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Emerging Challenges and Paradoxes of Microfinance Institutions in Nepal

The Centre for Self-help Development (CSD) in partnership with the University of New South Wales (UNSW), Sydney, Australia, organized a seminar on the topic "Emerging Challenges and Paradoxes of Microfinance Institutions in Nepal" on September 5, 2022. The objective of the program was to discuss on the emerging challenges and paradoxes in Microfinance Institutions in Nepal and make common understanding with the new way out.

Dr. Chiranjibi Nepal, former Governor of Nepal Rastra Bank and was the Chief Guest of the seminar. He inaugurated the seminar by lighting the traditional Lamp 'Panas'. In his remarks, he said, “Microfinance institutions in Nepal have been following profit centric approach and lately deviated from its core objective of poverty alleviation. “ He also said, “Anyone who has garnered sufficient experience and received skill development training will be able to initiate business if s/he has financial access. Milton Friedman, American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences said that the poor are poor not because they are lazy but because they do not have access to finance.” Dr. Nepal further said, “It is necessary to improve microfinance sector so that they can contribute in socio-economic causes of their clients. As per the latest data there are approximately 1.5 lakh men and 30 lakh women as members and similarly 90 thousand men and 30 lakh women as borrowers. Obviously the microfinance sector has involved majority of women and will definitely help in brining women in helm of decision making process even more so in the household level. Lately the microfinance has profit centric approach and deviated from its core objective of poverty alleviation. ”He added, “We, promoters, practitioners and shareholders, should not become rich through microfinance which is basically a social business. If some independent research shows that poverty has increased through microfinance then there will be problem for the microfinance sector. There will be question mark on its working modality and its existence as a whole. Even when Central Bank has capped retail interest rate at 15% we should lower the rate further for poverty alleviation and also for garnishing goodwill.”

The Chair of the opening session, Mr. Shankar Man Shrestha, said, “Microfinance is the tool of poverty alleviation and within the next five years the country will be free of poverty if we work diligently and with right mindset involving the right people who are poor. The problems in microfinance that we have been facing now are all created by ourselves and not through external factors. NRB as a regulatory authority of microfinance should take strict measures and enforce strong penalty for those deviating from the course or not complying its policies and guidelines. MFIs should come back to right track, purify and consolidate their operations rather than focusing on expansion and unhealthy competitions. The loan operations of MFIs are in critical state due to rampant multiple financing, volume of loan beyond their needs and capacity and the increasing trend of misuse of loans. ”

He suggested that a time has come today for introducing Grameen Generalized Model of the Grameen Bank, Bangladesh to get MFIs out of present crisis.

He further added, “The Grameen Bank has to award 5 stars which includes green, blue, violet, brown and red to its staff for rating their performance. The green star is for 100% repayment, the blue is for earning profit and not being in a loss, the violet is for self-financing, the brown is for all children in school and the red is for all the members moving out of poverty. “

In the session, "How to Manage Competing Demand of Nepalese Microfinance Organizations,” Dr. Josh Keller from School of Management and Governance, University of New South Wales (UNSW), Sydney, Australia. He said, “The dilemma at the policy level could be minor regulation versus over regulation. Overregulation may harm the sector and under regulation may weaken the compliance mechanism. The paradox mindset is the process of taking these issues simultaneously and mechanism to optimize the solution."

Dr. Nava Raj Simkhada, DCEO of the The Sana Kisan Laghubitta Bittiya Santha Ltd. (SKLBSL) said, “The main focus of SKLBSL is community level participation of local people and decentralized leadership, priority on enterprise development through skill development along with loan disbursement and providing wholesale loan to agriculture cooperatives at minimal rate.  The SKLBBL provides wholesale loan and Nepal Agriculture Federation provided non-financial services like capacity building and institution development services. Among the shareholders of The Sana Kisan Labhubitta Bittiya Sanstha Ltd 44% of the shares are owned by Sana Kisan Agriculture Cooperatives. There is no conflict of interest because if there is high interest rate the shareholders who are also the shareholders of the Sana Kisan Agriculture Cooperatives are going to benefit and if the interest rate is low Sana Kisan Agriculture Cooperatives are going to benefit as they are the recipient of wholesale loan from the Sana Kisan Laghubitta Bittiya Sanstha Ltd."

Similarly, Mr. Prakash Raj Sharma, the chairman of the Nepal Microfinance Bankers' Association (NMBA), said that in order to decrease multiple financing NRB should have strict measures for branch expansion and credit information bureau should be functional.  He said “The more than two MFIs should not lend to one borrowers. MFIs overcrowding loans to a borrowers should be punished by NRB.”

Mr. Mahendra Kumar Giri said, “There are currently 39,866 cooperatives. Apart from loan disbursement we have been involved in enterprise development and women empowerment.” Current issues include, “High default rate, low saving, low loan disbursement, low liquidity and low working capital.”

Dr. Prakash Kumar Shrestha said, “Currently the issues in this sector is multiple financing and over-indebtedness. This is due to oversupply of loan. In the period of 10 years credit outstanding has increased from Rs. 1.8 billion to Rs. 3.3 billion but this has not made visible contribution to enterprise development as our export is 10% of our total import.” He further added, “There is social banking and profit making paradox. Similarly, we need to use client protection fund for borrowers who are in trouble. We have highest concentration of MFIs in Madesh Pradesh but still the people are suffering from informal money lenders who chance exorbitant interest rate to the borrowers.”

In the session “Current Situation and Problems of Microfinance, Possible Solution and Way Forward, Ms. Mina Dhakal emphasized that MFIs should initiate to address the problem of their members. She said, " It is not necessary that microfinance and cooperatives should cover large area, their priority should be to fulfill the needs of members they work with. There is a problem of uncertainty of market and goods/service produced/value added by the members may not bring adequate price for sustainability of our enterprise. Members can produce agriculture products/services if technical inputs, fertilizers and proper seeds are provided at fixed market price with guarantee. The government should also announce the minimum support price which should be declared well in advance for farmers to plan their crops before the start of the planting season.”

Another speaker of the seminar Ms. Samjhauta Biswakarma suggested, "Despite of providing loan alone, MFIs should provide skillful training to their members in every village level. MFIs now have been providing loans to do something, but the members have not been able to invest on it because they do not have skills in their hands. Therefore, all banks and cooperatives have to ensure that their borrowers can generate adequate cash inflow to run their enterprise."

Ms. Kriti Devi Chaudhary, another speaker of the session, said, “Microfinance institution should stop members to repay their loan by way of coercion and threat. Some microfinance institutions inflict pressure on the borrowers if they are late on their loan repayment which has also resulted in members committing suicide because they cannot bear the torture and threat of the staff.”

Ms. Soniya Rijal, PhD Candidate, School of Management and Governance, UNSW, Sydney, Australia highlighted on the objectives of the seminar. She said, “Microfinance Institutions have social commercial paradoxes regarding whether to prioritize commercial aspect of the organization which includes profit maximization or whether to focus on social aspect which include poverty alleviation as well as mainstreaming of marginalized community. Having said that, however financial sustainability of particular organization and socio-economic needs of clients can move in tandem if right approach is followed. It is hoped that the seminar will discuss on appropriate methods to tackle socio-economic needs of clients with financial sustainability in mind.”

One of the participants Ms. Uma Bohara Joshi, Board Member of the Swabalamban Laghubitta Bittiya Sanstha Ltd. said “Problems in MFIs include profit oriented mentality in social business, providing ambitious targets to staff and NRB policy not favorable for credit plus programs.”

In the closing session Mr. Sanjay Kumar Mandal, CEO of the Jeevan Bikas Laghubitta Bittiya Sanstha Ltd. presented the way forward of the Seminar, based on current underlying issues of microfinance and on comprehensiveness of the scenarios, through consensus development of participants. The participants unanimously passed the way forward.

In the Seminar there were about 80 participants representing different Microfinance and financial institutions, experts, academia, representatives from the Nepal Rastra Bank and other stakeholders.

Emerging Challenges and Paradoxes of Microfinance Institutions in Nepal

Way Forward

1.Members of MFIs and MFCs will be capacitated to enhance their skills and transformed them into entrepreneurs rather than make them indebted with loan
2. Members will be allowed to join groups only after making sure that she is not over-indebted and while disbursing loan to a single borrower, the loan ceiling as directed by regulatory authority, will not be crossed and loan amount is provided to a single borrower by no more than 3 organizations and without crossing the mandatory loan ceiling for single loan amount. Regulatory authority will take appropriate actions if this criteria is violated
3. The poverty level of members is measured by using appropriate tools and the data on existing poverty level of members is updated periodically and submitted to the board annually
4. Borrowers who are unable to repay the loan installment will not be forced to pay the remaining installment but the installment pattern will be re-scheduled and forwarded to regulatory authority for further approval and necessary directives
5. Hardcore poor and those having problems who live within the working regions of particular microfinance institutions will be rehabilitated and socio-economically transformed and brought into the mainstream of other microfinance beneficiary  groups by utilizing the financial resources from Client Protection Fund and Institutional Social Accountability Fund
6. In order to transform microfinance institutions and capacitate them in providing service as per the need of the hour, priority will be given to digital service in order to minimize operating cost of the organization
7. Arrangements will be made so that branch managers and area managers will be made to visit 2 centers and 2 enterprises of the members in a single day for monitoring the activities and conducting loan utilization test of client.

 

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