Evolution of micro finance in Nepal

 In the 1990s, the Nepalese government passed several laws and

regulations to promote and regulate microfinance institutions
(MFIs) in the country.
 As a result, the number of MFIs in Nepal increased, including
both NGOs and commercial banks offering microfinance
services.
 In 1992 Grammen Bikash Bank were initiated by the government
sector, crossing a mlilestone in rural micro banking in Nepal.
 Micro-finance programs are implemented by government, semi-
government and non-government financial institutions such as
commercial banks, Grameen Banks, micro-finance development
banks, NGOs and savings and Credit Cooperatives and others.
Evolution of micro finance in Nepal
 Micro-finance programs that have evolved in Nepal over the years can be
categorized into 6 groups: Co-operative Programs, Priority Sector Lending
Program, Intensive Banking Program, Specific Target Group Programs,
Grameen Bank Replication Programs, Micro-finance Development Banking.
 NRB started a microcredit program which was later called microfinance. The
microfinance program was started by Grameen Bank from government level
and NGOs from private sector.
 This was later transformed into the concept of Microfinance development bank
 At that time microfinance banks were established under the then
DEVELOPMENT Banks ACT.
 But now microfinance are operating under Bank and Financial and Act.
 Micro-finance programs that have evolved in Nepal over the years can be
categorized into 6 groups: Co-operative Programs, Priority Sector Lending
Program, Intensive Banking Program, Specific Target Group Programs,
Grameen Bank Replication Programs, Micro-finance Development Banking.
Microfinance model
 Cooperative Model : Cooperative models are mostly
implemented by the Saving and Credit Cooperatives
(SCCs) under which a wide range of savings and loan
products are provided to the members.
 As per the Cooperative Act 1992, a group of 25 persons

from a community can form a cooperative by registering it

with the Department of Cooperatives, Ministry of
Agriculture and Cooperatives. 
 These cooperatives take savings deposits from their

members and whoever wants to put savings in the

cooperative is extended membership.
Cooperative Model
 The SCCs generally require mandatory savings from their members. However,
members can also choose from a variety of services such as individual or
group saving products, deposits, and festival and educational savings.
 Members are also provided with loans covering specific areas, such as
agriculture, housing, micro enterprises, or for some social or emergency
purposes. Loans so provided have a minimum term of three months to three
years.
 The SCCs are governed by Cooperative Laws and are supposed to be self-
regulated. However, some cooperatives that have been providing services to
non-members after being licensed from Nepal Rastra Bank (NRB) for banking
services come under NRB’s regulation and supervision.
 Although the SCCs serve almost all the districts in Nepal, they are considered
a more suitable financing model for the hilly and mountain residents as they
provide both savings and financial services to the members in a homely
atmosphere without much bureaucratic hassle.
Self-Help Groups (SHGs)/Community
Organizations (COs) model
 Based on the concept of “self-help”, SHG’s are small
groups of individuals formed into groups of ten to twenty
and operating a savings-first business model whereby the
member’s savings are used to fund loans.
 In a SHG usually women from a similar class and region

come together to form a savings and credit organization. 

They pool financial resources to make small interest
bearing loans to their members.  
  The ‘Dhukuti’ system is one such example of a very old

form of self-help group in Nepal which has been in

operation for over four decades.
Self-Help Groups (SHGs)/Community
Organizations (COs) model
 Community Organizations (COs)/SHG’s are formed at the
VDC level with the assistance of the Local Development
Fund (LDF) under Participatory District Development
Project (PDDP) and Decentralized Local Governance
Support Program (DLGSP).
 Their lending schemes generally offer loans at 10-12%
interest per annum to the borrowers. Members apply for
loans and collect due installments during a CO’s regular
meetings. The interest rates and other terms and conditions
of loans are determined by the CO’s if they lend money
using their own savings.
 However, if the member seeks a loan amount that is more than
what the CO can provide from its savings, the member would
have to fill a separate application form addressed to the Local
Development Fund (LDF).
 The CO recommends the loan and forwards it to the LDF for
approval. Similarly, Poverty Alleviation Fund (PAF) too
organizes the local groups of the target families called CO’s
with the help of local NGOs.
 They are informal groups and not linked up with any financial
institutions. These groups are provided with seed fund at the
rate of Rs. 3,000 per family member and are charged about
10% interest per annum.
Small Farmer Cooperative Limited (SFCL) Model
 A SFCL is a multi-service cooperative formed to provide financial as well
as non-financial services, like, social mobilization, training and technical
support services, to its members (farmers), mostly in rural areas.
 A SFCL’s services are targeted only at small farmers and are generally
confined to a single Village Development Council (VDC) serving round
500 household catering 200-700 clients within a community.
 The financial systems development approach of SFCLs comprising three
pillars:
 a) the local financial institutions at the grassroots level,
 b) the Sana Kisan Bikas Bank Limited (SKBBL) at national level for
refinancing, and,
 c) Federations/networks of SFCLs to provide non-financial (technical
support) services to SFCLs.
 An interesting feature that distinguishes SFCLs from other micro-finance
institutions (MFIs) in Nepal and beyond is their unique three-tiered
structure with small farmers groups, inter-groups and the main committee
as the three pillars
SFCL mainly focuses on four principle functions such
as saving, credit, income generation and community
development.
 –Farmer groups at village level –Inter-groups at
ward level –Main committee (the board) at VDC
level
Village Bank (VB) Model
 Established by NGO’s with an objective to provide members with
access to financial services, VB’s build community self-help
groups and help members accumulate savings.
  typical village bank consists of 25 to 50 members, who are low-
income individuals, seeking to improve their lives through self-
employment activities.
 VB’s mostly seek more female participation.
 VB lends loan to the members from the loan capital extended to it
by the sponsoring MFI.All members sign a loan agreement with
the village bank to offer a collective guarantee, thus providing
moral collateral for each extended loan.
 A member generally gets Rs. 3,000 to 10,000 at a time, depending
on the amount of savings available in the bank.The loan cycle
must end and all loans must be paid back at the end of the 16th
week to get new loans released.
Village Bank (VB) Model
 No interest is paid on savings but members receive a share
of profits from the village bank’s re-lending activities at the
end of each loan cycle in proportion to the savings deposits.
 In a VB, loans are generally charged at 24% interest per

annum and interest is collected on upfront basis.

 A VB’s management is generally handled by the chair, the

secretary and the treasurer elected by the members. The

members are also responsible for establishing the by-laws,
distributing loans to individuals and collecting payments.
 This model is most suitable and advantageous in the remote

and less accessible districts of Nepal.

Grameen Bank Model
 First introduced in Nepal in the early 1990’s, the Grameen Bank model is
comparatively more feasible in Terai, where the economic activities are more
flourished with a relatively more developed market and road infrastructure.
 Under this approach, peer groups, each comprising of five members, are
formed. 
 Three to ten such peer groups form a center at a particular location – close to
a village, where they meet once every week or fortnight or month as decided
by the members. 
 A group chairperson and a center chief, elected by each group and each
center respectively, oversee the activities of group members and maintain
group discipline, check loan utilization and ensure that loan installments are
timely repaid.
 In the meetings, group members collect savings and make demand for loans
and also settle the loans or interest due and repay loan installments as per
schedule.
 Such loans do not require collateral security. However, group
guarantee for repayment is mandatory.
 Subsequent loans can be accessed only upon the successful

repayment of existing loans by all group members. The MFI field

staff facilitates the group meetings and also verifies the utilization of
disbursed loans.
 Nepalese microfinance providers have started offering diversified

saving schemes such as pension fund savings, education savings, and

micro-insurance covering risks related to health, life and livestock as
in Grameen Generalized System (GGS).
 Nirdhan Utthan Bank Limited, Chhimek Bikas Bank Limited and

Swabalamban Bikas Bank Ltd. are some Nepalese MFIs operating

under the Grameen Bank Model.
Micro finance credit lending model
Associations Model
This is where the target community forms an
'association' through which various
microfinance (and other) activities are initiated.
Such activities may include savings. Associations
or groups can be composed of youth, women;
can form around political/religious/cultural
issues; can create support structures for
microenterprises and other work-based issues.
Closely related to the group model and similar
models.
 Community Banking Model
 Community Banking model essentially treats the whole
community as one unit, and establishes semi-formal or
formal institutions through which microfinance is
dispensed. Such institutions are usually formed by
extensive help from NGOs and other organizations, who
also train the community members in various financial
activities of the community bank.
 These institutions may have savings components and
other income-generating projects included in their
structure. In many cases, community banks are also part
of larger community development programmes which use
finance as an inducement for action.
 Closely related to the village banking model.
Cooperatives Model
 A co-operative is an autonomous association
of persons united voluntarily to meet their
common economic, social, and cultural needs
and aspirations through a jointly-owned and
democratically-controlled enterprise. Some
cooperatives include member-financing and
savings activities in their mandate.
 Credit Unions Model
 A credit union is a unique member-driven, self-help
financial institution. It is organized by and comprised
of members of a particular group or organization, who
agree to save their money together and to make loans
to each other at reasonable rates of interest.
 The members are people of some common bond:
working for the same employer; belonging to the same
church, labor union, social fraternity, etc.; or
living/working in the same community. A credit union's
membership is open to all who belong to the group,
regardless of race, religion, color or creed.
 A credit union is a democratic, not-for-profit financial
cooperative. Each is owned and governed by its
members, with members having a vote in the election
of directors and committee representatives.
Rural joint liability group model
 The rural joint liability group (JLG) model is a type of
microfinance program that operates in rural areas, particularly
in developing countries like Nepal. It is a form of group-based
lending where a group of individuals come together to take
out a loan and are collectively responsible for repaying it.
 In Nepal, JLGs are often organized by non-government
organizations (NGOs) or microfinance institutions (MFIs) as a
way to provide financial services to rural communities. The
members of the JLG are typically low-income individuals who
have difficulty accessing credit from formal financial
institutions. The members of the group provide mutual
support and a guarantee for each other, reducing the risk for
the lender and making it possible for the group to receive a
loan.