short-term revolving funds)
The Regulatory Status
Microcredit institutions are regulated by various laws. These are: Nepal Rastra Bank Act (2002), Agriculture Development Act (1967), Cooperative Act (1972), Finance Company Act (1985), Development bank act 1996 Social Welfare Act (1991), Company Act (1947), Financial Intermediary Act (1998) and Insurance Act. It appears to be over regulated but in reality the situation is just the opposite. There is some difficulty to regulate all micro-credit institutions because there are many MFIs established under different acts doing micro-finance activities. The ultimate responsibility to develop, regulate, monitor and supervise is of NRB. Recently, on February 24, 2003, NRB issued regulations for the development banks which are engaged in micro-finance, as a guide line to develop MFIs activities.
Challenges in Micro-Credit Delivery in Nepal
Nepalhas a varied topography at varied development stages, a mix of different cultures and different ethnic groups, which challenges the successful delivery of micro-finance. The major challenges are:
Formulating a micro-credit delivery mechanism that is better suited to the people in hills and mountains.
Successfully extending the outreach to the hills and mountains.
Redesigning existing programs of the formal MFIs to better target the poorest.
Unsustainable delivery mechanisms of government initiated MFIs and programs.
Evolution of Micro-Finance
The earliest initiatives for establishing micro-finance inNepaldate back to the 1950s, when the first credit cooperatives were established. For providing rural financial services, this was the first step. These cooperatives primarily intended to provide credit only to the agriculture sector. The next milestone was SFDP in 1975 within ADB/N. This program covers the entire country and aims to organize farmers into small groups to provide credit without collateral.
In 1981, NRB introduced the Intensive Banking Program (IBP) and compelled to the commercial bank to finance at least 7 percent on the priority sector, which was further increased to 12 percent in 1990. Now this compulsion is being phased out gradually.
In 1992, Grammen Bikash Banks were initiated by the government sector, crossing a milestone in rural micro-financing in Nepal and NGOs started grameen banking activities in certain areas.
The evolution of the micro-finance sector inNepal
Credit co-operatives were established in the 1950s.
Co-operative bank was established in 1963
Small farmer groups were established under SFDP (1970s)
SFDP was established under ADB/N (1975)
Commercial banks began to follow priority sector lending directives (1974)
The IBP program tries to involve commercial banks in micro-credit (1981)
Gender based micro-credit - PCRW (1982)
Gender programs refined - MCPW (1994)
Replication of Grameen Banking model (1992)
Co-operative act was established to support the credit cooperatives (1992)
Government-run MF programs - Bisheswor with the Poor, Women's Awareness program, government peace movement, etc.
The MF Sector in Nepal
Within Nepal there are a wide range of institutions active in the micro-finance sector, each with its own way of going about the task of making financial services accessible to the poor. Some writers distinguish between the so-called informal and formal sectors, but given that many of the informal organizations are in fact registered societies, the preferred terms to use are community-based sector and institutional sector.
The Institutional Sector
Nepal Rastra Bank (NRB)
NRB is a central bank and an apex institution of the financial system. It has placed various efforts to develop the micro-finance system inNepal. It introduced the priority sector (small sector) lending program in 1975 and the intensive banking program in 1981. Further, in 1992, NRB participated in equity and management to develop the Grameen Banking system by introducing regional rural banks as a replication of Bangladesh Grameen Banking model. NRB plays a vital role to develop the micro-finance system inNepalthrough introducing policy, systems and institutions as well.
Micro-finance Wholesale Apex Institutions
RSRF (Rural Self Reliance Fund)
In 1990, HMG/N introduced a fund of NRs. 10 million to provide a wholesale fund for small cooperatives and rural based NGOs to on lend to micro entrepreneurs. Further in 1999, government provided additional support of NRs. 10 million to the RSRF. Since the beginning, the fund has been handled by NRB. Up to mid July 2002, RSRF sanctioned loans to 48 NGOs and 129 cooperatives amounting to NRs. 18.15 million and 34.21 million respectively.
RMDC
Under the financial support of ADB, Manila, NRB, banks and financial institutions together injected equity to form the micro-finance apex institution Rural Micro-Finance Development Centre' (RMDC), incorporated in 1998 mainly to extend wholesale fund to the micro-finance institutions. As of mid July 2002, RMDC had approved NRs. 204.8 million in loans to 17 MFIs and disbursed NRs. 107.8 million. Its mandate includes capacity building for MFIs and ultimate borrowers in addition to providing a fund for on lending to them.
RMDC, a micro-finance apex wholesale institution, it has provided wholesale loans to MFIs as follows;
According to the NRB directive, commercial banks need to extend at least 3 percent of their total loan outstanding to the deprived sector. CBs are extending the 3 percent fund in equity and also providing wholesale loans to MFIs. At present, 17 commercial banks are extending credit to the deprived sector, amounting to NRs. 3482.6 million. Small Farmer Development Bank (SFDB) SFDB was established in 2002 under the development bank act of 1996 to provide wholesale funds to Small Farmer Co-operatives Ltd. (SFCLs). SFCLs were developed by the SFDP of ADB/N to make groups of small farmers self-reliant and sustained. Until now, the total number of SFCLs affiliated with the SFDB is 35 and the total number of groups within the SFCL is 3,434. The total loans disbursed to the group members amounts to NRs 25.4 million.
Development Banks
Some development banks formed under the development bank act 1996 are implementing micro-finance activities in rural areas. Prior to becoming development banks, some institutions were active as NGOs in the field of social development, as well as in micro-finance. Among these banks, 5 are regional rural development banks in the government sector and 6 are micro finance development banks established by private sector.
The Community Based Sector
FINGO (Financial Intermediary Non-government Organization)
Normally, NGOs inNepal(at least those registered under the Societies Act) have not been entitled to undertake profit-oriented activities, such as financial intermediation. However, the rapidly growing engagement of NGOs in social development has created a need for extending some basic financial services such as micro-finance services. To address the lack of institutions providing MF services in many areas of the country, the Central Bank of Nepal (NRB) has provided a mechanism by which selected NGOs can engage in financial intermediation activities. These activities are defined as the borrowing and on-lending of funds, but do not include direct deposit taking from the public. Currently, a couple of dozen NGOs have already been licensed by NRB. The last session of parliament approved changes in the Financial Intermediary Act of 1998, which now allows FINGOs to collect savings from the members of groups. Those NGOs that are operating in financial services transactions and opting for an NRB license are referred to as FINGOs.
As a replicator of Grameen Model, some NGOs were established to extend credit facility to the rural poor: Nirdhan (1991), CSD (1991), Chhimek, Deprosc (1994). In 1996, the development bank act came into existence and the above-mentioned NGOs became development banks. Since the financial intermediary act was implemented in 1998, 37 NGOs have received permission to extend credit and collect savings from the rural poor in group-based activities. The main objectives of these NGOs are to extend micro credit activities and help towards raising the living standard of the poor.
Saving and Credit Co-operatives
SACCOS are member owned, controlled and capitalized organizations, which provide financial services to members. There are more than 2,300 SACCOS registered with the Co-operative Department in Nepaland approximately 400 of these are a member of the national federation, NEFSCUN.Savings and Credit Groups
There are tens of thousands of unregistered SCGs in Nepals, some of which are quite large even though they are not registered either as NGOs or co-operatives. The vast majority of these SCGS grew out of assorted development initiatives (literacy programs, water and forestry user groups, mother and child programs, etc.) into which a savings component had been introduced, if only to strengthen the likelihood that the group would continue to meet and be active, after the specific program intervention had been competed. Given the limited prospects of such smaller groups, and the problems that promoting agencies face in maintaining outreach to large numbers of scattered, small groups, considerable attention is being paid nowadays to mechanisms for federating and institutionalizing these groups.
Traditional Savings and Credit Groups
Nepalhas a long history in the operation of traditional savings and credit associations, often referred to in the literature as a rotating savings and credit associations (ROSCAs), but known locally as Dhukuti or similar terms. These tend to be non-registered, but quite formally structured in terms of membership rights and obligations, etc.
Outreach
InNepal, traditionally there were many programs developed by government and government agencies in the formal micro-finance sector and by private organizations in the private and informal sector. The present status and estimated micro-finance outreach of various programs is as follows:
Status of Major Micro-Finance Service Outreach
Main Issues
In rural financing and especially in providing microfinance services there are some major issues, which have emerged from the operation of existing MFIs inNepal. Those issues are the following:
Dominance of the government and its agencies in micro-credit.
Need for restructuring and privatize the GBB to reduce the public sector dominance. Limited outreach in the hills areas. Diffused or not concentrated focus. Role of INGOs, MFIs, Apex wholesale institutions.
Sustainability and interest rate.
Conclusion
During the last decade of the 20th century it has become accepted that micro-finance is one of the most significant contributors for poverty alleviation. In Nepal, although the poverty reduction rate is slow, if a proper model is used the hill and Terai regions the standard of living could be raised very quickly. The diversity of regulatory acts shows that it is necessary to cater to all MFIs under one act for licensing, regulating and supervising and needs to make National Policy in micro finance. InNepal, experience shows that private sector managed MFIs are better off than government owned MFIs. So, it has become necessary to handover all Grameen Banks to the experts of micro-finance.
The micro-financing area inNepalincludes largely participation of private sector. So the role of government, NRB and micro-financer should be defined as early as possible. Now our ultimate challenge is poverty. This is the challenge of the government and private sector. For the fair implementation of micro-finance inNepal, the government’s role should be as a guardian and referee so that all players can play fairly
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