Financial Institutions
Contributing To Development

FINANCIAL institutions are the lifeblood of any economy. Without financial institutions, the operation of an economy cannot be conceived of.

Development

The institutional development of the financial sector in the country can be said to have begun with the establishment of Nepal Bank Limited in 1994 B.S. Before that, sahu mahajans (merchants/moneylenders) used to dominate the sector. They did not collect deposits but granted loans to the public against the mortgage of gold or silver at an exorbitant rate.

The overall development of the country depends on the development of rural areas and the agricultural sector in developing countries like Nepal. This is so because the country has more rural areas where most of the people live and engage themselves in agricultural and allied activities. Besides, most of the poverty ridden people in the country live in rural areas, some of which are not easily accessible.

With the establishment of 17 cooperative societies in 1956 AD, efforts were made to develop the agricultural sector by granting loans to the rural folks. As the rural folks were basically poor, the loans helped them procure the necessary inputs like seeds and fertilisers and even tools. In fact, this was the basic thrust of providing loans. To institutionalise the just-budding cooperative movement, the Cooperative Act was formulated in 1959 AD and the cooperative societies were registered under the act.

The Cooperative Act of 1959 AD was replaced by a new cooperative act in 1992 AD. The very essence of cooperative principles is that the scattered savings of the members are collected into a fund which is utilised for their collective benefits, such as by granting credit to the needy members.

Following the adoption of liberal policy by the government after the restoration of multi-party democracy in the country in 1990. A finance companies and cooperative societies have begun to mushroom. As per the latest statistics brought out by Nepal Rastra Bank, the financial system of the country consists of one central bank, 13 commercial banks, 7 development banks, 5 regional rural development banks, 46 finance companies, 36 cooperative societies and some postal savings banks operated by the Postal Service Development. Besides, there are 25 non-governmental organisations engaged in limited banking transactions.

There are two types of cooperative societies in operation now. One is licensed by Nepal Restra Bank and the other by the Cooperative Department. The number of cooperative societies operating under the Cooperative Department far exceeds that of those operating under Nepal Rastra Bank. Such cooperative societies number around 4,800 as against a paltry 36 cooperatives licensed by Nepal Rastra Bank.

As per the cooperative norms, cooperatives should have carried out transactions among their members only. But nowadays, they are carrying out transactions among non-members also. They accept deposits from and grant loans to the members and non-members alike. As the number of cooperatives is dizzily high, they should be kept under constant supervision and their activities closely monitored. Otherwise, unscrupulous directors may take advantage of the situation and play havoc with the savings of their depositors. And, the image of the cooperative movement may get tarnished.

At the initiative of Nepal Rastra Bank and as a step towards poverty alleviation, regional rural development banks were established in 2049 B.S. Modelled on Bangladeshi rural banks and established on the concept of balanced development, these banks provide rural folks with short-term loans, enabling them to pursue small-scale business and earn income for themselves, thus contributing to self-employment. As of Poush of 2056 B.S., the regional rural development banks were operating in 36 districts, including all the Terai districts and some hilly districts. However, they have not covered remote hilly and mountainous regions. Bearing in mind the importance of such banks in generating self-employment and hence alleviating poverty to some extent, it is imperative to extend their services to remote hilly and mountainous regions also.

Despite great contributions to rural development, the banks are not functioning satisfactorily. Apart from the western regional development bank, all other banks are now running in the red. Lack of sound management and unnecessary operating expenses, among other things, are held liable for their plight. If no reforms are taken right now, these banks will certainly collapse in the near future, compromising the ideal goal of poverty alleviation.

Recently, a village bank model has been formulated to extend credit to rural folk. It is based on the concept of microfinance. Under the model, rural women form informal groups, mobilise resources from their savings and grant credit to other fellow women living in the same community.

The village bank model, which is in use in over 50 countries worldwide, especially in Latin America, greatly contributes to women’s empowerment. It enables them to carry out small-scale business such as wickerwork, poultry farming or animal husbandry on their own and earn income for themselves, thus helping them to stand on their own feet.

Reforms

The financial institutions designed for speeding up rural development by contributing to poverty alleviation should be given continuity. The performance of these institutions should be regularly monitored. Any bottlenecks that may crop up in the smooth performance of the institutions should be removed through timely financial reforms so that such institutions can make concrete contributions to the ideal goal of poverty alleviation in a true sense.

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