Emerging Challenges of Microfinance in Nepal and Opportunities

Updated On : Nov 2022

Microfinance in Nepal has a strong rural orientation and is considered an effective tool for reducing poverty. However, there are various challenges ahead, such as lack of accessibility to funds, unhealthy competition, political unawareness, the exclusion of vulnerable groups, threats to financial discipline, resource constraints, limited knowledge, etc. On the other hand, rising poverty is encouraging the growth of the microfinance sector, which has a huge market potential and presents enormous opportunities.

Microfinance in Nepal gained momentum after the restoration of democracy in 1991, as the government focused on strengthening Microfinance institutions in a bid to provide financial services to the underprivileged and women. Five Regional Development Banks (RDBs) in each development region based on the Grameen model were formed with the sole purpose of providing micro-credit services to the poor and women. Eventually, these Regional Development Banks became Microfinance Development Banks (MFDBs) after privatization and were licenced as class "D" financial institutions.

In the early 2000s, several private microfinance institutions and NGOs with microfinance programs came into existence, providing financial services to the poor. Today, microfinance has shown positive results in many countries, but there are still huge masses of people in Nepal who are deprived of financial services. This is due to several challenges facing the microfinance industry in Nepal. Let us go through the challenges given below.

Challenges

• Limited or no accessibility
  

  There is limited physical infrastructure and economic opportunity in remote areas that house the majority of the poor population. Hence, it is difficult for microfinance activities to flourish in such areas. The basic infrastructure required for improving agriculture and the local economy should be developed by the government.

• Unhealthy competition 
  

  There is a complete lack of a supportive environment and minimal coordination between government agencies and microfinance banks and institutions. This leads to issues like duplications in the working area or, in some areas, more than one institution working with the same clients.

• Seasonal migration
  

  There are a large number of people from rural areas who migrate to towns and urban areas for seasonal employment. Even though they need access to microcredit, microfinance institutions are cautious about extending services to them because of their temporary stay in the program areas.

• Political unawareness
  

  A lot of political parties and their leaders do not understand the basics of microfinance and the need for the institutional sustainability of the MFIs, and thus they consider microfinance programs as charity. This leads to them often arguing for lower interest rates and loan waivers.

• Excluding vulnerable groups
  

  The extremely poor, marginalized castes like Dalits and Janjatis, and the destitute are excluded by the existing microfinance programs, even in microfinance-intensive areas like the Tarai regions. Microfinance institutions have to focus on providing services to these vulnerable groups urgently.

• Threatening the financial discipline
  

  There are a large number of highly subsidized microcredit programs that are still being operated in many parts of the country. This threatens the financial discipline and basic norms of microfinance systems.

• Resource Constraints
  

  NRB directs that commercial banks, development banks, and finance companies should provide loans to the deprived sector at 3%, 2%, and 1.5% of their transactions, respectively, to microfinance institutions. In microfinance, credit on micro hydro, hospitals, youth for employment, and small housing counts for nearly half of the resources changed for microfinance institutions. As microfinance banks expand into villages and unreached districts, resources are limited.

• Limited Knowledge
  

  The functioning and efficiency of the banking sector and MFIs are heavily reliant on the quality of human resources, the procedures and practices of the operating system, and the knowledge level of the person in charge of running that system. However, one of the biggest challenges is that today’s existing human resources have a very low knowledge level, which does not allow running this mechanism smoothly.

Opportunities 

• Poverty Alleviation
  

  Poverty is one of the major issues, and it is proven that microfinance can reduce poverty; it also diversifies income-carrying sources, builds assets, and improves the status of women. Microfinance is known to have a positive impact on income and asset levels.

• Conducive legal environment
  

  The ‘National Microfinance Policy, 2007’ seeks to create a conducive legal environment and the necessary financial infrastructure for developing the microfinance industry further, has been issued by The Government of Nepal. The ‘National Microfinance Policy of 2007’ seeks to create a conducive legal environment and the necessary financial infrastructure for developing the microfinance industry further, has been issued by the Government of Nepal.

• Better professional management
  

  Due to acquiring best practices and developing human resources to attain institutional and financial sustainability, several quality retail microfinance institutions with institutional capacity and professional management have formed over the last few years.

• Availability of domestic sources
  

  Under the mandatory Deprived Sector Credit Program, there is a considerable amount of funding for microcredit programs available from commercial banks.

• Micro-insurance products
  

  New products have been introduced through partnerships between microfinance providers and large insurance companies. There are several self-managed micro-insurance schemes at an institutional level (without links to an insurance company) that have been in practice for over a decade in Nepal. A new microfinance institution can replicate the scheme.

• Opportunity for Commercial Banks
  

  Microfinance as a new field is a good opportunity for commercial banks to fund investments, as there is a very high rate of recovery and the probability of higher profit.

• Operating in a professional manner
  

  Currently, there are a substantial number of professionally operating MFIs in Nepal, which can impart valuable best practices and good experiences in microfinance to upcoming microfinance leaders and practitioners.

• Women Empowerment
  

  One of the most positive outcomes of microfinance is that poor women have access to financial services through Microfinance Institutions (MFIs), NGOs, and other Nonbank Financial Institutions (NBFIs). The majority of these women have excellent repayment records. This also leads to better utilization of resources, which plays a positive role in the economic development of the economy.

Nepal’s extreme poverty and difficult geographic conditions make the delivery of financial services to the poor particularly challenging. The limited economic opportunities, limited outreach, and poor financial management lead to unsustainable microfinance institutions in the long run. Women are significantly poorer than men, with little education, limited domestic and agricultural work, and less influence over economic decisions. Providing women with access to credit and savings services has proven to result in poverty alleviation and empower them. However, it is crucial to do this in a sustainable and efficient manner to ensure continued access to financial services. Microfinance institutions need to adopt an approach that focuses on providing valued services designed to meet the needs of clients, taking into account the particular needs of women. Only then will microfinance in Nepal have a fair chance of meeting its goal.

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