Microfinance sustainability and Outreach in Nepal

The prime notion of banking the un-bankable was propounded, nurtured, and embarked upon by Mohammad Yunus via Grameen Bank in Bangladesh and the same has been implemented by developing nations where poverty reduction and struggles for basic infrastructure has been for ages within the millennium projects and national pride projects. Muhammad Yunus was the pioneer to initiate Microcredit in 1976 A.D. The Norwegian Nobel Committee awarded him the Nobel Peace Prize for 2006, divided into two equal parts between Muhammad Yunus and Grameen Bank of Bangladesh for their efforts to create economic and social development from the grass roots up. His vision is to make the world poverty free. He believes that poverty is the denial of all sorts of fundamental human rights. Gert van Maanen had defined  Microcredit, or microfinance, as banking the unbankables, bringing credit, savings and other essential financial services within the reach of millions of people who are too poor to be served by regular banks, in most cases because they are unable to offer sufficient collateral. In general, banks are for people with money, not for people without.

There is a base of trust which has recently buried down all believes and expectations of Nepalese. The panoramic view of Microfinance and the suffering of people on the countryside and rural area is a living example of instability, confrontation on ideas and working culture. What will be the future of Nepal where there is excursion of vested interest by the people who are aimed to work as per the objectives of Microfinance? Complications are increasing day by day due to confrontation on words and work. But it’s a miracle and honor to see a few people who are rising and making their living better. Poverty is not declining through micro-finance. Poor households simply remain poor because of the extra burden of interest rate and debt. Microfinance institutions (MFIs) are charging high interest rates and this is having an inverse effect on empowerment and better living.

Though billions of money has already been invested in microcredit’s programs in Nepal where millions of households have received security free loans and total numbers of actual borrowers has reached over a million; the motto of micro-finance in the context of Nepal hasn’t gained momentum yet. Most of the MFIs are failing to divert lending on productive sector. Hence, this type of practice have violated of MFI ideology and philosophy. Large number of MFIs focal point in the context of Nepal is on agriculture which still adopts traditional concepts and agricultural base. Small business enterprises related to agriculture, preserving endangered culture hasn’t been considered as a low hanging fruit. Concentrated lending on traditional cum conventional farming only hinders the portfolio management of MFIs.

Generally, microfinance lends money to those households who struggle to complete their four -square meal, who are named unbankables but show high potential to sustain and grow small business enterprises. But, on the other hand, if the targeted group are residing temporarily i.e. on rent then the probability of default is comparatively high as they stay and migrate frequently. Hence, the outstanding and due amount will put extra pressure on the potentiality and future proof of MFIS. Providing loan is not an end in itself. As a prudential lending institution there must be clear assessment of need of funds, ability to repay the loan, loan size, frequent appraisal and visit of sites where the business has been operating, their intentions towards business. The need and intention of the client must be identified clearly.

Most of the time people considered soft loan and subsidized interest rate as a grant which often play as bleach to the concept of self sufficiency and sustainable development. MFIs outreach has not been realized yet because they mainly focus on medium-income group than extremely low-income groups. MFIs can mobilize financial resources (to buy shares and debentures) to any one organized institution up to 10% and for all corporate bodies 30% of its core capital of last quarter. MFIs are mushrooming on the limited arena where there is better access to infrastructures of development but not on high hills and mountains where cold and inflation is extreme. It would be as more effective and outbound if MFIs expand and extend their services to people who reside on hill tops and high Himalayas considering cost, service, objective, viability and sustainability. As per economic survey FY 2076/77 there were 89 licensed MFIs till falgun 2076 B/S. The absence of sense of need of fund, repayment ability, amount of fund and more marketable but high operating cost adds non-value added activities as compare to value added activities.

MFIs are borrowing wholesale loan from commercial banks and development banks at higher rate than we expect for financing clients need. Since last few years back commercial banks, Development banks and finance companies are managing portfolio in microfinance sector too through different means. To curb ongoing dilemma and hassles Nepal Rastra Bank has been making mandatory to lend their portion of lending in deprived sector. Those who need to be served at affordable interest rates are compelled to pay higher interest rates than commercial banks despite the fact that it is tagged as deprived sector lending. Nowadays, NRB has given permission to accept public deposit, a practice already place in India. There are also problems on institutional re-engineering, re-structuring, and capacity building.

There are many ways to measure the impact of MFIs. Most of the time household expenditure, Return on investment, household income, employment rate, non-agricultural investment, current as well as fixed assets accumulation, economic empowerment as well as social empowerment is used but the crux of these indicators doesn’t justify the contribution of MFIs on poverty reduction.

There have been a lot of activities, actions, strategy carried out but it was best suited on paper work and implementation part was not worthy so far to consolidate and reconcile all the shortcomings within the MFIs. There must be strategic fit among MFI apex institutions, Ministry of Finance, National Planning Commission, Nepal Rastra Bank, Development partners, NGO, INGO, FINGO and beneficiaries as a whole. There must be tailored services whereby MFIs can address the changing and customized needs of its clients.

There is a need to guide, monitor and control large no. of MFIS. High interest rates, unhealthy competition and multiple lending, geographical constraints, temporary residence, no exemption of MFIs from corporate tax, focusing intensively on conventional and self-sufficiency agricultural lending, a lack of saving, a lack of development infrastructures, failing to attract new small and micro enterprises, caste related cases, moral hazards and asymmetric information by clients, stability of government question on capacity building and lack of government attention are the major challenges faced by MFIs. There are fewer chances of let off and concessions regarding corporate tax rate to MFIs. If these above enlisted issues are well addressed then the philosophy and objective of microfinance will be clearer in the context of Nepal.

Microfinance has been considered as an effective tool for the reduction of poverty. As per economic survey FY 2076/77 Banks and financial institutions have occupied significant share in the total assets and liability structure of financial system but MFIs have only occupied 4.7% of total share of financial sector. The covid-19 pandemic is threatening lives and livelihood. How could MFIs act its best during the time of pandemic? So, there is need to access the impact of covid-19 on MFIs clients' activity so as to initiate further needful doings. Every cloud has a silver lining. In spite of all level of hurdles and discomfort, the level of perseverance will define success of MFIs.

 

Bishal Prashant Poudel, Branch Manager

Agriculture Development Bank Limited

Email ID: [email protected]

Cell No:9849667749