Critical Issues in Nepal's Micro-Finance Circumstances

Publication Date: 1997
Published by: IRIS Center at the University of Maryland
Document Type: Paper

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How to improve the provision of microfinance services in Nepal?

This paper examines the effectiveness and outreach of microfinance organizations (MFOs) in Nepal. The paper:

• Assesses MFOs in Nepal;
• Identifies the critical issues faced by these organizations;
• Proposes solutions;
• Provides recommendations for the government, donors and microfinance practitioners.

It states that:

• Poverty and difficult geographical circumstances make the delivery of financial services to the poor challenging;
• Limited economic opportunities result in low income and low savings capacity;
• Women are confined to domestic or agricultural activities;
• Providing access to savings and credit has proven to contribute towards poverty alleviation and the empowerment of women.

The study finds that although MFOs in Nepal appreciate the costs and benefits of microfinance, their outreach and financial management is poor. There is a “social-service approach” instead of a “business approach”.

It identifies the following critical issues faced by MFOs in Nepal:

• Financial viability;
• Transformation of government programs from retail banking to wholesale banking;
• Provision of financial services to the “Hills”;
• Unfair competition between MFOs;
• Lack of institutional infrastructure.

The authors recommend that:

• Governments and international non-government organizations (INGOs) support only those institutions that are moving towards financial sustainability;
• Capital funds and training in bookkeeping be made available to MFOs;
• Financial reporting of MFOs in Nepal be improved;
• Interest rate subsidies be eliminated;
• Legal reforms be implemented to establish an institutional structure.