KATHMANDU: Since its introduction in the 1990s by the legendary Mohammed Yunus, microfinance institutions (MFIs) have become a powerful engine to combat poverty and enhance economic development in third world countries through collateral free loans to skilful and capable poor people. Thirteen out of 29 million Nepalis lack access to basic formal financial services. The highest penetration rate is in the southern Terai (66 per cent), followed by middle hills (33 per cent), inaccessible hills (nine per cent) and only six per cent in the
Himalayan region. Research has identified MFIs as a great tool to help create and sustain micro-enterprises. However, there are numerous challenges for MFIs in Nepal:
1. Some MFIs only focus on agricultural lending, ignoring small non-agricultural enterprises which prevents risk diversification and income growth.
2. The outreach of MFIs is primarily medium-poor population rather than the very poor. Furthermore, micro-credit programmes in Nepal have not been very successful in reaching women.
3. The industry is largely driven by supply instead of demand. There is disproportionately high credit supply but limited savings services. So, the borrower basically ends up at the same socio-economic level as before.
4. With the rise in competition and absence of institutional mechanisms for sharing credit information among MFIs, the duplication of lending has also increased. As a result some clients are over-indebted while most remain out of reach. Encroachment or unfair competition is also gradually emerging as an issue.
5. Most MFIs continue to rely heavily on group-lending technology for service delivery. This provision is beneficial at the initial stage. Over time, with an increase in loan size, flexibility in loan decreases due to its pre-determined loan sizes, locked-in savings, regular meetings and joint liability which ends up creating high transaction costs to the group members and raises effective interest rates on borrowing.
6. Despite the low interest rate (three to five per cent) set by the deprived sector lending policy of Nepal Rastra Bank, commercial banks, development banks and finance companies charge high interest rates of six to nine per cent, making it difficult for MFIs to sustain.
7. The government charges equal corporate tax of 30 per cent to both commercial banks and MFIs, categorising them as financial business. If such tax could be exempted, the amount could be used to expand service to micro-enterprises.
Due to low accessibility, poor infrastructure, high competition among MFIs and poor policy, micro-finance banks are at crossroads. The supply driven aspect of MFI is creating a barrier to attract more clients. Considering that MFIs are the most important source to generate finance for the poor people without collateral, concerned government and other stakeholders, including the private sector need to
take appropriate actions to support its sustainability. For banks and finance institutes, this area should be among the first priority also in regards to CSR activities because this engagement can have a strong impact on society and lead to extension of their customer base and ultimately turnover and profits.
(The author is a project manager at NBI and can be reached through email@example.com)