Economy News The Rising Nepal (Daily)

'Lack of professionalism hitting micro-finance'

BY ARHAN STHAPIT

Poverty reduction, development experts believe, has been the biggest challenge in the development process. Initiated by Agricultural Development Bank of Nepal (ADB/N) in 1975, the Small Farmers Development Programme (SFDP) is one of the effective human intervention programmes in poverty alleviation in Nepal. Reportedly having the largest population coverage among such poverty reduction programmes, the SFDP has currently been running with the technical assistance from the German development agency, GTZ.

Ulrich Wehnert, GTZ's SFDP-TA Project team leader, does not see the lack of money as the problem in micro finance that aims at combating poverty. "But, the major problem is the lack of professionalism in running micro-finance institutions," says Wehnert, who is also GTZ's Regional Advisor for South and South East Asian in area of Financial Systems Development. Professionally assertive and energetic yet friendly, Wehnert recently spoke with Arhan Sthapit of The Rising Nepal on the issues of poverty alleviation through institutional development of the small farmers. Excerpts:

TRN: Would you please highlight the basic concept of Small Farmer Development Programme (SFDP) in the context of rural development?

Wehnert: The SFDP was one of the first poverty alleviation efforts in Nepal, initiated by the ADB/N in 1975. The overall goal of the programme is to increase the income and well being of small farmers, the landless and small traders. Since the poor did not have access to formal banking institutions due to lack of traditional collateral such as land property, the joint liability concept was introduced to Nepal for the first time. Farmers organized in small groups of 5-12 people and gave a guarantee to the ADB/N to pay back a loan as a group, if one group member would default. Today in micro finance, the joint liability of group members is well accepted all over the world. 25 years ago in Nepal this concept must have been a very revolutionary idea.

TRN: Literatures have it that ADB/N and GTZ have long been working together for 'institutional development' at the small-farmers level through the SFDP. Would you appraise and update us of the outcome of the programme?

Wehnert: While the SFDP initially was very successful, the programme came under increasing criticism for its high overhead costs and deteriorating recovery rates in the mid-80s. The ADB/N thus decided to go for a major policy shift and introduced a programme to transfer its Sub Project Offices (SBOs) into fully self-administered and owned Small Farmers' Cooperatives Ltd. (SFCLs).

An SFCL is a multi-purpose cooperative designed to deliver primarily financial but also non-financial services to its members in rural areas. The SFCLs are civil society organisations pooling their joint resources to meet basic needs and to defend their members' interests. They are organized along cooperative lines, they are member-owned and controlled and have an open membership policy towards "poor" farmers. An SFCL is a three-tiered organization with small farmer groups, inter-groups and the main-committee as the main pillars of the cooperative.

Today, 85 SFCLs have been established, serving more than 50,000 members in 29 districts of Nepal. Another 150 Sub-Project-Offices are expected to be transformed into cooperatives within the next five years. Their total outstanding loan volume has arrived at more than Rs 550 million. The total amount of internal resources mobilized is progressively increasing and stands at more than Rs 90 million. Eleven out of 85 SFCLs have received a banking license from Nepal Rastra Bank and are thus allowed to mobilize savings also from general public other than their members.

TRN: The SFDP is regarded as one of the most successful programmes in Nepal when it comes to Nepal's Poverty alleviation efforts. What major services SFCLs are providing to the small farmers?

Wehnert: SFCLs are providing a wide range of credit, savings and insurance products to its members. In addition, the members implement other income generating activities such as milk marketing, consumer stores or transport services. Social programmes such as alphabetisation (or hite racy programme) can be arranged from any surplus at the end of the fiscal year or with support of other donor and government funds.

TRN: Despite all these services and importance, questions are often raised about the overall sustainability of the SFCLs. Could you elaborate on this aspect please?

Wehnert: The concept of sustainability is relatively new in Nepal. No one was talking about this 25 years ago at the outset of the SFDP. Today, this is very much different. When it comes to the "financial sustainability" of SFCLs, we have to consider two major indicators - "outreach to the poor" and "financial viability". With an average membership of 600 small farmers and total membership of 50,000 as of now, SFCLs have a significant outreach when compared to cooperative standards in Nepal. The big size in terms of members allows SFCLs to mobilize increasingly their own resources. This decreases their dependency on external money. The majority of SFCLs today show a strong trend towards achieving a mature stage, which will allow them to cover all costs with internally generated revenues. Successful SFCLs, for example, are able to report profits of Rs 1 million plus.

TRN: In the context of the 'financial viability,' what do you think should be the refinance rate of the banking system to the community based micro-finance institutions? Should it be fixed keeping in view the existing open market rates?

Wehnert: The refinance rate of the banking system to the Community based micro-finance institutions must be a market-oriented one. The provision of cheap money adversely affected the SFDP programme some 12-15 years back. In many cases, cheap money will foster loan repayment indiscipline, it will prevent financial institutions from covering costs and it will discourage mobilisation of local savings. Especially this last aspect is very crucial for SFDP at the moment. Micro finance apex institutions, Nepal Rastra Bank as well as some commercial banks under special rules and regulations are providing refinance facilities at low rates. It will be very difficult to continue motivating cooperatives to mobilize their own savings from members at high costs, if money is provided from other sources at below-market rates. What will happen once these funds dry out? The major problem in micro finance is not the lack of money but the lack of professionalism in running these small financial institutions.

TRN: Would you specify what type of economic environment should be in Nepal's rural finance system? And what would be the future steps of your organisation for making rural finance system more effective in Nepalese context?

Wehnert: The same economic rules, which apply to the formal banking system, also do apply in the area of rural finance. Small financial institutions such as Savings and Credit Cooperatives must be able to cover costs from internally generated revenues. Only then poverty alleviation will be successful on a large scale in Nepal. It is the task of the Government to create a conducive environment in which these institutions can operate. In this connection, the establishment of a sound regulatory and supervisory framework for micro finance institutions is very important.

GTZ will continue to support ADB/N in its efforts of transforming bank-owned Sub Project Offices into member-owned SFCLs.

In addition, ADB/N and SFCLs will create a new institution, which will provide refinance to the SFCLs. This is a very innovative concept for Nepal since the proposed "Small Farmers Development Bank" is designed to become an apex-institution of the SFCLs. Their full ownership will be transferred to the SFCLs within five to ten years. It will be the first Development Bank in Nepal owned by "the poor" themselves.

The new institution will be one of the main pillars of a strong SFCL-movement, which will also be working in creating its own central federation at the national level in the next three to five years. The credit goes fully to the small farmers and the ADB/N, which has the vision to slowly withdraw from SFDP and to let the farmers finish building their own "house".

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