Microfinance is a financial service aimed at low-income individuals or at those who do not have direct access to typical banking services. Microfinance encompasses a number of financial services like micro-credit, micro-lending, micro-insurance, savings and money transfer among others. A microfinance institution (MFI) provides financial services to the communities who cannot offer collateral against the loans they take but have skills and desire to undertake economic activities for generating income and self-employment. MFIs range from small non-profit organizations to commercial banks.Based on the concept that access to financial services can help elevate low-income individuals out of poverty, microfinance programs are implemented in Nepal with a strong rural alignment, especially aiming at the poor.
With the history of quite a few decades, MFIs in Nepal have been following a few prominent microfinance models. These comprise ofCooperative model, Small Farmer Cooperative Limited (SFCL) model, Grameen Bank model, and Community based organizations (COs) or Self-Help Groups (SHGs) model. In addition, Village Bank (VB)is also considered a separate program/model of microfinance in Nepal. Brief descriptions of these models are as follows:
- Cooperative Model
Cooperative models are mostly implemented by the Saving and Credit Cooperatives (SCCs) under which a wide range of savings and loan products are provided to the members. The SCCs target all community members in a given locality regardless of their social and economic status. However, organizations established by development programs stress more on serving the disadvantaged population. As per the Cooperative Act 1992, a group of 25 persons from a community can form a cooperative by registering it with the Department of Cooperatives, Ministry of Agriculture and Cooperatives. These cooperatives take savings deposits from their members and whoever wants to put savings in the cooperative is extended membership.The SCCs generally require mandatory savings from their members. However, members can also choose from a variety of services such as individual or group saving products, deposits, and festival and educational savings.Members are also provided with loanscovering specific areas, such as agriculture, housing, micro enterprises, orfor some social or emergency purposes.Loans so provided have a minimum term of three months to three years.
The SCCs are governed by Cooperative Laws and are supposed to be self-regulated.However, some cooperatives that have been providing services to non-members after being licensed from Nepal Rastra Bank (NRB) for banking services come under NRB’s regulation and supervision.
Although the SCCs serve almost all the districts in Nepal, they are considered a more suitable financing model for the hilly and mountain residents as they provide both savings and financial services to the members in a homely atmosphere without much bureaucratic hassle. Due to low cost operation, their interest rates are also lower than that of other financial institutions.
- Small Farmer Cooperative Limited (SFCL) Model
A SFCL is a multi-service cooperative formed to provide financial as well as non-financial services, like, social mobilization, training and technical support services, to its members (farmers), mostly in rural areas. Managed by the members themselves, it also provides financial loans in wholesale.A SFCL’s services are targeted only at small farmers and are generally confined to a single Village Development Council (VDC) serving round 500 household catering 200-700 clients within a community.
SFCL has a three tiers structure. At the village level, promoters help local household members to form groups; at the ward level, the farmers’ groups with proximity and common interest are combined into intergroup associations; and at the VDC level, all groups and inter-groups are represented in the Executive Committee.The Executive Committee, comprising of the members elected by the General Assembly,is responsible for hiring the Manager and other staffs and for ensuring the smooth and effective operation of the organization by deciding on the rules and regulation needed. Regular meetings are organized by the grassroots’ groups to collect compulsory savings, loan repayments and applications for loan demand. Respective inter-groups appraise these loan applications and forward them to the Executive Committee with their recommendations for making the final decision.The loans are extended mainly with collateral security. However, rare cases of loans provided without collateral security can be observed as well. Sana Kisan Bikash Bank (SKBBL) provides these MFI’s with wholesale loans while the Federation of SFCL’s regularizes and supervises their financial activities.
- Grameen Bank Model
This popular model, founded in 1976 by the Nobel Laureate, Professor Muhammad Yunusin Bangladesh, is quite popular worldwide and has been adapted by a large number of organizations. First introduced in Nepal in the early 1990’s, the Grameen Bank model is comparatively more feasible in Terai, where the economic activities are more flourished with a relatively more developed market and road infrastructure. Under this approach, peer groups, each comprising of five members, are formed. Three to ten such peer groups form a center at a particular location – close to a village, where they meet once every week or fortnight or month as decided by the members. A group chairperson and a center chief, elected by each group and each center respectively, oversee the activities of group members and maintain group discipline, check loan utilization and ensure that loan installments are timely repaid.In the meetings, group members collect savings and make demand for loans and also settle the loans or interest due and repay loan installments as per schedule. Additional loans may be provided to the members using the group fund managed by the group members. Loans are made initially to two members, then to two others and finally to the last member, with a four to eight week interval between each disbursement. Such loans do not require collateral security. However, group guarantee for repayment is mandatory.Subsequent loans can be accessed only upon the successful repayment of existing loans by all group members. The MFI field staff facilitates the group meetings and also verifies the utilization of disbursed loans.
The typical loan offers of MFIs underGrameen methodology are general loans, seasonal loans, specific loans (sanitation, housing) and the loans issued from the group fund while the savings products comprise of the compulsory group fund savings, and any additional personal, voluntary savings. In recent years, several leading Nepalese microfinance providers have started offering diversified saving schemes such as pension fund savings,education savings, and micro-insurance covering risks related to health, life and livestockas in Grameen Generalized System (GGS).
RMDC (Rural Microfinance Development Centre) finances Microfinance Development Banks (MFDBs) along with commercial banks and finance companies under the Deprived Sector Lending (DSL) scheme.
NirdhanUtthan Bank Limited, ChhimekBikas Bank Limited andSwabalambanBikas Bank Ltd. are some Nepalese MFIs operating under the Grameen Bank Model.
- Self-Help Groups (SHGs)/Community Organizations (COs) model
Based on the concept of “self-help”, SHG’s are small groups of individuals formed into groups of ten to twenty and operating a savings-first business model whereby the member’s savings are used to fund loans. In a SHG usually women from a similar class and region come together to form a savings and credit organization. They pool financial resources to make small interest bearing loans to their members. The terms and conditions and accounting of the loan are set by designated members in the group. The ‘Dhukuti’ system is one such example of a very old form of self-help group in Nepal which has been in operation for over four decades.
Community Organizations (COs)/ SHG’s are formed at the VDC level with the assistance of the Local Development Fund (LDF) under Participatory District Development Project (PDDP) and Decentralized Local Governance Support Program (DLGSP). Local community residents are organized into CO’s, either separately for men or women or together irrespective of the gender. Similar to other MFI’s, the CO’s too mobilizemandatory and other types of savings. Their lending schemes generally offer loans at 10-12% interest per annum to the borrowers. Members apply for loans and collect due installments during a CO’s regular meetings. The interest rates and other terms and conditions of loans are determined by the CO’s if they lend money using their own savings.However, if the member seeks a loan amount that is more than what the CO can provide from its savings, the member would have to fill a separate application form addressed to the Local Development Fund (LDF). The CO recommends the loan and forwards it to the LDF for approval. Similarly, Poverty Alleviation Fund (PAF) too organizes the local groups of the target families called CO’ swith the help of local NGOs. They are informal groups and not linked up with any financial institutions. These groups are provided with seed fund at the rate of Rs. 3,000 per family member and are charged about 10% interest per annum.
- Village Bank (VB) Model
Village banks are credit and savings associations that are managed and run by the community members. Established by NGO’s with an objective to provide members with access to financial services, VB’s build community self-help groups and help members accumulate savings. A typical village bank consists of 25 to 50 members, who are low-income individuals, seeking to improve their lives through self-employment activities. Aiming to enhance the social status and intra-household bargaining power of women, VB’s mostly seek more female participation.
VB lends loan to the members from the loan capital extended to it by the sponsoring MFI.All members sign a loan agreement with the village bank to offer a collective guarantee, thus providing moral collateral for each extended loan.A member generally gets Rs. 3,000 to 10,000 at a time, depending on the amount of savings available in the bank.The loan cycle must end and all loans must be paid back at the end of the 16th week to get new loans released.Members are usually requested to save twenty percent of the loan amount per cycle. New loans or collective income generating activities are funded using members’ savings, thereby ensuring that the money stay within the village bank. No interest is paid on savings but members receive a share of profits from the village bank’s re-lending activities at the end of each loan cycle in proportion to the savings deposits.In a VB, loans are generally charged at 24% interest per annum and interest is collected on upfront basis.
A VB’s management is generally handled by the chair, the secretary and the treasurer elected by the members. The members are also responsible for establishing the by-laws, distributing loans to individuals and collecting payments.All the documents, relating to the records, minutes and books of accounts maintained by the management, are put in a tin box, triple locked by all the three officials and opened and locked in the meeting in front of all the members to confirm transparency to all the members. This model is most suitable and advantageous in the remote and less accessible districts of Nepal.
Over the past few decades, microfinance in Nepal has witnessed quite a many changes and adapted to various operating models with varying degrees of success.Individuals, especially women and rural residents, have been able to create self-employment opportunities and empower themselves economically as well as socially through increased income earning from their small undertakings due to the access to micro-financial services. With different models working for different terrains and traditional models being adapted to suit the current times and need, microfinance has evolved into a novel economic development tool for alleviating poverty through self-sufficiency, financial inclusion, and socioeconomic empowerment.