AN OVERVIEW OF MICROFINANCE SECTOR IN NEPAL

1. Over the past 28 years, the Government introduced a number of programs to

extend
financial services to the rural people focusing on the poor and women. These
include
mainly, the Small Farmers Development Program (SFDP) implemented by the
Agriculture
Development Bank (ADBN), Intensive Banking Program (IBP) implemented by two
national
level commercial banks (CBs) and one joint-venture private commercial bank,
Production
Credit for Rural Women (PCRW) implemented by the CBs and ADBN in partnership
with
Women Development Department of the Government, Regional Rural Development
Banks
namely Grameen Bikas Banks (GBBs), and the Micro-Credit Project for Women
(MCPW)
implemented through the CBs. Evidences indicate that these programs have not
been able
to substantially outreach the poor households in the country. Less than 20% of the
total poor
population has been estimated to have come under the fold of institutional microcredit.

Inadequate financial infrastructure is another major problem in the Region. Financial

infrastructure includes legal system, information system, and regulatory and
supervision
system for financial institutions and markets. In general, the governments in the
region have
focused on creating special programs and institutions to disburse funds to the poor
with little

attention on building financial infrastructure, which supports, strengthens, and

ensures the
sustainability of such institutions or programs and promotes participation of private
sector
institutions in the microfinance sector.
For example, NGOs are found very appropriate in delivering micro-credit and
mobilizing
local resources for the poor in the rural areas. But, their operations are largely
limited
because of inappropriate legal instruments. They are not allowed to take public
deposits,
which could be major source of funds for on-lending to the poor. The governments
or central
banks neither could undertake regular supervision of the NGOs and enforce
performance
standards, nor do they like to transfer these authorities to appropriate institutions,
such as
wholesale organizations.
Although there is a large number of NGOs and cooperatives, only few of them could
be
termed as MFIs. Besides, the so-called MFIs have very limited institutional capacity
and
experience in microfinance operation. Most of them are not using standard practices
of
microfinance, and are operating as amateurs. Although they have mobilized
substantial
amount of financial resources under different projects, they have not paid attention
to buildup
own capital base. They lack professionalism in their operations. A lot of efforts are
required to be made to enable them to undertake microfinance services as a
business.

Developing new institutions is a time taking process; it generally takes 2-3 years to
bring
them to an acceptable level. Hence, RMDC's current focus has been on the
institutional
strengthening and capacity building of the new and potential MFIs.