NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Friday, August 12, 2005

A country with overwhelming agrarian population, 80 percent of whom have no access to formal credit, the microcredit lending has come up as a slowly but steadily growing viable alternative in rural Nepal . Around 800,000 rural population in the country ? mostly representing the women and poorest section of society ? are currently benefiting from microcredit service provided by various institutions and NGOs. Around Rs 20 billion (approximately US$ 285 million) has been invested in this sector. Apart from its crucial role in reduction of poverty, the microcredit programs ? which usually are linked with other social development packages like literacy and health campaigns ? have empowered a large number of backward people. Despite various problems emanating from conflict, microcredit has shown the potentials for success. In fact, at a time when bigger commercial banks are unable to expand their network in rural areas thanks to insecurity, rural people will have to continue to depend on microcredit for many years to come

Goma Kumari used to curse her fate when she was married off to a disabled boy when she was in early teens and had to face grinding poverty. Her family moved from hilly district of Syangja to flatlands in Dudhraksha of Rupandehi district hoping to improve their financial condition. Unfortunately, she could not earn enough from a small tract of land there to feed her two sons, one daughter and husband.

However, Kumari?s fate took a dramatic turn after she came to know about an NGO called ?Nirdhan.? Cautiously, she decided to take small loan from the NGO five years ago. She received a week-long training and became a member of the local group and obtained the first loan of Rs 5000 (around US$ 72). She used the money to buy some small stuffs like toys, sugar and oil and sold it in nearby markets making a small profit.

This started a chain of events, which led Kumari to involve in selling vegetables. Impressed by her hard work and regular repayment of interest, she obtained second loan of Rs 10,000 (around US$ 144) a year later. She used this money to buy fertilizers to increase productivity in her own small field. She even renovated her small hut and sent her children to a boarding school in village. She plans to start a bigger retail shop in near future. ?I could improve further if I obtained more training on ways to conduct businesses,? she said.

Gyanimaya Praja belongs to one of the most backward tribal communities called Chepang in Dandagaon of Chitwan district. Before she was introduced to group savings and credit activity by an NGO called SAPPROS (Support Activities for Poor Producers of Nepal), her family consisting of two children and husband used to reel under extreme poverty. They could only eat for 6/7 months a year from their agriculture produce and whatever they earned was used up to pay the loan they took at 60 percent interest from local landlord.

After Praja was initiated to SAPPROS program of group savings and credit and obtained knowledge of small technologies like micro irrigation and vegetable farming, Praja along with other group members began to witness rapid transformation in their lives. She took loan from the group to buy a small land. In a matter of few years, she owned a small house, drinking water tap, sprinkler for irrigation, 3 goats, 4 chickens, 1 cow, 2 pigs and also different jewelries like nose pin, ear rings, locket etc.

The above two case studies of two leading NGOs involved in rural micro financing and self-help indicate the remarkable changes they have been able to effect.

Significance Of Microcredit

A country with 24 million population ? around 31 percent of them living below poverty line ? Nepal is grappling with a number of problems whose roots lie on extreme poverty and inequality subsisting across backward communities across the country.

At a time when 80 percent of the rural population have no access to formal credit institutions, there is no alternative to microcredit to serve them. Microcredit normally means credit of less than Rs 30,000 (around US$ 430) and given without collateral and less paperwork. ?A country like Nepal needs microcredit a lot not only for the purpose of poverty reduction but also to deepen the social empowerment of women and backward people,? said Hari Gopal Gorkhali, deputy general manager of Agriculture Development Bank Limited of Nepal (ADBLN) ? who has been involved in the microcredit sector for the last three decades.

Agrees Dr. Shankar Sharma, vice chairperson of the National Planning Commission (NPC) ? the apex planning body. ?The microcredit has helped spread the resources for promoting income-generating activities across the remote villages. They have been particularly effective in empowering women,? said Dr. Sharma. Realizing the significance of microcredit, the government has put it in high priority in its current Tenth Plan and is keen to expand them, he added.

Devendra Bahadur Raut, managing director of Nirdhan, an NGO active in microcredit sector said that the microcredit services launched by them have supplementary support services. ?We give training on the proper use of credit. We also provide health services to our clients and give them technical training services,? he said.

Nirdhan is the first replicator of Bangladeshi model of Grameen Bank. Active since 1991, it established Nirdhan Utthan Bank Limited (NUBL) in 1994 along with other promoters including The Grameen Trust. The NGO provides microcredit service through this bank. ?Microcredit, undoubtedly is effective to reduce poverty,? asserts Raut, a noted microcredit expert.

?Poverty cannot be reduced until you actually empower the poor people. Microcredit is one of the effective tool to empower them,? added Narendra KC, director of an NGO called Support Activities for Poor Producers of Nepal (SAPPROS), which is involved in facilitating income-generation among the poorest people in various remote districts.

History Of Microcredit In Nepal

The introduction of Small Farmers Development Program (SFDP) in 1975 by the government-owned ADBN marked the formal beginning of history of microcredit in Nepal . Introduced with the support of Asian Development Bank (ADB) and International Fund for Agriculture Development (IFAD), the SFDP met with significant success initially.

Till date the program has served 300,000 small and marginalized farmers. Out of the bank?s total number of depositors of 425,000, nearly 85% are microcredit borrowers who borrow less than Rs 50,000 (US$ 700). The SFDP has invested Rs 6.5 billion (US$ 93 million) in microcredit to help the farmers increase their income and has already recovered Rs 5.5 billion (US$ 79 million). But in recent years, the repayment rate in SFDP has declined and due to conflict its operation has been severely affected. The Maoists have burnt offices of 80-85 SFDP causing millions of rupees of losses.

Consequently, the bank is planning to phase out the program and transform the SFDP units (there were a total of 425 such units across villages) into Small Farmers Cooperatives Limited (SFCL). Already 175 SFCL units have been created. Here, the ownership is transformed to local cooperative, which has slightly increased the repayment and decreased the cost of loan administration from 8-9% to 2-3%.

The government followed up the SFDP program with Priority Sector Lending Program, Intensive Banking Program and so on.

It was in the early 1990s that the campaign of microcredit spread through various NGOs and INGOs. In 1992, the government set up Rural Development Banks (Grameen Bikas Bank). There are now five such banks in five development region in the country. Different NGOs like Nirdhan, Chhimek and others also came into being. These apart, there are hundreds of Self Help Groups and Saving and Credit Organizations across the country.

Variety Of Models

Different banks and organizations have adopted different models of microcredit lending in the country. The government programs like SFDP could not become sustainable because of high cost involved. ?It was expensive to mobilize bank staffs to remote villages, form groups, impart training, administer loan and monitor the repayment. Gradually, the repayment rate, too, dropped and we had to transform them into cooperatives,? said Gorkhali.

NGOs like Nirdhan ? which later helped floated Nirdhan Utthan Bank Limited (NUBL) ? and institutions like Rural Development Banks follow the model of Grameen Banks of Bangladesh . ?We reach into villages, identify target groups, raise their awareness, train them and provide microcredit for income-generation,? said Raut , MD of Nirdhan. At present, over 65,000 rural people are getting service from NUBL. Most microcredit institutions, according to Raut, charge around 20% of interest rates ? compared to over 60% charged by informal moneylenders in villages. And their repayment rate is around 90 percent. ?In fact, NUBL had achieved 99% repayment till a few years ago but now it has dropped,? he said.

On the other hand, SAPPROS has a different model of self-help. ?We do not involve directly in giving credit. In fact, our team reaches into farthest corners of even conflict-hit areas and work in coordination with the local community. Only if the community wants our service, do we stay there. We help them, teach them, train them and facilitate the formation of saving and credit groups. We teach them accounting practices and let them raise their own savings and distribute microcredit to each other. We have found this model very effective in income-generation and empowerment,? said Narendra KC, director of SAPPROS, which is active in remote and conflict-hit districts like Bajhang, Bajura, Mugu, Lamjung and Gorkha, among others.

According to KC, their model has no problem about repayment and is unaffected by conflict as the local community members are themselves wholly involved in the activities. ?In fact, starting from income generation, we help such groups in sectors like micro irrigation and small infrastructure development like suspension bridges, roads, etc,? he added.

Likewise, Rural Development Foundation (RDF) ? an NGO active in women empowerment, among others ? is conducting a pilot scheme in Nuwakot district where it provides seed money of Rs 4700 (US$ 67) as annual grant to village units whose members raise another Rs 4700 ? and they use the resource collectively for lending for agricultural and livestock activities like cattle-rearing. ?Till now RDF is bearing the seed money out of its own overhead cost. We are testing this model for effectiveness. And we have found it worthwhile to fulfill basic needs of rural people,? said Krishna Man Pradhan, president of RDF.

Roadblocks

Although microcredit has been recognized globally as an effective tool to tackle poverty, it has its problems particularly in a country like Nepal . ?Because of social norms and geographical distribution, providing microcredit service to far-flung villages is costly. Besides, there is widespread illiteracy and lack of awareness, which hurts repayment,? said Gorkhali.

The raging internal conflict has severely limited the possibility of formal microcredit institutions reaching into remotest corners and has increased the cost of loan administration and decreased repayment rate.

?There are several distortions that exist in micro finance sector in Nepal . Take for instance, the government-owned institutions are reducing their rural operations thanks to conflict and the resources have not been flown to rural sector. In other countries, micro finance has yielded great results but here we suffer from problems of execution and operation,? said Professor Dr. Bishwambher Pyakuryal, senior economist.

According to Gorkhali, there are some clear limitations that impede the sustainability of microcredit. ?In Nepal , there are only two ways that microcredit can become successful and sustainable. One is if there is heavy government/donor support and subsidy to the microcredit service providers. And another is if the microcredit institutions are able to charge hefty rates of interest ? which would defeat the very objective for which they are formed,? said Gorkhali.

?But I have no doubt that despite these daunting challenges, microcredit does have extremely important role to play in poverty reduction in Nepal,? Gorkhali added. In the last one decade, the prevalence of poverty in Nepal decreased from 42% to 31% – and one of the reasons for this change was microcredit and rural income-generation activities.

Raut, a seasoned microcredit expert, adds that Nepal needs to go for package program to meet the needs of micro-borrowers. ?Health, education, vocational training and other program to empower rural people are required along with microcredit,? said Raut. He cited the examples of micro-borrowers buying everything from cow to goat and from land to house from their loans. ?They lack focus and knowledge on how to maximize the benefit from the loans. In fact, we are trying to help backward people from Kalaiya area to commercialize their farming. We are providing them market links and helping in supply chain for their agricultural products like vegetables,? he added.

Despite these challenges, experts and economists alike, agree that properly executed microcredit holds key to achieving the targets of poverty alleviation. In fact, community approach has had shown tremendous results in even conflict-hit areas. As such, the microcredit institutions would need to re-adjust their models to suit the exigencies of conflict and intensify their operations that could result in creating wealth for more people like Gyanimaya Praja and Goma Kumari.
Story found here.