Microfinance Policy, legal

and regulatory framework

Chapter 4
Prepared by Nimmi Rai
Micro finance policy

 Microfinance policy refers to a set of guidelines and

regulations established by governments or other
regulatory bodies to promote and regulate the provision of
financial services to low-income individuals, small
business owners, and others who lack access to traditional
financial services.
 The policy typically includes measures to encourage the
establishment of microfinance institutions, the provision
of microcredit, and the development of other financial
products and services designed to meet the needs of
underserved populations.
Micro finance policy in Nepal
 The Government of Nepal declared the National Micro-
Finance Policy in May 2008.
 Nepal has continued to develop and refine its
microfinance policies, with the Nepal Rastra Bank (NRB)
playing a key role in overseeing and regulating the sector.
 Microfinance policy 2008 has introduced as a new
mechanism to boost up microfinance industry.
 It aims to improve the smooth flow of funds to the poorest
segment of the rural population by creating national fund
for microfinance.
The highlights of the policy
1 Enhance the supply of microfinance services to the rural and urban poor to
suit to their geographical, social and economic diversity.
2 Improve for the smooth flow of microfinance services with or without
collateral to the poor and the destitute by establishing a standard
procedure for identifying the target groups.
3 The government will also integrate microfinance with various poverty
alleviation programs and projects and implement these in a coordinated
manner.
4 The government will coordinate its activities with the institutions
responsible for micro-enterprise development and assist the targeted poor
people for their enterprise development.
5 The government will also motivate destitute classes to mobilize their
savings to improve their access to microfinance services.
6 The government will establish relations with microfinance service
providing institutions such as community organizations and savings and
credit groups by making a legal provision to easily recognize these
microfinance institutions.
And so on
Regulatory Authority and institutions
 In Nepal, microfinance institutions are regulated by the
Nepal Rastra Bank, the central bank of Nepal, under the
Microfinance Regulation 2018.
 The regulation sets out rules and requirements for

licensing, operations, and reporting for microfinance

institutions, including governance, risk management,
financial reporting, and consumer protection.
 Additionally, the regulation sets out guidelines for interest

rates, loan terms, and other practices to ensure that

microfinance institutions operate in a transparent, fair, and
responsible manner.
 Regulatory Authority and institutions

 Details of NRB’s prudential regulation for MFDBs are

presented below.
 Capital Requirement : A minimum of paid-up capital

of NRs. 100 million is required to open a MFDB at

national level. Similarly, MFDB which is to be
operated within 4 to 10 districts excluding Kathmandu
valley requires NRs. 20 million as its minimum paid-up
capital. The lowest capital requirement for MFDB is
NRs. 10 million and such MFDB can operate with the
coverage of 3 districts, excluding Kathmandu valley.
 Limit for Promoter’s Stake: A minimum of 15 promoters are
required to promote an MFDB. The promoters of MFDB can
hold a maximum stake of 70 percent. At least 30 percent shares
should be allotted to the general public, which should be issued
within 2 years of the operation of the bank. The promoter can
off-load their stake with the permission of the NRB after
meeting the following two conditions: (a) public issue has been
done; and (b) listing of shares at the Stock Exchange has
already been done for the last 3 years
 Provision for Foreign Stake Holding: Foreign institutional
investors can hold a minimum of 20 percent to maximum of 85
percent stake at the MFDB. However, such stake should not
effect the public allocation i.e. 30 percent if the foreign
investment is less than 50 percent. If foreign investment is
equal or greater than 50 percent of the total paid-up capital
there should be a provision of 20 percent for public allocation.
But foreign individuals are restricted to have equity in MFDB.
Regulatory Authority and institutions
 Individual Share Holding Limit: Any individual, firm,
family, group, house, company falling in the same
group cannot hold more than 15 percent share of
MFDB. Such limit is also applied to the promoters.
Regulatory Authority and institutions
 Nepal Rastra Bank (NRB)
 The Nepal Rastra Bank is the regulatory body for all types of banks and

financial institutions licensed by it and classified as class A, Class B Class

C and Class D banks under the bank and financial institution Act 2006.
 The Nepal Rastra Bank (NRB) regulates microfinance institutions

(MFIs) in Nepal through various mechanisms, including:

 Licensing: NRB issues licenses to MFIs to operate as regulated

financial institutions, subject to meeting specific requirements such as

minimum capital, management competence, and sound operational
practices.
 Supervision: NRB conducts regular on-site and off-site inspections to

monitor the operations of MFIs, assess their financial health, and ensure
compliance with applicable laws and regulations.
 Reporting: MFIs are required to submit periodic reports to NRB,

including audited financial statements, loan portfolio quality reports,

and other regulatory filings.
 Capacity building: NRB provides training and technical
assistance to MFIs to help them build their capacity and
improve their performance.
 Consumer protection: NRB has set out guidelines for MFIs to
ensure that they operate in a transparent and fair manner,
including rules on interest rates, fees, disclosure, and customer
grievance redressal.
 Through these measures, NRB aims to promote the growth of
the microfinance sector in Nepal while safeguarding the
interests of borrowers and ensuring the stability of the financial
system.
Department of Cooperatives(DOC)
 The department of cooperatives under the Ministry
Agriculture and Cooperatives is the regulatory body for the
cooperatives societies including saving and credit
cooperatives registered under cooperative act 1992.
 The long term vision is to develop cooperatives as one of the

lead sector for economic development of the country.

 The mission of the Cooperatives Department is to develop the

values and principles based cooperatives in the country and

the plan would be delineated for the fulfillment of long term
vision.
 Cooperatives will be developed as the foundation pillar of the

economy for the economic growth, member saving deposits

mobilization, operation of agriculture and micro-enterprises,
and creating awareness of the people on Cooperative
concepts.
 The Department of Cooperatives typically performs a variety of functions,
which may include:
 Registration of cooperatives: The department is responsible for registering
cooperatives and ensuring that they meet the legal requirements for
incorporation.
 Promotion of cooperatives: The department may promote the formation of
cooperatives by providing training and education on the benefits of
cooperative enterprise.
 Regulation of cooperatives: The department may establish regulations and
guidelines for the governance and operation of cooperatives, and may
conduct regular audits to ensure compliance.
 Support for cooperative development: The department may provide
financial and technical support to cooperatives to help them grow and thrive.
 Dispute resolution: The department may act as a mediator in disputes
between cooperative members, or between members and the cooperative
itself.
 The specific roles and responsibilities of the Department of Cooperatives
may vary depending on the country and its legal and regulatory framework.
Laws and Regulations
 Nepal Rastra Bank Act, 2058 (2002)
Objectives
 To establish Nepal Rastra Bank

 To Manage and Operate Nepal Rastra Bank

 To Formulate necessary monetary policy and foreign exchange

(FOREX) policy.
 To maintain a relationship with the government

 To maintain the stability of the price

 To consolidate the balance of payment

 To develop an efficient system of payment

 To regulate other banks and financial institutions. Such as –

 -Issue license

-Issue Directives
-Inspection, supervision, and monitoring
As per the provision of Nepal Rastra Bank Act 2002,
section 79,
 The regulatory power has been mentioned on the following sub clauses.
a) The NRB shall have full powers to regulate the functions and activities of
commercial banks and financial institutions.
b) For the regulation, the Bank may frame rules and bye-laws on the matters which
the Bank deems appropriate and issue necessary order, directives and circular
and it shall be the duty of the concerned commercial bank and financial
institution to abide by such Rules, Bye-laws, order, directives and circular.
c) The Bank shall issue appropriate directives to commercial banks and require
them to submit the following particulars:-
d) Its balance sheet accounts, off balance sheet commitments, statement of income
and expenditures and their ratio among accounts or items.
e) Prohibitions, restrictions or conditions concerning specific types or forms of
credit or investments, or of credit or investments, forms of commitments of a
risk-bearing nature which are not matching as to maturity of assets and liabilities
and off-balance-sheet items, foreign currency, spot or advance rate of interest,
swap, option or similar instruments or access to the payments system through
electronic or other means.
Functions of Nepal Rastra Bank
 To issue bank notes and coins
 To formulate necessary monetary policy and

implementation
 Determination of foreign exchange (FOREX) rate

 Management and operation of FOREX reserve

 Issuing license to Bank and Financial Institutions

 Act as a bank of bank & function as a lender of the last

resort
 Act as financial advisor/agent/banker of the Government

of Nepal
 Develop and promote an efficient payment system
 Perform other activities required to obtain other objectives
Objectives of Nepal Rastra Bank
 To formulate necessary monetary policy and foreign
exchange policy.
 To maintain and promote financial stability and

liquidity required in banking and financial sectors.

 To develop a healthy secure and efficient system of

payment.
Bank and Financial Institutions Act 2006
 BAFIA is an umbrella banking law.
 It is integrated banking law/regulating law.
 BAFIA focused on financial good governance.
 Focused on maintaining financial stability.
 Compliance with Money Laundering Prevention Act.
 Allow to buyback shares.
 Provision to incorporate B&FIs only as a public company.
 Use of economic liberalization.
 Promotion of transparency and protection of deposits.
 It classifies B&FIs into 5 types and 4 classes.
 Two types of winding up provisions are outlined – such
as Voluntary and Compulsory 
 Prohibited functions of B&FIs are clearly mentioned.
Major Provisions of BAFIA 2073 

1. It has a provision of incorporation of Banks and Financial

Institutions.
 Before the incorporation of the Banks and Financial

Institution, it is necessary to get prior approval from Nepal

Rastra Bank.
– Bank can be incorporated only as a public company.
 To get prior approval from NRB, it is required to submit

related documents along with the application.

 Documents needed

 Memorandum of Association (MOA)

 Article of Association (AOA)

 Feasibility Study

 Details of the promoters

 NRB shall provide approval within 120 days from the date of

application received.
– NRB can refuse to provide prior approval in the
following conditions.
 Promoters are accused by criminal offenses such a

money laundering, rape, banking offense, fraudulent,

forgery, etc.
 If the proposed name is the same as previously

registered B&FIs.
 If the objectives and functions are against the

provision and law.

– Incorporation of B&FIs with a joint venture or
foreign investment need to get prior approval from
NRB.
– To expand branches, need to get prior approval from
NRB.
2. It has provision relating to the capital (Share, Stock) formation/ Share
Transaction
 All the B&FIs must submit their prospectus to NRB before issuing share
capital.
– Must a lot their capital as per the following structure
 Minimum 30% for the general public

 Minimum 51% for promoters.

 Maximum 0.5 for employees

-To make a share transaction, they must assign capital/share manager and notice it
within 7 days of an agreement.
-Lock up period for converting promoter share into the public is defined as 10
years.
3. Provision relating to the punishment of BFI’s who operate without getting
a license.
4. Provision relating to license for banking operation
 For incorporation of BFIs, prior approval from NRB is needed.

 Without getting a license, a bank cannot be incorporated

 To get bank license, required documents and application must be submitted.

 Documents include AOA, MOA

 NRB provides approval notice within 120 days or refusal notice within 90 days
5. Provision relating to the capital and capital fund

 BFIs must maintain the capital fund and Capital

Adequacy Ratio as per the direction of NRB
 Must maintain a general reserve fund
 Must maintain a foreign exchange reserve fund
 Must maintain liquidity fund as per the direction of

NRB
 Dividend announcement and distribution as per the

direction of NRB
 NRB approval needed an increase and decrease of

capital
Cooperative Societies Act
 The cooperative societies act has introduced in Nepal in
1992.
 Under this act cooperatives can form with 25 persons as
its members.
 These autonomous institutions are entitled to formulate
their own bylaws or operational procedures through their
General Assembly (GA) meetings.
 Each cooperative will have a Board of Directors and an
Accounts Committee (AC) consisting of members duly
elected by the members through General Assembly using
one man vote principle.
 The term of Board members and members of Account
Committee (AC) consisting of members duly elected by
the members through General Assembly.
 The concerned members have to make an application
for the registration of an society with two copies of the
Bye-law, work plan and description of shares and
signed by the members.
 The registrar shall register the society after necessary

inquiry as to whether the Bye-law of that society is in

accordance with the cooperative principle.
 Every association or society shall have its preliminary

general meeting within three months after of its

registration.
 all members of an association shall be members of the

general meeting of the association.

 The tenure of the board shall be as provided in the
Bye-law but shall not exceed a period five years.
 An association or society may collect share capital by

selling its shares to those persons who are under its

jurisdiction and are eligible to become its members .
 A fine not exceeding One Thousand Five Hundred

Rupees shall be imposed, by order of the Registrar, on

any association or society which fails to submit a report
Financial Intermediaries Act 1998
 Financial intermediation means the collection of micro
savings and supply of micro-credit under this Act.
 No one shall work or instigate others to work as a

financial intermediary without obtaining a license

under this Act.
 Any society which desires to work as a financial

intermediary, it must submit an application to the bank

in the prescribed form.
 After receiving the application, NRB conduct necessary

enquiries and if all the enquiries are fulfilled, NRB will

prescribed fee and issue licenses to the society.
 A Society must have its license renewed by the NRB

every two years in the prescribed manner.

 The Bank may demand any information, data, or document relating to micro-
credit from any Society, micro-savings and it shall be the duty of the
concerned Society to furnish such information, data, or documents.
 While supplying micro-credit, a Society must sign a written agreement with
the borrower by prescribing conditions deemed essential for the protection and
proper utilization of the credit.
 Society shall not accept the security furnished by any person not connected
with the concerned group while obtaining a security from the borrower.
 In case any borrower fails to fulfilled by the agreement signed or could not
repay the micro-credit of a Society within the time limit, or in case a Society
finds through investigations that the borrower has misused or misappropriated
the amount of the micro-credit, the Society may auction any property pledged
to it, or any security deposited with it, according to current law, and thus
recover the principal and interest.
 In case the principal and interest cannot be fully recovered through the auction
sale of the collateral pledged to the Society the Society may recover the
balance by auctioning the other assets of the concerned member in case any
member of a group has obtained the micro-credit on an individual basis, and
of all the members of the group in case the micro-credit has been obtained on
a collective basis.
NRB Directives
 The main features of the Directives have summarized under the following headings;
1 Minimum capital adequacy requirement
 4 percent primary capital(paid up capital, share premium, general reserve, retained earning

loss)
 8 percent primary and supplementary capital (loan loss provision, asset revaluation reserve

and other reserve)

2 Fund mobilization
 It can mobilize fund up to 30 times of core capital through group savings, borrowing and

debentures.
3 Compulsory reserve and liquid assets
It is required to maintain compulsory minimum reserve of 0.5 percent of total borrowed fund
with NRB or any other class A commercial bank.
It is also required to maintain liquid assets of 2.5 percent of individual, group and special saving
of members. The liquid assets have defined as cash reserve at hand, investment in government
bonds, investment in NRB bonds and deposit in commercial banks.
4 Expansion of Branch and Geographical Area
MFDBs must take permission from NRB prior to expansion branches and geographical areas.
5 Norms of Corporate Good Governance
MFDBs should clearly spell out rules for appointment of Board of Directors and CEO and
specify their functions and job responsibilities.