Annex 2 national micro finance policy


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National Micro Finance Policy 2064, Nepal

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Annex 2 national micro finance policy

  1. 1. National Micro Finance Policy, 2064 (English Translation) –Annex-21. BackgroundIt is found that Poverty is the major problem in the development of Nepal as ratio of AbsolutePoverty is 30.8 percent according to Living Standard Determining Survey done by Central Bureau ofStatistics in 2003/04 AD. For the solution of this problem, it is extremely felt that a long-termpolicy is required to decline above mentioned ratio of Absolute Poverty. In this policy, it seemsnecessary to increase the credit assess to mainly rural and poor communities to conduct incomegenerating, employment oriented and professional programs by managing required sources andmobilizing small savings in one side and in the other side, it becomes appropriate to follow theworking policy that develop economy of country as a whole by creating the environment of selfconfidence in underprivileged groups.2. Past EndeavorThe act of providing credit for poor communities in an institutional manner initiated fromcommercial banks with Nepal Rastra Bank directive started in 2031 Baisakh as “Small Sector CreditProgram”. After the Nepal Rastra Bank issued directive to commercial banks to compulsorily investa certain portion of their deposits to priority areas, agriculture, and cottage industry and servicebusiness and to poor communities, credit started flowing in these sectors. Institutional creditprogram started to flow after the Fifth Plan (2032-037) when Agriculture Development Bankthrough the Small Farmers Development Program started to provide micro credit providingfinancial services to the poor communities. Maintaining the provision of investing 3 percent of totalcredit to the poor communities, priority sector credit program is completely removed now; sinceinvesting in these sectors have become optional for commercial banks, it is necessary to declareMicro Finance Policy as per requirement of nation in micro finance sector by reforming theinstitutional structure for the management of supply of institutional loans going to the rural areas.3. Present ConditionIn the sector of micro finance in Nepal, commercial banks, rural development banks, other microfinance development banks of the private sector, rural self-reliant fund, nongovernment financialinstitutions that works as mediator, small farmers’ small farmers’ cooperative institutions, andvarious projects related to micro finance in an institutional manner. From their activities, mediumand marginalized & poor communities’ family and individuals have been greatly benefited. Thoughthere has been increment in the flow of micro credit from commercial banks, development banks,cooperative institutions, nongovernment agencies and funds of various other organizations, thereach of such credit programs have not reached the poor communities as expected. Thus,considering the rise in demand of financial resources at the local level, it is important to developinstitutional mechanisms to coordinate, simplify, promote, set standards, regulate and monitor at thenational level by simplifying and coordinating the flow of micro credit and increasing the access ofthe poor people.In the present situation of huge demand of financial services in the poor communities, there are nosufficient services and that expansion of micro finance services is one reliable and easy way out tomange institutional loan and to enhance the access of poor communities in such loans. In suchcontext, where there is no sufficient present institutional structure and existing legal provisions, itwas considered necessary to formulate one national micro finance policy to manage required 1
  2. 2. institutional and legal provision, Nepal Government has issued this “National Micro FinancePolicy 2064.”4. Problem and ChallengeStill today in Nepal, the institutional financial services have not reached the poor families. Accordingto one latest Rural Credit Survey, only 20 percent of the total demand of credit in the rural sectorfrom the institutional sector is supplied. According to one study of the Asian Development Bankthere is a gap of Nr 13 billion in the demand and supply of the rural credit. This clearly shows thatthe supplies of credit in the rural areas have not been good in terms of demands. Because of conflictin the past, the credit providers mainly the service provided by commercial banks became districtheadquarters centric as a result of which the gap between demand and supply in such rural areas hasbeen increasing further. Since it is proved that the financial services of rural banks and private sectormicro finance banks and micro finance institutions that implement the rural banking process and areaffiliated with various credit programs targeting the marginalized and poor communities help touplift the social and economic status of the poor people, we can be assured if such programs areconducted effectively in an integrated and coordinated approach which will help reduce poverty inNepal as desired.5. Necessity of New PolicyConsidering the economic condition of the country, geographical and social structure and capacityto mobilize sources, the micro finance program seems to be very useful for the nation. To fulfill theobjective of the poverty alleviation which is the main agenda for economic development of thecountry, micro finance is seen as one important and effective tools and it is today’s necessity todevelop it into one supportive tool for poverty alleviation and thus the formulation of NationalMicro Finance Policy is seen to be very timely.It has become important demand of time to provide employment opportunities by making easyaccess to capital, tools and sources through micro financial facilities to people of rural geographicalzone, socially and economically backward and poor families and dedicated entrepreneur and skilledpeople. There is the situation that the savings with the community organizations established at thelocal level by utilizing such funds as seed money and mobilizing external resources in an appropriatemanner and capital formation has not been institutionalized. It has become necessary to implementmicro finance programs in a flexible manner according to national diversity and geographical andsocial conditions. Thus, this policy has been formulated to encourage the enterprising capacity of thepoor family creating appropriate opportunities to include such families in the mainstream of nationaldevelopment and simplifying, coordinating and managing both the service users and serviceproviders bringing micro finance services into single legal framework.6. Definition and Work AreaMicro Finance refers to that financial service that helps poor communities to involve in the activityof income by providing them self employment opportunities through micro savings, micro credit,and micro credit insurance/micro credit security developing their professional skill.Besides above mentioned activities, the Micro Finance related national policy shall include also socialand community service. After implementing this policy and addressing the geographical and socialdiversity of Nepal, timely flexible operational policy and operational pattern can be implemented.This policy shall also provide legal ground for both service users and service providers to worktogether with mutual agreement and coordination. 2
  3. 3. 7. GoalThe Goal of National Micro Finance Policy-2064 will be to assist in poverty alleviation throughsustainable, simplified and access oriented micro finance services.8. ObjectivesTo achieve such objective the goal of National Micro Finance Policy, 2064, following objectives areset: 8.1 Increasing the access of micro finance services for poor and weak financial status family and women group and conducting income generating and employment-generating work. 8.2 Making the micro finance service reliable and accessible through micro finance institutions. 8.3 Helping micro finance service supplying organizations to develop required capacity to be established in sustainable and self capable manner. 8.4 Formulating required law related to micro finance. 8.5 Developing appropriate institutional mechanism to increase the micro finance service and to make such service disciplined.9. National Micro Finance Policy: To increase the access of community institutions and institutions involved in micro finance transaction and expand micro finance service, following types of policy shall be implemented by creating healthy and competitive environment and encouraging private sectors as well in this endeavor: 9.1 Simplifying the flow of micro finance service targeting poor communities according to the economic and social diversity of geographical and rural and urban sector. 9.2 Developing clear standards for identification of beneficiary poor people of micro finance services and strengthening the mechanism of providing micro finance service with or without collateral (collective guarantee). 9.3 Providing necessary help for the social mobilization and empowerment, institutional development and re-structuring and encourage financial institutions that provide wholesale credit established or establishing from private and public sector in this work. 9.4 Affiliating various poverty alleviation related programs and projects with this policy and operating it in a coordinated approach. 9.5 Help to develop targeted group’s professionalism by coordinating with reputed agencies to develop professionalism. 9.6 Formulate provision of establishing relationship with micro finance service provider institutions with the provision of getting accreditation to local level existing community institution, saving and credit group, institutions involved in micro finance transaction easily. 9.7 Increase the access of micro finance to poor communities and motivate such communities on saving mobilization. 9.8 Formulate a separate agency in the direct supervision of Nepal Rastra Bank to timely regulate, supervise, monitor and evaluate by making service provider self-disciplined managing necessary institutional and legal provision to provide micro finance service in sustainable and simplified manner. 9.9 Establish National Micro Finance Development fund to make resource available for easy supply of micro finance service in long-term manner. Also mobilize resources and tools 3
  4. 4. through this National Micro Finance Development Fund that obtain from various national and international agencies. 9.10 carrying out the survey with regards to information concerning existing cooperative and micro finance institutions number, service delivery and access; 9.11 Manage the provision of training regarding micro finance for the capacity increment of the people working in micro finance sector. 9.12 Shall be carrying out loose policy in deposit collection on the basis of service provided by micro finance institutions and their share capital. 9.13 Shall be taken flexible policy with regards to corporate tax that has been applied to the institutional income tax of micro finance institutions and interest obtained from deposit kept in such institutions by poor communities.10. Strategy and Work Policy11. Institutional StructureA separate agency shall be formulated to regulate and supervise in timely manner for theinstitutional development of micro finance provider organizations.12. Economic PartShall encourage for the establishment and Program of micro finance service provider institutions inprivate sector.13. Legal ProvisionNecessary act rules will be formulated for the implementation on the basis of National MicroFinance Policy 2064. 4