Nepal is yet to tap the huge potential offered by micro-finance institutions in alleviating widespread poverty

By Pratibedan Baidya

Founder of the Bank Muhammad Yunus. (Photo source: nobelprize.org)

Founder of the Bank Muhammad Yunus. (Photo source: nobelprize.org)
The recent decision of the Nobel foundation to award Nobel Peace Prize to the Grameen Bank (Rural Bank) and founder of the Bank Muhammad Yunus, has not only appreciated the role played by Yunus and the Bank in poverty eradication in Bangladesh but has also outlined the need of micro-finance for poverty eradication in developing countries.

Founded in 1983, the Grameen Bank provides small loans to poor people in Bangladesh who use them to establish tiny businesses. Grameen Bank has 2.4 million borrowers, 95 percent of whom are women.

The bank concentrates on lending to women because bank research has shown that women tend to have a longer term planning and spend more business profits on family members than their male counterparts.

The example of Grameen has inspired a global micro credit movement that has spread to 65 developing countries and has reached 17 million borrowers around the globe.

The Grameen Bank logo. (Photo source: nobelprize.org)

The Grameen Bank logo. (Photo source: nobelprize.org)
Several countries around the world including Nepal have tried to replicate the Grameen model—although with mixed results.

So far, more than 700 thousand families are associated with the micro-credit organizations in Nepal.

Talking to Nepalnews, former vice-chairman of National Planning Commission Dr. Shankar Sharma, said that as the poverty level is high in Nepal the role of micro-credit organizations has been found very effective to reduce rural poverty.

He however said that such organizations are more effective in the terai region than in the mountainous region where there is no access to roads.

When asked why the performance of Rural Micro Finance Development Centre (RMDC) and its partner organizations is effective compared to rural development banks managed by the Nepal Rasta Bank, Dr. Sharma added that it was because of less accountability on part of the employees and an ineffective monitoring mechanism.

“Like other public institutions, such development banks are also not free from politicization, which is the important cause of their failures,” added Dr. Sharma.

Talking to Nepalnews over phone, chairperson of the Nepal Women’s Community Service Centre (NWCSC), a non-governmental organisation based in conflict-hit mid-western district of Dang, Bimala Yogi said that her organization has so far provided micro-credit to 10,000 poor families of the Dang district.

NWCSC provides loan to women, who are very poor and belong to marginalized communities and do not have any asset to submit as collateral to the financial institutions.

“We are giving loan in group guarantee by forming groups of such women and also providing skill development training to them so that they would be able to utilize the loan effectively,” she said.

“The recovery rate of our organisation is nearly 90 percent and has brought tremendous changes in the lives of rural poor women,” she added.

Chief Executive Officer of Rural Microfinance Development Centre ( RMDC), the organization which provides skill development services and loan to micro-finance organizations, Shankar Man Shrestha said that there was no other effective way than micro-finance to alleviate poverty in a country like Nepal.

The RMDC covers 39 out of 75 districts in the country.

“I do not claim that people will be rich overnight by micro finance but they would be easily able to generate income to support their basic needs,” Shrestha told Nepalnews.

RMDC provides support to 47 micro-finance organizations, and has been able to reach to more than 700,000 people across the country.

Shrestha, however, said that there was less presence of micro-finance companies in far western development region and some hilly districts due to the decide-old conflict in the country.

He said that the repayment rate of such micro-finance companies was almost 99 percent despite the fact that loan was provided to poor women without collateral.

He said that Maoist act of looting such organizations and intimidating people not to repay their loans had hampered their act in the conflict-hit areas. “We hope the situation will improve if peace is restored in the country,” he added.

On the failure of the rural development banks run by the Nepal Rastra Bank, Shrestha said it was because of the poor leadership. “The leadership is not strong and the employees are just concerned about their facilities rather than providing good services to the people, in such context how can such banks be successful?” he asked.

“The government should form suitable policies and not intervene in micro-finance institutions to make them instrumental in alleviating rampant poverty in the country,” he added.

Chief of the research department at the Nepal Rastra bank, Keshav Acharya, too, agrees that there is no alternative to micro-finance to bridge credit gap in the country.

According to Acharya, large number of people in the rural areas still depend on informal credit, so micro-finance could bridge the gap.

He further added that since the credit delivery mechanism of micro-finance organizations was effective in terai regions compared to hilly regions, some alternative mechanism should be developed to reduce the cost.

“As micro-finance organizations are not only involved in commercial activities but also involved in the social works, the government should allocate some percentage of its revenue for micro-finance organizations,” he added.

He also acknowledged the fact that the rural development banks under the Nepal Rastra Bank were less effective compared to non-governmental micro-finance organizations.

The Nobel Peace Prize 2006
The Nobel Peace Prize 2006
“There are two reasons for it. The first is due to political interference and the second is they are more guided by the interest of the people rather than earning profits,” Acharya added.

The Nobel prize for peace to Prof. Yunus, the pioneer of the micro-finance, this year has not only boosted the morale of micro-finance institutions but also taught a lesson that it is an effective instrument for poverty alleviation. But it may be a long way before Nepal fully realizes its potential. nepalnews.com Oct 18 06