2009

Produced by The Banking with the Poor Network in collaboration with the SEEP Network Funded by the Citi Foundation as an activity of the Citi Network Strengthening Program

Nepal_Report_forprint.indd 1

27/05/2009 5:41:03 PM

i. Acknowledgements
The MicrofinanceThe BWTP Network Industry Report: Nepalalso wishes to thank was produced by TheMr. Mukunda Bahadur Rural MicrofinanceBista from the Centre of Development CentreSelf-Help Development Ltd. (RMDC), NepalNepal for valuable under the direction ofcomments to the final Jamie Bedson, BWTPdraft. Thank you also to Network LeadShawn Hunter (FDC), Coordinator and AsiaCarly Stephan (FDC) Regional and Eric Larson for Representative at Thecontributions to the final Foundation fordraft. Development Cooperation (FDC). The BWTP Secretariat would like to thank all those who participated in its production.
For RMDC, Senior Manager Mr. Ram Dayal Rajbanshi, prepared this report by collecting data from a variety of industry sources including published reports, online resources and institutions. RMDC staff assisted in gathering data from different sources. RMDC CEO Mr. Shankar Man Shrestha closely supervised Mr. Rajbanshi in analysing and preparing the Assessment. Dr. Rabindra Shakya, a freelance economist and former Secretary of the Government, edited the report.

microfinance industry report - nepal

Nepal_Report_forprint.indd 2

27/05/2009 5:41:04 PM

ii. Foreword
s. The purpose of the BWTP Network Industry Reports is to This an microfin provide overview of the ance industry microfinance report sectors in which the BWTP was complet Network ed as a operates. These Banking assessments with the aim to extend beyond the Poor performance of Network (BWTP individual Network institutions, and focus on the ) activity development of within the microfinance the Citi market as a Network whole by being Strength both descriptive ening and analytical in Program nature. The aim , in of these collabor assessments is ation to provide an with the outlook on each SEEP industry that is a Network valuable and resource to the funded BWTP Network, by the its members and Citi the wider Foundati microfinance on. community. The Citi The ARCM is a Network review of the Strength microfinance ening sector in Nepal, Program and constitutes a supports new contribution the to Nepal BWTP develop Networks Asia ment of Resource Centre Microfin for Microfinance. ance This report builds Assess on a country ments profile completed for by the BWTP national Network in 2006. and Prepared under regional the guidance of level the BWTP network Network, this

industry (RMDC) has report prepared this includes report based on a the data country available from overview different reports , aand institutions financial and from its own sector considerable overview experience in , athis field. summar y of governm ent initiative s and regulatio ns, the status of the retail microfin ance sector and support institutio ns, an overview of funding sources, the impacts of microfin ance and the upcomin g challeng es and opportun ities for the microfin ance industry in the country. The Rural Microfin ance Develop ment Centre Ltd.

t Asia, services that are essential in the fight against poverty in the The ARCM isregion, improving lives of based onthe millions through the exchang asset building and e ofincreased income. dialogue The ARCM has two main and informati objectives: on atFirst, the ARCM national aims to and encourage regional partnerships levels inand cooperation South in Asia, among and microfinance Southeasproviders and t Asia,supporters, and and aimsbetween to providers and constitut financiers, in e a one-order to stop increase learning financial support and for microfinance informati schemes and to on hubincrease peer for learning. BWTP Second, the members ARCM aims to and other build a microfina knowledge nce management actors in platform Asia. The accessible to all ARCM microfinance promotes actors in the increase Asia region, in d order to outreach increase and institutional efficiency capacity, to of increase the financial dissemination of services innovations, and for the to develop best poor in practice South standards in and microfinance. Southeas

Banking With The Poor Net work

3
Nepal_Report_forprint.indd 3

27/05/2009 5:41:04 PM

iii. Map of Nepal

Source: http://ncthakur.itgo.com/map04.htm

microfinance industry report - nepal

Nepal_Report_forprint.indd 4

27/05/2009 5:41:04 PM

iv. Contents
i. Acknowledgements ii. Foreword iii. Map of Nepal v. Abbreviations vi. Exchange Rate 1. Country Overview 2. Financial Sector Overview 3. Government Initiatives, Laws and Regulations 4. Microfinance Sector Development 5. Funding Sources 6. Impact of Microfinance Activities 7. Opportunities and Challenges References 3 4 6 7 8 10 12 15 25 27 30 32 2

Banking With The Poor Net work

Nepal_Report_forprint.indd 5

27/05/2009 5:41:05 PM

v. Abbreviations
>> ADB >> ADBN
>> AEPC

>> ARCM >> BFIA >> BFIO

>> BSP

>> BWTP
>> CB

>> CBO
>> CO

>> CSD >> DB

>> DEPROSC >> FAOq

>> FINGO >> FORWARD

>> FY

Asian Development Bank Agriculture Development Bank of Nepal Alternative Energy Promotion Centre Asia Resource Centre for Microfinance Bank and Financial Intermediation Act Bank and Financial Intermediation Ordinance Biogas Sector Partnership Nepal The Banking with the Poor Network Commercial Bank Community-Based Organisations Community Organisations Centre for Self-help Development Development Bank Development Project Services Centre Food and Agriculture Organisation of the United Nations Financial Intermediary NGO Forum for Rural Woman Ardency Development
Fiscal Year

>> GBB

Grameen Bikas Bank

>> GON
>> GTZ

>> MFDB >> MFI >> NCDB >> NGO >> NUBL
>> NRB >> OSS >> PRA

Government of Nepal Deutsche Gesellschaft fr Technische Zusammenarbeit GmbH Microfinance Development Bank

Microfinance Institution National Cooperative Development Bank Non-Government Organisation Nirdhan Utthan Bank Ltd.
Nepal Rastra Bank

>> PWR >> RMDC >> RRDB

>> RSRF

Operational Self-Sufficiency Participatory Rural Appraisal Participatory Wealth Ranking Rural Microfinance Development Centre Ltd. Regional Rural Development Bank
Rural Self-Reliance Fund Rural Finance Nepal

>> RUFIN
>> SCC

Savings and Credit Cooperative

Small Farmers Cooperative Ltd.

>> SFCL

>> SFDP >> SKBBL >> UNDP

>> VDC

Small Farmers Development Bank

Sana Kissan Bikas Bank Ltd.

United Nations Development Program Village Development Committee

microfinance industry report - nepal

Nepal_Report_forprint.indd 6

27/05/2009 5:41:05 PM

vi. Exchange Rate

2 October 2008
US Dollar 1.00 = Rs 74.55

Banking With The Poor Net work

Nepal_Report_forprint.indd 7

27/05/2009 5:41:05 PM

1. Country Overview
wildlife reserves and conservation areas.

1.1 Geography

The country is divided into five north-south

administrative zones: Nepal is a small, landdevelopment Eastern Development locked country Central surrounded by theRegion, Region, Peoples Republic ofDevelopment Western Development China to the north and Mid-Western by India to the east,Region, Development Region and west and south. Nepal has extremeFar-Western topography anddevelopment climate. The altitude ranges from 70 meters to 8,848 meters, and the climate varies from tundra to polar. The country stretches from east to west with a mean length of 885 km and widens from north to south with a mean breadth of 193 km.

Geographically, the country is divided into three east-west ecological zones: the Northern Range Mountain; the Mid Range Hill; and the Southern Range Terai (flat). In the Northern Range, the Himalayas form an unbroken mountain range which contains eight peaks higher than 8,000 meters, including Mt. Everest on the boarder with China. The middle range is captured by mountains, high peaks, hills, valleys and lakes. The Southern Range, with a width of almost 1632 km, is the continuation of the Gangetic plain of India and consists of dense forest areas, national parks,

of the total population is younger than 15 years, 7.6% are 60 years and Region. The country isabove, and the remaining further divided into 1452.8% represent the active zones and 75 districts.economically The districts arepopulation (15-59 years). further smaller Village (total 58). divided intoThe overall dependency units, calledratio of the country was 89 Developmentin 2003-04, which has 3915) and1995-96.1 It is much lower (totalin urban areas (63%) than
in rural areas (95%). The average household size in

Committees (VDCs) come down from 97 in Municipalities

1.2 the country is 5.3 Population and according to the NLSS in Among the Demographics 2004.
zones, the According to theecological Population Censusaverage household size is 2001, the annualthe highest in the Tarai growth rate of the(6.7) and the lowest in the population is 2.25%.Hills (4.9). Among the total households, 19.6% are Based on this growth headed by females. rate, the total Among the development population of the regions, the country in 2007 reached 26.4 million 1 The dependency with an almost equal ratio refers to the age-population proportion of males ratio between and females. those not in the labour force (the According to the latest dependent National Living variable) versus those in the Standard Survey 2004 labour force. (NLSS 2004), 39.6%

Table 1: Population and Demographic Data, Nepal

2005
Total population (millions) Economically active population National poverty line (US$) % of population living below the national poverty line Adult literacy rates (%) % of population living in rural areas Life expectancy Population growth (%)
Sources: http://www.cbs.gov.np, http://www.adb.org/Statistics/pdf/BasicStatistics-2007.pdf (2004), http://www.unicef.org/infobycountry/nepal_nep al_statistics.html (2005)

2006

2007
26.4 52.8% 324 30.9 49 86.1 63.7 2.25 348 31 54.1 385 31.8 54.1

microfinance industry report - nepal

Nepal_Report_forprint.indd 8

27/05/2009 5:41:05 PM

Western region has the highest proportion of female political parties to implement important economic headed households (28.7%) while the Central has the reform measures. lowest (15.7%). 29.4% of households in the rural west

mountains and hills are headed by females, while this hydropower and forestry are among the major figure is only 14.1% in the Eastern Tarai.

Agriculture

(mainly

horticulture),

tourism,

areas of investments for broad-based development of the country. Areas of growing interest for foreign 1.3 Poverty and Macroeconomic investment include, among others, hydropower and Situation tourism. Situated between two fast growing The National Living Standard Survey 2004 estimates thateconomies (China and India), Nepal has the nearly one-third of the total population (31.8%) live belowpotential to grow socially and economically, the poverty line. The Gini coefficient, which is anprovided permanent peace is restored and basic approximate measurement of the gap between the richsocial and economic infrastructure are developed in and the poor, is 41.4. Over the last few years, the annualthe country.
GDP growth rate in the country has been very low, staying within a range of 2.5% and 3.1% and averaging 2.5% for the FY 2006-07. At the current prices, the annual per capita income in 2006-07 stood at US$ 383. The population lives mostly in the rural areas of Nepal Table 2: Macroeconomic Indicators (86.1%), where basic social and economic infrastructures 2004/05 2005/06 2006/07 are lacking. Nearly 80% of the population are employed 3.12 2.80 in agriculture and related activities, which does not reach Annual Growth of GDP (%) its productive capacity due to the lack of necessary Per Capita GDP (US$) 328 350 Annual Change in Real 1.11 0.76 infrastructure (such as irrigation, improved seeds, fertilizers) and technology. A considerable percentage of Per Capita GDP (%) 14.58 13.60 the labour force (mainly the youth and educated people) Export of Goods and Services/GDP (%) are leaving Nepal in search of employment every year. Since the 1990s, the Nepalese government has instituted a program of economic reforms that involves the reduction of business licenses and registration requirements for trade and foreign investment. The program also includes a reduction of subsidies, privatisation of state industries, and downsizing of the civil service in order to cut government expenditure. However, political instability over the last decade or so has hampered the governments ability to forge consensus among
Import of Goods & Services/GDP (%) Inflation Rates (%) Interest Rates Commercial Savings (%) Commercial Lending (%) Public Savings (%) Public Lending (%) Exchange Rates (Nepalese rupee/s per US Dollar) (%) Employment (employment to population ratio) Workers remittances of employees received (US$) 3 11 4 14 73.8 57.80% 2.5 10 3 12 71.9 57.80% 1.1 billion 2.5 10 3 12 71.9 57.80% 1.5 billion 24.54 4.5 23.82 8

2.50 383 0.53 12.48 19.55 6.5

Sources: www.cbs.gov.np, www.img.org/external/pubs/ft/weo/2007/02/weodata/ download.aspx, www.ilo.org/public/english/employment/strat/kilm/index.htm;www. bfr.nrb.org.np/statistics/interest_rate_structure, www.adb.org/public/english/ employment/strat/klim/index.htm; http://red.nrb.org.np/publications/economicreports/Economic_Reports_2006_07.NEW.pdf

Banking With The Poor Net work

Nepal_Report_forprint.indd 9

27/05/2009 5:41:05 PM

2. Financial Sector Overview

exponential growth in the number of its financial institutions. A number of microfinance Over the past two decades, Nepals retail institutions (MFIs) have financial sector, along with the number and type of financialformed to provide financial institutions, has grown rapidly due to services to the
reforms and liberalization in the sector. The microfinance sector has become more diversified in recent years because of the commercialization of microfinance NGOs and their transformation into microfinance development banks. Yet in most parts of the country, the access to financial services remains limited to a small segment of the population. About half of Nepals households do not have access to formal financial services, which includes banks, financial-intermediary NGOs (FINGOs), cooperatives and finance companies. The informal sector, on the other hand, includes money lenders, traders, friends and Dhikuti2. Poorest of the poor mainly borrow from family and friends and this source makes up the largest source of informal loans. In comparison to urban people, rural people are deprived of bank services, as most of these formal financial institutions are located in the urban areas. Bank procedures are perceived as cumbersome by rural and low-income people. Only 28% of Nepalese households have an account with a bank or have taken a loan from a bank. Another 25% have an account or loan from a formal financial institution other than a bank. Some 28% rely solely on informal financial sources, while 20% are financially excluded and receive no service from the formal or informal financial sector3. Total rural credit requirement in the country is estimated at Rs 23.3 billion, while the total supply from the formal and semi-formal sectors is only Rs 9.6 billion4. Of the approximately 2.1 million households living below the national poverty line, nearly half are deprived of services from the formal microfinance sector.
2 Dhikuti is a traditional Rotating Savings and Credit Association (ROSCA) in Nepal. Ferrari, A., G. Jaffrin, S. R. Shrestha, 2006. Access to Financial Services in Nepal. Majorano, Francesca, 2007. An Evaluation of the Rural Microfinance Development Centre Ltd. as a Wholesale Lending Institution in Nepal, p.2

In recent decades, Nepal has seen

general do not provide loans for consumption or social activities. Most of them offer poor. The commercial banks (CBs) docompulsory group saving and not lend directly to the poor, butvoluntary individual savings rather provide wholesale funds toservices. A few microfinance these retail MFIs under thebanks and cooperatives now remittance transfer mandatory Deprived Sector Creditoffer Program. CBs are the largestservice products. Due to the providers of loans larger than Rslack of insurance services 50,000; whereas microfinanceavailable in rural areas, most institutions (MFIs), such asMFIs have offered some protection microfinance development banksinstitution-based schemes related to livestock (MFDBs), financial-intermediary NGOs (FINGOs) and savings anddeath and life insurance. credit cooperatives (SCCs), are theWith the objective of predominant direct providers ofsupplying wholesale funds to microfinance services to low-incomeretail microfinance households and rural people. MFIsorganisations, four wholesale serve clients for small loans generallylending agencies have been below Rs 50,000. MFDBs largelyestablished in Nepal over a serve in the Tarai; whereas FINGOsperiod of two decades. The and cooperatives are the largestRural Microfinance service providers in the hills andDevelopment Centre Ltd. mountains. (RMDC) and Sana Kisan Regarding the share of the market,Bikas Bank Ltd. (SKBBL) are MFDBs are the largest MFIs in thethe two large wholesale country. One MFDB serves 25,000 -lending organisations. The 80,000 clients, a FINGO 2,000 Rural Self Reliance Fund 30,000 clients, an SCC 50-200(RSRF), which is being members, and a Small Farmersmanaged by the central bank, funds to NGOs, Cooperative Limited (SFCL) 200-700offers and the clients. All these institutions servecooperatives Agriculture Development only their members. These MFIs generally provide short-term loans ofBank of Nepal (ADBN). less than 18 months for productiveAdditionally, the National Development uses such as agriculture, livestock,Cooperative Bank has been established poultry, petty trading, and grocery stores. Except for SCCs, MFIs inwith the aim of providing funds to SCCs.

10

microfinance industry report - nepal

Nepal_Report_forprint.indd 10 27/05/2009 5:41:05 PM

PDF to Word