Like many Nepali women, Shiba Pariyar did not have big ambitions. She was too occupied in carrying out her household chores and helping her husband in a small plot of land they had. Nearly a decade ago, one fine morning, she heard that an officer from a local NGO was visiting her village to form a women’s group. With friends, she attended the meeting. That was a turning point in her life.
Shiba now runs a tailoring shop at Ghorahi in Dang district. “I borrowed Rs 5,000 from Nepal Women Community Service Center (NWCSC)—a local NGO based in Dang—and started this shop with one sewing machine. Now, I have got 10 sewing machines and eight people working in my shop. My children have passed the SLC exams and I have also bought a plot of land in the town area,” Shiba said with a big grin.
It’s not a small feat for a ‘dalit’ (so-called untouchable) woman like Shiba to run her own shop and also generate employment for young men and women. Tens of thousands of women in Nepal, like Shiba, are working as micro-entrepreneurs as part of the microfinance movement. The idea of microfinance took off nearly four decades ago with the launch of Grameen Bank in Bangladesh, founded by Prof Muhammad Yunus, and was based originally on the idea of providing small loans to poor—mainly women through joint-liability groups—also known as the Grameen model.
Microfinance in Nepal started at around the same time as in Bangladesh but at a much smaller scale. In mid-1970s, Nepal Rastra Bank (NRB) directed two state-owned banks to lend at least five percent of their deposits under the “Priority Sector Credit” scheme. Though the policy was phased out in 2006/07, NRB has still made it mandatory for commercial banks in the country to invest three to five percent of their lending to what it defines as the deprived sector. Commercial banks, for their part, lend to Microfinance Development Banks and Microfinance Institutions (MFIs) to meet their obligations.
Microfinance products in Nepal include micro-credit, medium and small enterprise credit, group savings, project loan and micro-insurance. NRB considers loan up to Rs 60,000 per borrower given to the deprived sector and a group loan up to Rs 150,000 given to the members on joint liability for project loans as micro-credit.
It is believed that more than 10,000 unregistered NGOs are operating in the country either in the field of microfinance or in social and community based development activities. However, only 47 NGOs have received license from the NRB for conducting limited banking operations. The interest rate ranges between 18 to 25 percent per annum and the repayment system of NGOs in microfinance is on a short term periodic basis.
The major problems being faced by the microfinance sector in Nepal include the tendency of the MFIs to concentrate in areas with easy proximities to market and high population density. In its 2008 report, NRB noted that MFIs charge as high as 25 percent interest as against the commercial bank’s interest rate of around 14 percent. “Surprisingly, most of the microfinance programs running in the country incur high operating costs, in some cases reporting as high as 27 percent. This has brought a question mark on the sustainability of microfinance program itself, which may bring higher social costs to the nation, if not handled in time,” the report said.
The government has drafted a Microfinance bill that envisions establishing a supervisory authority to regulate and supervise microfinance activities and institutions. Also, there are plans to roll out essential regulations, guidelines, policies and standards for the same purpose. This will be a significant step in further promoting microfinance, especially to the unbanked population.
According to the Nepal Living Standard Survey 2010/2011 conducted by the Central Bureau of Statistics, among the households taking loans in the country, just 20 percent take loans from banks, while over 66 percent get it from relatives and money lenders, 5.1 percent from cooperatives, 4.1 percent from NGOs and 4.6 percent from other channels. The Microfinance Act would be a catalyst in channelling affordable formal financing to the unbanked population. However, the process of approving the bill from the parliament needs to be expedited.
There has been, however, strong criticism of the microfinance model saying that it aims to reduce the role of the state in poverty alleviation programs. In his book 23 Things They Don’t Tell You about Capitalism, economist Ha-Joon Chang insists that the problem with the microfinance is that it shows the limitations of individual entrepreneurship. “Unless we reject the myth of heroic individual entrepreneurs and help them build institutions and organizations of collective entrepreneurship, we will never see the poor countries grow out of poverty on a sustainable basis,” he adds.
Chang cites the examples of the dairy sectors in countries like Denmark, the Netherlands and Germany where farmers organized themselves, with state help, into cooperatives and jointly invested in processing facilities and overseas marketing. In contrast, the dairy sector in the Balkan countries has failed to develop despite a large amount of microcredit channelled into them.
In case of Nepal, it would mean that MFIs will have to support and turn into cooperatives in sectors like agriculture, horticulture, poultry or dairy. Though cooperative movement is facing a big backlash at the moment due to a range of scandals and weak regulations, for the microfinance sector time has come to look beyond microcredit and find ways and means to turn individual entrepreneurs into small, medium and may be big entrepreneurs over time.
While NRB has asked few MFIs like the NWCSC to graduate into a development bank by the end of next fiscal year, most MFIs don’t have access to adequate capital or knowhow to expand their services. There is also a fear that MFIs converted into development banks may be driven by profit motives.
Those observing the Nepali MFIs from close quarters suggest that MFIs better coordinate among themselves and pull in their resources to reach out to a larger population especially in the rural areas. NRB will have to play a leading role in promoting cooperation and discouraging unhealthy competition among the MFIs. Strong legal regime backed by Credit Information Bureau covering the MFIs would go a long way in this direction. Moreover, the government needs to support initiatives of micro-enterprises to turn into small and medium enterprises (SMEs).
To give opportunity to tens of thousands of Nepali men and women, policymakers will have to look beyond microfinance and take concrete measures to unleash the hidden potential in would-be entrepreneurs like Shiba.
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