Final study report for publication december 17, 2009

Microfinance Policy and Regulatory Framework
Diagnostic of Nepal: Recommendations

Tejhari Ghimire and Tulasi Prasad Uprety

Center for Microfinance (CMF)

2009 Bahtbhateni, Kathmandu, Nepal
Tel: 977 1 4434041, 4443984
Email: cmf@cmfnepal.org
Internet: www.cmfnepal.org

Copy rights

2008 Center for Microfinance (CMF), Kathmandu

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or
transmitted, in any form or by any means, without the prior written permission of the Center for
Microfinance (CMF). CMF does not guarantee the accuracy of the data included in this publication
and accepts no responsibility for any consequences in their use.

This publication Microfinance Policy and Regulatory Framework Diagnostic of Nepal:
Recommendations was published with the financial support of The Asia Foundation. The study was
conducted by the following team:

Tejhari Ghimire, Team Leader
Tulasi Prasad Upreti, Microfinance Consultant;
Sushila Gautam, Naresh Nepal, Ganesh Bista, Ruchi Bhagat, and Mimu Raghubamshi, Field
Researchers

The views expressed in this publication are those of the authors and do not necessarily reflect the
views of the CMF and The Asia Foundation.

Center for Microfinance (CMF)
Bahtbhateni, Kathmandu, Nepal
Tel: 977 1 4434041, 4443984
Email: cmf@cmfnepal.org
Internet: www.cmfnepal.org

i

ABSTRACTS

The objectives of the study were to review the current legal and regulatory frameworks related
to microfinance institutions in Nepal; to identify stakeholder policy and regulatory framework
issues; and to suggest measures required for MF sustainability and growth. The study team
reviewed the regulatory frameworks of other countries; held group and individual discussions
with MF industry representatives; and held a national seminar to share the outcome results
before finalizing the study.

Many MF practitioners believe that the “Market is the best regulator”. They also realize the
need to have some form of government regulation. The possibility of a stakeholder(investor)
panic ‘run’ on an MFI due to lack of information; the public’s concern regarding the
opportunistic and risky behavior of agents; the need for consumer protection; and the
requirement to ensure stability and protection of wholesale lenders are often put forward as
the reasons for having appropriate regulation and supervision. In addition, the building of an MF
database; facilitating the acquisition of a legal identity; ensuring a healthy development of the
sector i.e. performance standards; and facilitating the linkages that enable banks to become
involved in direct micro-finance are considered some of the other important areas that help to
establish need.

Nepal has experimented with different types of MF models i.e. Grameen replication, Savings &
Credit Cooperatives (SACCOs), Financial Intermediary NGOs (FINGOs) as well as project/
program based models. These models are apart from any informal MF practices.

Many of the MFDBs and FINGOs regulations are acceptable to MFIs but there are areas where
reform is required to ensure the growth and sustainability of the sector. The co-operative MF
sector lacks regulation. Unfortunately, the policy and legal framework now under discussion at
the Central Bank lacks the required direction. Consequently, MF industry stakeholders are
committed to draft an appropriate policy and framework using a participatory approach. The
multi agency regulations for different types of MFIs (current model) are appropriate but a
number of provisions required revision.

Rather than applying the Basel Framework of regulations, the Government should use the
PEARLS rating system to regulate and supervise MFIs. The Pearls rating system is simpler, more
realistic and comparable to the worldwide MF database. It is also recognized that setting
performance standards, self-regulatory norms and promoting best practices can be enhanced
through appropriate policy and regulation application.

An outcome of this study was the model Microfinance Act of 2009. Its’ adoption by
Government is expected to set a level playing field for all MFIs, aid the growth of the sector,
widen MFI outreach and help to reduce poverty.

ii

TABLE OF CONTENTS
Abstracts...................................................................................................................................ii
Acronyms .................................................................................................................................v
List of Tables...........................................................................................................................vii
1 Introduction............................................................................................................................1
1.1 Context................................................................................................................................. 1
1.2 Methodology ....................................................................................................................... 3
1.3 Limitations ........................................................................................................................... 3
2 Microfinance Market Environment ........................................................................................4
2.1.1 Outreach Growth........................................................................................................... 4
2.1.2 Market Penetration........................................................................................................ 5
3 Policy and regulatory environment.........................................................................................8
3.1 Defining Microfinance.......................................................................................................... 8
3.2 Principles and Characteristics .............................................................................................. 9
3.3 Best Practices ....................................................................................................................... 9
3.4 Why Enabling Regulatory Environment.............................................................................. 10
3.5 Principles of Enabling Environment.................................................................................... 11
3.6 The role of Government and the Central Bank................................................................... 12
3.7 Impact of Micro- finance in Nepal...................................................................................... 12
3.8 Regulations for Microfinance Institutions ........................................................................... 13
3.9 Establishment Criterion...................................................................................................... 13
3.9.1 General......................................................................................................................... 13
3.9.2 Licensing Norms for FINGOs......................................................................................... 15
3.9.3 Registration Norms and SACCOs.................................................................................. 16
3.10 Regulations for Micro Finance Development Bank (MFDB) .............................................. 16
3.11 Regulations to Savings and Credit Co-operative Societies (SACCOs) .................................20
3.12 Regulations for FINGOs..................................................................................................... 22
4 Micro-Finance Policy, 2065 (2008).........................................................................................22
5 Survey findings.....................................................................................................................24
5.1 Survey Coverage................................................................................................................. 24
5.2 Policy Issues Awareness...................................................................................................... 24

iii

5.3 Policy Issues raised by the Actors....................................................................................... 25
5.3.1 Co-operatives.............................................................................................................. 25
5.3.2 FINGOs ........................................................................................................................ 26
5.3.3 MFDBs.......................................................................................................................... 27
5.3.4 Policy Organizations..................................................................................................... 27
5.3.5 Donor Agencies / INGOs............................................................................................... 28
6 Recommendations................................................................................................................30
6.1 Legal/Regulatory Framework.............................................................................................. 30
6.2 Performance Standards/Indicators..................................................................................... 35
6.3 Model Microfinance Regulation Act 2009.......................................................................... 36
6.4 Other Suggestions .............................................................................................................. 36
Annexes..................................................................................................................................37
Bibliography............................................................................................................................60

iv

ACRONYMS

ACCION ACCION International - a Latin American MFI system
ADB Asian Development Bank, Manila
ADB/N Agriculture Development Banks, Nepal
ASA Association for Social Advancement, Bangladesh
BASEL Basel Committee for Banking Supervision, Bank for International Settlement,
Switzerland, BASEL
BFI Bank and Financial Institutions
GBB Grameen Bank Bangladesh
BRAC Bangladesh Rural Advancement Committee
CAMELS ‘Capital Adequacy, Asset Quality, Management, Earning, Liquidity and
Sensitivity’ to Market Risk
CAR Capital Adequacy Ratio
CMF Center for Micro- Finance, Kathmandu, Nepal
CBs Commercial Banks
CBOs Community Based Organizations
CEO Chief Executive Officer
CRR Cash Reserve Ratio
CSD Center for Self Help Development, FINGO
CGAP Consultative Group to Assist the Poorest
CGISP Community Ground Water Irrigation Sector Project
DDB Deprosc Development Bank
DLGSP Decentralized Local Governance Support Program.
DSL Deprived Sector Lending
FCs Finance Companies
FD Fixed Deposit
FGD Focus Group Discussion
FI Financial Institution
FINGO Financial Intermediary Non-Government Organization
FSS Financial Self-Sufficiency
FWGB Far Western GB
GB Grameen Bank
INAFI International Network of Alternative Financial Institutions
LLP Loans Loss Provision
LOI Letter of Intent
MCPW Micro-Credit Project for Women
MCR Minimum Capital Requirement
MEDEP Micro Enterprise Development Program
MDGs Millennium Development Goals
MF Micro-finance
MFDB Micro Finance Development Bank

v

MFI Microfinance Institution
MGB Madhyamanchal GB
MWGB Madhya Paschimanchal GB
MIS Management Information System
NCDB National Co-operative Development Board
NCF National Co-operatives Federation
NEFSCUN National Federation of Saving and Credit Co-operatives
NGO Non-Government Organization
NRB Nepal Rastra Bank
NUBL Nirdhan Utthan Bank Limited
OSS Operational Self-Sufficiency
PAF Poverty Alleviation Fund
PCRW Productive Credit for Rural Women
PEARLS Protection, Effective financial structure, Asset Quality, Rates of return and costs,
Liquidity, Sign of growth
PGB Paschimanchal GB
PuGB Purbanchal GB
RFP Rural Finance Project
RMDC Rural Micro-Finance Development Centre
RSRF Rural Self-Reliance Fund
SACCOS Savings and Credit Co-operative Societies
SFCL Small Farmer Co- operative Ltd
SFDP Small Farmer Development Project
SHGs Self-Help Groups
SKBB Sana Kishan Bikash Bank
SBB Swabalamban Bikas Bank
SOL Single Obligor Limit
SPOs Sub Project Offices (SFDP)
STI Second Tier Institution
TLDP Third Livestock Development Program
UN United Nations.
VICCU Vijaya SACCOS, Nawalparasi
WOCCU World Co-operative Union

vi

LIST OF TABLES

Table 1: MFI Categories and Client base

Table 2: Current Microfinance Market size and penetration

Table 3: Microfinance Market breakdown by regional type

Table 4: Market Concentration in thirteen ( 13) districts

Table 5: Minimum Capital Requirement in Nepalese Rs in Millions

Table 6: MFIs and Organizations Surveyed during policy diagnostic

vii

Introduction

1 INTRODUCTION
1.1 CONTEXT
Microfinance has been one of the few effective tools for poverty reduction. As a result of the
creation of sound microfinance institutions and systems, poor people can safely deposit money
and accumulate funds for future investments or emergencies as well as access loans for
productive purposes leading to higher incomes. Additionally, microfinance has produced an
impact in other areas including good governance, participation in the political process, women
empowerment, social inclusion and conflict transformation.1
Currently, more than 1.6 million individuals in the rural population have access to microfinance
services. This figure represents approximately 7 percent of the population and approximately
22.7 percent of the people living below the poverty line. The outreach of sustainable and sound
microfinance institutions to the rural and urban poor still needs, however, to be increased in
order to further diminish poverty. Despite ongoing development efforts, poverty remains
widespread with approximately 31 percent of the population living below the poverty line. The
incidence of poverty is highest in rural areas, particularly in the remote hill and mountain areas.
The Microfinance Summit Nepal held from February 14 to 16, 2008 discussed the major issues in
the microfinance sector. These issues included:

• Lack of an enabling microfinance policy based on a broad consensus among
policymakers and stakeholders;

• Lack of coordination among microfinance stakeholders (including the international
donor community) which has lead to market distortions and overlapping interventions;

• Lack of appropriate strategies to build a strong and inclusive microfinance sector which
responds to the needs of all segments of society, and actively contributes to creating a
peaceful and socially equitable society;

• Lack of microfinance sector baseline data on key stakeholders and customers which
hinders the development of targeted and tailor-made support strategies for different
client groups (i.e. how to bring microfinance services to hill areas? How to better access
dalit and janajati communities?);

• Lack of information sharing on innovations, new technologies and strategies which
impedes increased outreach, particularly to the less accessible areas.

Delegates (838) of private, government and public microfinance stakeholders together with the
international donor community attempted to address these issues at the Summit. Microfinance

1
Microfinance Summit Nepal 2008

CMF Nepal 60

Introduction

stakeholders shared their experiences with microfinance issues and jointly decide on the future
direction of microfinance in Nepal. The Summit promulgated the ‘21 Point Kathmandu
Declaration’ and established goals for Nepal only after recalling national and global
commitments.

• The national development plan; and the United Nations Millennium Development Goals
(MDGs) call for reducing international poverty by half by the Year 2015, thereby globally
reaching 175 million poor families;

• Bearing in mind that the Global Microcredit Summit held in Halifax, Canada declared a
goal of ensuring that 100 million of the world’s poorest families move from below USD 1
day earnings to an adjusted purchasing power parity above USD 1 a day;

• Recognizing that adopting an inclusive approach for poverty reduction through
appropriate financial services contributes to ensuring a peaceful, democratic future for
Nepal.
The Summit set as its goal:
• Reaching 2 million of the ‘poorest of the poor’ with microfinance services for their
sustainable income by 2010;
• Reaching a total of 3 million of the ‘poorest of the poor’ by 2015

The Summit also formulated a two year action plan to meet this goal. The most important step
was to form a fifteen (15) member Taskforce to lobby for the formulation of a microfinance
policy and the creation of an enabling regulatory environment. The Summit recognized that an
enabling policy and regulatory environment was a necessary pre condition to meeting its goal. In
the course of this action, a review of new policy, regulations and regulatory provisions was felt
to be necessary. This recognition prompted CMF and The Asia Foundation to implement the
project “Advocacy for Enabling Microfinance Policy Environment in Nepal” (May 10, 2008 to
January 31, 2009).
The partnership conducted primary and secondary research to diagnose the current regulatory
gaps and ambiguities in Nepal’s microfinance policy in close coordination with the Summit’s
Taskforce. This diagnostic report is the outcome of the primary and secondary research, and the
in-depth discussions held with the Microfinance Policy Taskforce formed at the Summit.

Rationale:

Microfinance in Nepal is emerging and transforming itself from a directed public sector
environment to a market led private effort. This does not mean, however, that the
Government, the Central Bank and donor institutions are not giving it the necessary attention.
Their role is recognized as systematizing, regulating, supervising, promoting and facilitating the
systems, methods and institutions.

Nepal's Central Bank (Nepal Rastra Bank) is considered the prominent regulator. It is always in
support of poverty reduction strategies through the provision of development finance especially
microfinance. In this mission it has created not only laws and regulations but also institutions at
various points in time. In recent years it has concentrated on regulatory reforms in the banking

CMF Nepal 2

Introduction

and financial system in line with Basel II for creating a safe and sound financial system. This is
the basic requirement of sound macroeconomic stability. Currently, NRB is in the process of
strengthening microfinance systems, regulations and regulatory frameworks.

Objectives

This diagnostic study on the policy and regulatory framework for microfinance in Nepal had the
following objectives:

1. To review the existing policy, legal and regulatory frameworks for different models of
micro finance institutions;

2. To identify issues related to policy and regulatory framework from the perspective of
stakeholders; and

3. To suggest measures and a regulatory framework for MFIs with the aim of enhancing
their sustainability and growth.

1.2 METHODOLOGY
• The study reviewed the policy and regulatory framework of the microfinance sector.
Available literature on principles, issues and practices of regulation and policy
framework of several countries were also reviewed.

• Individual consultations were held with forty-four microfinance institutions, policy
making organizations, donor agencies and INGOs.

• The national Microfinance Summit held in February 2008 in Kathmandu proposed a
national Taskforce Committee be formed to prepare and suggest policy and regulatory
issues in micro-finance to the next Summit to be held in February 2010. The
Microfinance Secretariat formally constituted the Taskforce and conducted a series of
nine meetings with members, the NRB governor, and NRB officials. The outcome results
of a desk-top audit and field review were submitted to this Committee. The final
comments of the Committee including final draft recommendations were then
submitted at a wider stakeholders meeting including the National Steering Committee
members on January 26, 2009. The model draft Microfinance Act and stakeholder
suggestions on it are attached as Annex-1-2.

1.3 LIMITATIONS
The study focused on the regulatory environment, reviewing current practices and
recommending how to reform them. It did not focus on the depth of outreach, sustainability
factors and probability of sector growth. This was due to the availability of resources. As a
consequence, there exists further scope for study in each of these areas.

CMF Nepal 3

Microfinance Market Environment

2 MICROFINANCE MARKET ENVIRONMENT
An unstructured form of microfinance service started in the 1950s when several saving and
credit co-operative societies were formed in Chitwan district. Available study data indicates that
while this informal financial system (SACCOs) remains dominant the microfinance sector has
undergone many changes. The sector has experienced a rapid growth of institutions (MFIs) and
significant progress has been made in terms of client out-reach, savings and credit management
services. The number and outreach of microfinance institutions in Nepal has increased
substantially over the last 13 years.

Market Outreach

The table below shows the microfinance market in Nepal by category of financial model. The
number of institutions in each category, the number of clients served per institution, and the
total client base are shown. This information was gathered mostly from secondary sources.

Table 1: MFI Categories and Clients

MFI Categories Number Number of Clients (Range) Client Base
of MFIs

MFDBs 10 20,000-96,000 455,782

SACCOs 4,432 100-5,000 686,453

FINGOs 47 5,000-40,000 343,596

SFCLs 219 500-1,500 139,368

Sources: NRB (2008), CMF (2008), Department of Cooperative (2008), SKBBL (2008).

SACCOs account for 42 percent
of the market. The 10 MFDBs
account for 28 percent and the
47 FINGOs for 21 percent of
the microfinance customer
base. The rest of the market is
covered by SFCLs.

Figure 1: Market share

2.1.1 OUTREACH GROWTH
Figure 2 below shows the annual microfinance outreach growth from 2004 to 2008 of each MFI
category. The FINGO category has the highest growth rate but has had a declining rate since
2006. SFCLs have a positive growth rate in comparison to other categories from 2006 to 2007.

CMF Nepal 60


The aggregate annual average growth rate of all MFIs is nearly 23 percent. The unexpected
growth of SACCO clients in 2008 was due to the growth in the number of SACCOs. There was
only limited growth in 2007, however, among the other MFI categories. This indicates the need
exists for an enabling policy and regulatory environment to boost outreach

MFI Outreach (2004-2008)

75%
70% 70% 70%
65%
62% 62%
60%
55%
50% 51%
Outreach growth

45%
40%
37%
35%
33%
30%
25%
22% 21%
20% 19% 19%
17% 16%
15% 15% 15%
12% 11%
10%
8%
5%
2%
0% 0%
2005 2006 2007 2008

Fiscal Year

MFDBs SACCOs FINGOs SFCLs Aggregate outreach

Figure 2: Outreach growth

2.1.2 MARKET PENETRATION
As discussed earlier, the potential microfinance market comprises the 31 percent of the
population that live below the poverty line. The table below shows the current outreach and
market potential of each development region. The data used to estimate the market potential
and the coverage of MFIs came from CMF reports.

CMF Nepal 5


Table 2: Current Microfinance Market Size and Penetration

Development Number of Microfinance Percent of

Regions Clients Market Penetration

Eastern 306,388 2,543,536 12%

Central 472,810 2,806,561 17%

Mid-West 117,126 1,043,790 11%

Western 237,772 1,518,415 16%

Far Western 49,657 766,722 6%

Total 1,183,753 8,679,024 14%

Sources: CBS (2007), CMF (2008). Note: Market penetration is based on 2007 client base data.

Table 2 shows that a small percent of the microfinance market is being reached. It also shows
that those that are being reached come from the Eastern, Mid-Western, and Central regions.

The vast majority of microfinance recipients live in the Terai as indicated in Table 3. However,
Table 3 also indicates that the hills and the mountain areas have a high number of possible
needy clients.

Table 3: Microfinance Market by regional type

Eco-zone Number of Microfinance Market Percent of Market

Clients Size Penetration

Terai (plain 743,423 3,153,752 24

areas)

Hills and 440,330 5,525,272 8

mountains

Total 1,183,753 8,679,024 14

Sources: CBS (2007), CMF (2008).

Table 4 shows that the majority of microfinance clients live in only 13 districts primarily
centered in the Central and Eastern regions.

CMF Nepal 6


Table 4: Market Concentration in 13 districts

Microfinance
Concentration of Market ( 31% of
SN Districts clients Total Pop) Total Population Regions
1 Morang 88,795 291,900 941,614 E
2 Sunsari 60,200 220,361 710,842 E
3 Rupandehi 55,026 249,755 805,662 W
4 Bara 55,046 196,708 634,542 C
5 Jhapa 54,484 234,203 755,494 E
6 Kathmandu 43,823 395,794 1,276,754 C
7 Chitwan 43,765 165,694 534,496 C
8 Sarlahi 40,627 221,499 714,513 C
9 Dang 35,985 161,674 521,528 MW
10 Parsa 35,604 174,627 563,312 C
11 Nawalparasi 33,800 196,220 632,969 W
12 Dhanusa 32,441 231,695 747,402 C
13 Bake 27,468 135,968 438,608 MW
Total 607,064 2,876,098 9,277,736
51 % share of total market penetration by 13 districts
21% penetration in the microfinance market of 13 districts

The policy and regulatory measures that are to be formulated must be able to encourage MFIs
to expand their services to the underserved target groups and into other districts. In addition,
support in reducing operational cost through innovation, research and ICT infrastructure can
also help MFIs expand their services beyond these 13 Terai and hill districts.

CMF Nepal 7

Policy and regulatory environment

3 POLICY AND REGULATORY ENVIRONMENT
3.1 DEFINING MICROFINANCE
Micro-finance has emerged as a powerful tool for poverty reduction. Historically, different
forms of intermediation and development strategies have not been able to trigger poverty
reduction economic activities. This has caused policy makers and practitioners to re-think
microfinance as an emerging tool for poverty reduction. This re-thinking reflects the paradigm
shift in rural development attitudes world -wide.

Microfinance has been defined in different ways to suit both academics as well as MF
practitioners. Its origin, however, can be traced back 50 years when development focused on a
planned approach. As a consequence of this approach, rural development programs, especially
those lending to agricultural, agro business and related businesses had the objective of attaining
growth with social justice.

The Asian Development Bank (ADB) defines micro-finance as “the provision of a broad range of
financial services such as deposits, loans, payment services, money transfers and insurances to
the poor and low income households and enterprises.”

The World Bank defines it as “the provision of financial services to low income clients, including
the self employed. It includes both financial and social intermediation. It is not simply banking, it
is a development tool.”

Similarly, Rachel Rock defines it as the “development of small amounts of short term working
capital and in some cases, long term investment loans and provision of deposit facility to small
scale business and households.”

“Microfinance is the supply of loans, savings, and other basic financial services to the poor"
(CGAP).

A microfinance institution (MFI) is defined as an organization that provides microfinance
services, ranging from small non-profit organizations to large commercial banks. CGAP broadly
defines an MFI as any organization—credit union, downscaled commercial bank, financial NGO,
or credit cooperative that provides financial services to the poor.

Nepal’s National Microfinance Policy 2008 defines microfinance as the financial services that
help poor communities develop their professional skill and become involved in income related
activities by offering self employment opportunities through micro saving, micro credit, and
micro credit insurance/micro credit security activities.

CMF Nepal 60


3.2 PRINCIPLES AND CHARACTERISTICS
Microfinance encompasses key principles that have evolved over the years through the
interaction of stakeholders, researchers and academicians. These principles clearly demonstrate
that MF has created its own development and academic identity.

Key Microfinance Principles: 2

1. “Poor people need a variety of financial services, not just loans.
2. Poor people are bankable, can pay loans and can also save.
3. It is a powerful tool to fight poverty.
4. It means building financial systems that serve the poor.
5. It can pay for itself, and must do so if it is to reach very large numbers of poor people.
6. It is about building permanent local financial institutions.
7. Micro-credit is not always the only answer.
8. Interest rate ceilings hurt poor people by making it harder for them to get credit.
9. The role of government is to enable financial services, not to provide them directly.
10. Donor funds should complement private capital, not compete with it.
11. The key bottleneck is the shortage of strong institutions and managers.
12. Micro-finance works best when it measures and discloses its performance.”

Characteristics of Microfinance: Microfinance possesses characteristics which separates it from
other forms of finance. Some of these characteristics include:

1. MF is mostly collateral free
1. MFIs go to clients rather than clients go to MFIs
2. Simplified savings and loan procedures
3. Small size of loans and savings
4. Repeat Loans
5. Loan sizes increases when there are repeated loans or in subsequent cycles
6. Interest rate is usually between that charged by money lenders and formal banks
7. Free use of loans (no restrictions on specified purpose)
8. Loan repayment considers incomes from business as well as other sources
9. Loan and saving products within manageable numbers

3.3 BEST PRACTICES
Initiatives to develop microfinance have attracted the attention of development agencies, i.e.
the United Nation proclaimed 2005 as the “Year of Micro-credit”. From the various
development agency initiatives a number of MF models have been developed and practiced
over the years. As a consequence of this experience, a large knowledge base has developed
which in turn has led to the development of guiding principles, often termed ‘best practices’,
which can help MFIs achieve sustainable operations for longer periods of time.

International ‘best practices’ include: building effective management information systems
(MIS); offering outreach services to attract a larger number of clients (vision of growth);

2
CGAP

CMF Nepal 60


promoting and diversifying savings services; offering services that fit client needs; diversifying
loan products; and simplifying loan procedures. In addition, there exists the need to motivate
clients to repay loans which focus on high repayments; attain operational self sufficiency (OSS)
and financial self sufficiency (OSS) by charging adequate and appropriate interest rates and fees;
involve clients when designing services; promoting effective governance characterized by
democratic and transparent decision-making; and properly targeting clients..

‘Best practices’ also includes a focus on financial services (provision of business development
services as a separate but parallel intervention not as a part of, or, condition of finance);
development of institutional linkages; implementation of incentives systems that promote
efficiency and maintain quality; and implementation of an internal control system that
minimizes financial and credit liquidity, interest rate charges, transactional and operational risks
and the risk of fraud. It is regrettable that the majority of MFIs in Nepal can not follow these
‘best practices’ due to the absence of a proper infrastructure, regulatory environment and
market standards.

3.4 WHY ENABLING REGULATORY ENVIRONMENT
There is no unanimous opinion among MF practitioners and regulators on the issue of
regulation for microfinance operations. Some say the “Market is the best regulator” while
others argue that MF should be left outside the purview of formal regulation. The later envisions
a scenario where MF works are viewed as noble social work versus as a professional financial
activity.

The general consensus that has emerged, however, is that some conducive, facilitative or
growth oriented regulation could boost the MF sector. According to Fukaya and Shadagopan
(2001) “The motivation for regulatory intervention is based on the assumption that an
asymmetry of information exists between the lender and the borrower.” They argue that
regulation has to match the actions of the institutions (Agent) and the clients (Principal) in such
a way that the actions of the agents are controlled, decision making power of the agents are
restricted and provide incentives in doing so by harmonizing the benefits to principal and the
agents. In summary, the reasons for an enabling regulatory environment are:

• The possibility of a ‘run’ on an MFI due to a lack of information to the stakeholders
(investors).

• The opportunistic and risky behavior of an agent even for MFIs that do not take deposits
may pose a serious threat to the functioning of the MFI.

• The need for consumer protection in order to ensure stability.

• The protection of wholesale lenders (some could be banks in which case public funds
are involved, others could be bilateral or multilateral agencies where returnable funds
may have as a condition the requirement for appropriate regulation and supervision
before disbursement to the MFI).

CMF Nepal 10


• The need to ensure a healthy development of the sector through performance
standards

• The need to facilitate linkages with commercial sources of finance.

• The need for the prudential regulation of savings

• The opportunity for banks to become involved in direct microfinance.

Once microfinance activities start various needs emerge according to changes in the market.
The enabling regulatory environment creates a competitive market for microfinance. It
determines the size of the micro enterprise sector, the supply of credit, the assessment of the
credit gap, the interest rate setting, the number and types of institutions, the capital
requirement, the product design, etc. It also protects the quality of a portfolio through
documentation requirements, group guarantees, insurances, and either the CAMEL or PEARLS
rating systems. In addition, the enabling environment builds the institutional capacity of an
agency, obtains timely and adequate financial information and establishes effective off and
onsite supervisory mechanisms and handles potential insolvencies.

Nepalese experience and studies suggest that building an enabling and sound regulatory
environment is very important for an efficient and effective microfinance industry. The enabling
environment in the Nepalese context consists of creating a legal framework; developing self
regulatory norms; ensuring good management practices and governance; developing
appropriate internal control and institutional rating systems; and public disclosure of norms,
deposits and credit insurance schemes as well as the development of performance standards.

Generally, non bank MFIs are not subjected to prudential regulation when they do not accept
public deposits (McGuire and Conroy 1999). This study suggests that for most non-bank MFIs,
prudential regulation is not always effective in preserving financial health. Suggestions arise
from observation that leads one to find ways for developing institutions that are sustainable,
self regulated and governed with sound performance management systems. Additionally, these
actions can be supported by the use of independent credit rating systems and the disclosure of
financial and social performance information. If these actions are taken, it will facilitate
wholesale funds, and better enable commercial banks and foreign financial institutions to
provide funding to MFIs. Ultimately, this will lead to self-led supervision under performance
criterion and strong loan repayment performance.

3.5 PRINCIPLES OF ENABLING ENVIRONMENT
Globally practiced enabling regulatory environment principles include:

1. Competitive neutrality: The regulatory environment needs that all types of MFIs play
on a level field. There should not be any discriminatory policies for any type of MFI
(Government owned/ Private/ Cooperatives/ Banks/ FINGOs, etc.).

2. Negative effect of regulation: Regulations that effect efficiency should be minimized to
allow for reducing the cost of intermediation.

3. Do not mix social objective (political agenda): Avoid self-interest in promoting financial
markets.

CMF Nepal 11


4. Avoid institutional failure: The purpose of regulation and supervision should be to do
this.

5. Provide competition: Regulation must rely, as much as possible on the self-interest of
the economic agent.

6. Regulatory framework should not be static: Markets always innovate and find ways to
avoid regulation. Therefore, there must be a strong will on the part of regulators to
discover changes.

The regulatory framework should be flexible enough to regulate different intermediaries in
different manners as required.

3.6 THE ROLE OF GOVERNMENT AND THE CENTRAL BANK
The role of Government and Central Bank has been discussed earlier. From the 1950s until the
1980s most countries pursued a guided rural, small or micro- financial approach. The aim was to
provide funds to poor rural people at concessional rates, sometimes together with other
interventions to replace the traditional informal sector, which was considered as exploitative.
Consequently, many governments and central banks launched directed credit programs. During
the 1990s this approach was criticized as financial repression.

Rapid outreach was not considered possible due to a lack of funds. Ultimately, the poor did not
benefit due to the non availability of funds at the required time. (Uprety, 2005) The success of
Grameen Bank Bangladesh model in reaching a large number of poor people without a
government subsidy and intervention has led many policy makers and practitioners to rethink
and act in different ways. Today, MF theorists have the view that role of the government and
the central bank should only be to facilitate and not control. This will be discussed more in the
section on the Analysis of the Nepal MF Policy Framework.

3.7 IMPACT OF MICRO- FINANCE IN NEPAL
There are only a few studies available on the generic impact of microfinance services in Nepal.
Generally, however, it has been found that MFs can contribute to poverty reduction by
encouraging the acquisition of new assets, income growth, women empowerment, better
health care and better education for the client’s children. Some specific observations made by
Dhakal and Uprety, 2005 include:

 MF services are not very diversified.

 Micro- credit has been used for both production (66 percent) and consumption (36
per cent) activities.

 MF contributes to a reduction in a client’s household poverty (56 percent reported an
increase in their income after participation).

 MF has served to lessen the dependency on moneylenders by reducing the average
interest rate.

CMF Nepal 12


 Participation in income generating micro- enterprise activities has increased income
and employment as well as created more employment in the ratio of 1:1.28.

 Access to financial services has had a significant impact on clients for a wide range of
economic and social indicators including: increased income, improved nutrition,
higher quality food and clothing, better housing, lower child mortality, lower birth
rate, higher family planning practices adoption, better health care, better education
for their children, women empowerment and participation in social and political
activities. Thus, MF is directly helping Nepal to attain its MDG goals.

3.8 REGULATIONS FOR MICROFINANCE INSTITUTIONS
The term regulation is understood differently by organizations depending on their place in
society. Broadly, regulation in banking and finance can be referred to as "binding rules
governing the conduct of legal entities and individuals, whether they are adapted by a legislative
body (laws) or an executive body (regulations)” (CGAP, 2003). Regulations can be further
described as: 1. Self-Regulation; 2. Prudential Regulation; 3. Non-prudential Regulation; and 4.
Enabling. Regulation.

Self-Regulation: Regulation and/ or supervision by a body that is effectively controlled by the
entities being regulated or supervised based on predetermined performance criterions or rating
system (PEARLS rating system is applied by many MFIs as self-regulation norms in many
countries).

Prudential Regulation: Regulations aimed at protecting the financial system as a whole as well
as protecting the safety of small deposits in individual institutions. Many such regulations stem
from the BASEL principles and CAMELS rating, which may be a burden to some smaller MFIs to
adhere to especially for those who do not take public deposits and to regulators.

Non-Prudential Regulation: Outside of a central banks purview there are regulations covering
"fit and proper", "dos and don'ts" maintained by various government bodies, industry
associations, audit firms, rating tools, etc. Many believe that an MF portfolio covering 2 percent
(on average) of total financial asset does not pose a safety soundness risk to the financial system
and thus does not require prudential regulation.

Enabling Regulation: Regulation having a positive outlook that allows MFIs easy entry and
involvement in new activities is considered as an enabling or promoting regulation.

The worldwide issues in regulation and supervision are: the movement of deposit vs. on-
deposit taking; small vs. large outreach volume; donor funded vs. commercial fund accessed
MFIs; and rating services availability etc.

3.9 ESTABLISHMENT CRITERION
3.9.1 GENERAL
Based on the above theoretical understanding of regulation and supervision, an analysis of
the existing MFI regulations in Nepal is possible. MFIs in Nepal are subject to many

CMF Nepal 13


different types of regulations including the establishment of criterion, prudential and non-
prudential regulation (a few regulations could even be termed enabling).

Minimum Capital Requirement

The minimum capital requirements to establish a Banking Finance Institution (BFI) are
determined based on the category type and functional area. The establishment norm for MFIs
is considered as facilitative and promotional but does not reflect on the future return to the
equity holders.

Table 5: Minimum Capital Requirement: NRs in Millions

Category of Central Regional From 4-10 From 1-3 Priority
Financial Level Level* Districts* Districts* Areas ***
Institution
Commercial Bank 2,000 - - - -
Development Bank 640* - 300** 300** 20
200 100
Finance Company 300** - - 300** 10
200 100
Microfinance 100 60 20 10 -
Development Bank
+ 5 Hill
districts
*Outside Kathmandu Valley only
*Includes leasing business
***Priority areas where there are less than 5 bank branches / VDCs or municipalities having
no banking services.

Facts
1. Promoters must invest at least 51 percent of the required equity, while 30 percent can be
set-aside for the general public (of which 5 percent can be allocated to staff members).

2. Joint venture partners can invest up to 85 percent in the equity of a bank or financial
institution. If Joint venture partners invest less than 50 percent, 30 percent needs to be set-
aside for the general public. If they invest 50 percent or more than 15 percent needs to be
set-aside for the general public.

3. Individual, firms or companies must submit their latest tax clearance certificates, source of
fund and for a company their audited balance sheet for the last 2 years as well as a record of
their retained profit. In the case of micro-finance development bank companies are required
to submit at least one-year’s balance sheet.

CMF Nepal 14


4. Promoters of a bank or financial Institutions need to deposit 5 percent of paid-up equity at
the time of application; 45 percent at the time of receiving the Letter of Intent (LOI); and the
remainder at the time of receiving the operating license from Nepal Rastra Bank (NRB).

5. Promoters of a bank or and financial institution must have a clear financial record. If they
were blacklisted in the past they need to have completed at least 3 years after their names
were deleted from the black list by the Credit Information Center.

6. At least one third of the promoters should have a bachelor’s degree.

7. The investment limit for a single person, their family or firm is a maximum of 15 percent of
the paid-up equity. A type 'D' or Micro-Finance Development Banks is set at a maximum of
25 percent.

8. Banks and financial Institutions in various categories (type A, B, C and D) have a maximum
establishment expense limit of 0.5; 1.0; 1.5 and 2 percent respectively. Banks and financial
institutions must submit 0.01 percent of their issued capital as a licensing fee at the time of
application (non refundable).

9. Banks and financial Institutions must start operations within 6 months from the date of
approval of the NRB license. If they do not, their license will automatically be cancelled.

10. Microfinance Development Banks (MFDBs) can expand branches at a cost in the ratio of NRs
2.5 million in capital per branch.

Other conditions can be found in the licensing norms, Bank and Finance Institution Act and NRB
regulations relating to the incorporation, corporate governance and other topics that need to be
followed as a precondition. Banks and MFIs are also required to disclose other matters as
mentioned in the laws, regulation and policies.

3.9.2 LICENSING NORMS FOR FINGO S
Facts:

1. The minimum capital requirement is NRs. 100,000. The capital of Non-Government
Organizations (NGOs) is defined as membership fees, reserves and capital grants.

2. NGOs must have at least 500 members in the Kathmandu Valley and Terai and 300 in other
districts (with at least 50 percent women member) to apply for a financial intermediation
license.

3. At least 2 working committee members must have a Bachelor’s degree and 50 percent SLC
level qualifications.

4. At least 2 members of working committee must be trained in micro-finance.

5. Working committee members should not have been blacklisted by any bank or finance
institutions and also have no criminal offences.

6. NGOs must have at least 3 years of continuous experience in the social sector.

CMF Nepal 15


7. Priority will be given to NGOs having worked in PCRW, MCPW and having functioned as the
credit agent of a commercial bank or as a borrower from RSRF with satisfactory results.
NGOs also targeting dalits and disadvantaged ethnic group will also be given priority.

8. A business plan and other documents need to be submitted as required by the NRB together
with the application for a license.

9. NRB has suspended taking any application for a FINGO license since 2004.

3.9.3 REGISTRATION NORMS AND SACCOS
Facts:

1. There should be at least 25 persons to organize a co-operative society. All corporative
societies are not necessarily MFIs as they may focus on micro-finance for a targeted group.
In either case, the registration requirement is the same.

2. Members of a co-operative society can be individuals, firms, and international co-operative
alliance member institutions (maximum 20 percent of paid-up share).

3. Single shareholder limit is a maximum of 20 percent.

4. Voting right is "one member, one vote" and not on the basis of number of share owned, as
per the principles of co-operatives.

5. SACCOs can issue and sell shares to members on the basis of 'open to all' principle at any
time.

6. Working area can be 5 VDCs or all the wards of a municipality or the 5 adjoined wards of a
greater / sub greater municipality.

7. Branches can not be opened without the prior permission of the Department of
Cooperatives (DOC).

3.10 REGULATIONS FOR MICRO FINANCE DEVELOPMENT BANK (MFDB)
Micro Finance Development Banks are type 'D' financial institution as defined in the Banking and
Financial Institutions Act, 2006, and are regulated by NRB. Therefore, they are regulated by the
Bank and Financial Institution Act, 2006, Nepal Rastra Bank Act, 2003 and other regulations
issued by the Nepal Rastra Bank from time to time. Some of the major regulations affecting
performance are:

1. Board of Directors

Micro Finance Development Bank, like all other banks and finance institutions are required to
organize a management board having 5 to 9 directors. One member should be a professional
director appointed from the list of professionals published by NRB. A professional director
requires a master's degree qualification and 5 years of experience at the executive level.
Unfortunately, these qualifications make it difficult to find sufficient interested professionals.

CMF Nepal 16


2. Permissible Activities
• Lending as per NRB directives
• Micro-credit provision in accordance with NRB directives
• Borrowing from local and/or foreign institutions for micro lending or strengthening micro-
finance systems
• Providing services to promote microfinance i.e., training and conducting seminars.
• Taking deposits (with or without interest) from the public as per the conditions stated by
the NRB.
3. Capital Adequacy Ratio (CAR)

The CAR is set at a lower rate for MFDBs than other BFIs. CAR - primary capital 4% and total
capital fund 8 percent of risk weighted asset. [For commercial banks, development banks, and
finance companies the CAR is 5.5 and 11 percent. Recent changes for type A, B and C BFIs
require a minimum CAR of 8 percent and additional capital provision as per BASEL II regulations]
Risk Weights applicable to Micro Finance Development Banks (MFDBs) %

Cash 0
Balance held at Nepal Rastra Bank 0
Nepal Government/Nepal Rastra Bank securities
Balance with other Banks and FIs 20
Loans against govt. securities 0
Accrued interest to be received (Government securities) 0
Loans against other Bank and Finance institutions FDs 20
Balance held with Foreign Banks 20
Money at call 20
Investment in shares/debenture 100
Loans 100
Fixed assets 100
Other assets 100

4. Loan Loss Provision

Categories LLP %

Pass - Principle not overdue or due up to 3 months 1%

Sub-standard - Principle overdue from 3 to 6 months 25%

Doubtful - Principle overdue from 6 to 12 months 50%

Loss - Principle overdue from more than a year 100%

A term loan (more than one year) installment due is counted as the total due and provision
need to be made accordingly. A loan to a missing borrower and a miss-utilized loan are
counted in the loss category whether overdue or not .

CMF Nepal 17


5. Single Borrower Limit

The loan limit of a Micro Finance Development Banks (MFDB) involved in wholesale lending is
the same as for a commercial bank and financial Institution - that is a maximum of 25% of core
capital to a single borrower (MFI). The loan limits for an MFDB at retail is:

• Maximum of NRs. 60,000/- per person (group member) - Group guarantee and collateral
free.

• Micro-enterprise (Income generating occupation having less than 10 persons involved) loan
to group members (graduated) up to NRs. 150,000/- (with collateral).

• Micro Finance Development Bank (MFDB) can invest only up to 25% of their total lending in
a micro-enterprise portfolio.

6. Accounting Policy and Financial Returns

Accounting and reporting formats for MFDBs have not been issued separately. Informally they
were advised to use the same format (prescribed for commercial banks, development banks and
finance companies) that process is complicated, lengthy and basically unnecessary for them to
complete. Even so, this does not facilitate nor provide the required information for an MF
comparative database.

7. Regulation for Minimizing Transaction Risk

This is a common regulation for all types of banks and financial Institutions. Many of the
provisions under this regulation may not be applicable to MFIs i.e. gap analysis.

8. Regulations on Corporate Governance

Duties of the Board of Directors:

Maintain Minimum Acceptable Behavior: To commit to compliance to Nepal Rastra Bank
guidelines; not to interfere in the day to day operations; and to disclose any involvement in the
transaction of the concerned MFI.

Not to be involved against the MFI's Interest: The Board of Directors of a bank or a financial
institution cannot be a Director of another bank or financial institution (Bank and Finance
Institution Act, 2006).

Appointment of Chief Executive Officer (CEO)

A qualified, experienced and capable person must be appointed as CEO.

CEO/Staff Discipline: Maintenance of confidentiality, CEO is not to abuse the position and
information received; maintains trustworthiness; does not act against the interests of the
institution; and needs permission for part-time work to be approved in advance.

CMF Nepal 18


Shareholders: (with more than 1% of shares), Board of Directors and staff are restricted from
borrowing from the bank (except loans) as per staff rules and in pledging collateral for others in
the bank.

9. Regulations on Investment

• Investments can be made according to the investment policy approved by the MFDBs Board
of Directors.

• There is no restriction to invest in Government and Nepal Rastra Bank (NRB) securities.

• Banks and financial institutions can only invest in listed companies, and only up to a
maximum of 10 percent in a single company and in total 30 percent of its own primary
capital. Banks and financial institutions can invest up to 20 percent in a related company
but that amount needs to be deducted from its primary capital for calculation purposes.

• The valuation of an equity investment or debenture has to be made on the basis of the
purchase price or market price whichever is less. If the market price is less, then a provision
has to be made for the purchase price in the same amount. A bank or a financial institution
can not invest in the equity, debenture or hybrid capital instruments of another BFI. Banks
and financial institutions in type 'A', 'B' and 'C' categories can, however, invest in type 'D'
(Micro Finance Development Bank) securities

10. Regulations on Compulsory Reserve (Liquidity)

• MFDBs are required to maintain 2.5 percent of their deposit liability in the form of liquid
assets. Liquid assets are defined as cash in the vault, investments in Government and Nepal
Rastra Bank securities, and deposits in commercial banks.

• MFDB’s are required to maintain a compulsory reserve with the Nepal Rastra Bank, and
where there is no Nepal Rastra Bank branch with a commercial banks in a current account
for 0.5 percent of their member’s deposit and borrowed fund

• Liquidity is calculated monthly on a daily average basis.

• There is a limited penalty provision for non-compliance.

11. Branch Expansion

MFDBs are allowed to open, close or merge their branches within approved geographical areas.
They are required to inform Nepal Rastra Bank, however, within 15 days of doing so. Three to
ten district MFDBs can expand their branches into an additional 5 hill districts with the same
capital. They can also expand branches at the additional capital ratio of NRs 2.5 million per one
district.

12. Interest Rate

MFDBs are not restricted to a fix flat rate. They can fix interest rates at any time by placing an
announcement on their notice board. Like other banks and financial institutions, they are not

CMF Nepal 19


required to publish a change in the national newspaper, but only need to inform the Nepal
Rastra Bank after the change.

13. Financial Resource Mobilization

• MFDBs can mobilize financial resources (deposits, borrowings and debentures) up to 30
times their core capital (subject to maintaining a CAR of 8 percent)

• MFDBs are not permitted to collect deposits from non-members.

• Borrowing from foreign sources requires the approval of the Nepal Rastra Bank (NRB).

• The Issuance of debentures and debt instruments is conditional. Banks and financial
institutions must have completed 5 years of operation, public shares must have been issued
and their listing has occurred at least 3 years before. In addition, any initial operating loss
has already been recovered.

• If excess resources have been mobilized, they should be brought within limits within 3
months time. Until this happens the bank or financial institution cannot announce or
distribute a dividend or mobilize further resources.

3.11 REGULATIONS TO SAVINGS AND CREDIT CO-OPERATIVE SOCIETIES (SACCOS)

SACCOs are registered in accordance with the Co-operative Act, 1992 and operate according to
the Acts, rules and bylaws. All SACCOs are not Micro Finance Institutions. Many of them have,
however, adopted micro finance principles and practices in their operations. There are no
separate regulations for such co-operatives. Some of the SACCOs (16 out of 3000) have also
received limited banking licenses from the Nepal Rastra Bank but only a few are involved in
microfinance. Even so, the Nepal Rastra Bank regulations are also not specific regarding
microfinance formicrofinance for SACCOS.

SACCOS, worldwide, are governed by the ‘Seven (7) Principles’ of co-operatives and the
international practices of credit unions. Each SACCO is an autonomous institution governed
democratically by its member.

Nepal has had some bitter experience in the co-operative field. During the past 5 years more
than 100 co-operatives have lost member's money. There are also co-operatives abusing the co-
operative principles and acting as financial institutions without appropriate regulation and the
absence of prudential supervision. This has created a negative image for the functioning of
financially sound co-operatives.

According to the Co-operative Act certain general regulations govern co-operatives. These
regulations include:

1. Registration: At least 25 persons residing in the described geographical area and agreeing to
apply co-operatives principles can apply for registration.

2. Bylaws must be in accordance with Cooperative Act and its rules.

CMF Nepal 20


3. The annual general meeting (AGM) for shareholders must be conducted within 6 month of
the end of the fiscal year.

4. The Board of Director must be appointed for a maximum of 5 years by the AGM (members 5
to 11); an audit committee (1 co-coordinator and 2 members); and other sub-committees
must also be formed based on the approved bylaws.

5. SACCOS can generate resources by issuing shares to individuals, members and other
agencies, and foreign co-operatives (international co-operation alliance) up to a maximum
of 20 percent for all categories; accept savings from members (individuals only); and issue
debt instruments with the approval of Government.

6. The principle of one member one vote applies as opposed to the normal company practice
of one share one vote.

7. Co-operatives can accept savings and provide loans to members and also conduct other
banking activities with members with NRB approval.

8. Co-operatives must transfer 25 percent of their surplus (annual profit) to a reserve fund as
per their bylaws. They can only distribute a maximum of 15 percent in dividends to
shareholders from the net surplus.

9. Co-operatives can merge or separate in accordance with the law.

10. Co-operatives are subject to supervision by either a registrar or another designated person.

11. Co-operatives should follow the PEARLS rating system while supervising co-operative
societies.

12. Co-operatives can not discriminate by categorizing members as promoters, general
members and share only members.

13. Co-operatives can fix interest rate spreads of not more than 6 per cent.

14. Co-operatives can mobilize member deposit up to 10 times the cooperatives share capital. If
the co-operative‘s capital has eroded, however, it can still collect (receive) deposits.

15. Co-operatives can lend up to 5, 10 or 20 percent of their capital to an individual for the first,
second and third loan respectively. They can also take collateral and can lend based on a
group guarantee. They can not lend, however, to more than 49 percent of their members at
any time. Lastly, they need to maintain a minimum debt equity ratio of 80:20 while lending.

16. Co-operatives should maintain at least a10 percent liquidity in relationship to their total
savings. This does not take into consideration borrowing, however, which may cause them
to fall into a liquidity trap. At least 2 per cent of any liquid asset should be cash in the vault
or cash at a commercial bank. Liquidity data should be published monthly and must be
submitted quarterly to the concerned district co-operative offices.

CMF Nepal 21


17. NRB regulated SACCOS can mobilize resources up to 10 times their share capital but must
maintain a cash reserve of 0.5 percent and liquid assets of 7 percent which are subject to a
single obligatory limit of 10 percent. A loan loss provision also exists with similar bank and
financial institutions and corporate governance regulations.

18. NRB has barred co-operative from purchasing each other's share. This was done after
finding artificially created amounts equal to the amount of share transactions without cash
being involved with the aim of deceiving regulators. The 1, 25, 50 and 100 percent loan loss
provisions also apply to ‘pass loan’ when they are: 6 months, 12 month and more than 12
months over due.

3.12 REGULATIONS FOR FINGOS
The Act for Financial Intermediation by societies was promulgated in 1998. Under the provisions
of this Act, forty-seven (47) FINGOs provide their memberships with microfinance services.

There are only a few regulations for the operations of a FINGO. The legal licensing requirement,
the NRB conditions mentioned earlier and performance regulations which include:

1. FINGOs can only work with groups of poor people. Poor people are defined as those who
do not posses more than 6 Ana or 10 dhur in a municipality and 20 ropani or 1.5 bigha in
another area. Poor people also do not have permanent employment, have no access to the
loan facilities of commercial banks and financial Institutions and have annual incomes of less
than NRs. 5,500.00 per year.

2. The lending limit for group members is NRs. 60,000.

3. A FINGO must prepare and implement rules and bylaws approved by the NRB.

4. The geographical working area of a FINGO is determined by the NRB in accordance with the
recent regulations that they can only work in one district.

5. FINGOs must avoid client duplication with other MFIs.

6. Reporting formats and the frequency of need to be set by the NRB.

7. The NRB has introduced the PEARLS rating system into its inspection and supervision
manual for FINGOs. It has not yet, however, directed the use of PEARLS as a rating tool or
asked for any disclosures.

4 MICRO-FINANCE POLICY, 2065 (2008)
The Government announced a National Microfinance Policy 2008 after the conclusion of
Microfinance Summit 2008. Briefly, the major points of this policy are (see Annex-2 for more
details):

• Availability of microfinance services will be made simpler as per geographical diversity and
for rural and urban poor. Standards will be set for identification of the poor and MF
services flow system will be strengthened.

CMF Nepal 22


• Support will be made available to MFIs for their strengthening, institutional development
and wholesale financing from the public and private sectors

• Programs addressing poverty will be implemented in a co-ordinate manner.

• Micro enterprise and similar skills will be promoted.

• Local community institutions and saving credit groups involved in MF will be legally
recognized and linked to other MFIs.

• Micro saving will be encouraged.

• A second tier institution (STI) will be established under the NRB for effective regulation,
supervision, monitoring and evaluation of MFIs.

• A Micro Finance Development Fund will be established and funds available from domestic
and donor agencies will be mobilized through this Fund.

• A survey will be conducted to gather information on MFI outreach and activities.

• Capacity building of MFI practitioners will be done through training.

• A simplified policy will be adopted for MFI deposit mobilization depending on their services
and share capital.

• A flexible policy will be adopted on the corporate and deposit tax system for MFIs.

Most microfinance experts view this new policy as a way for the Government to orient,
emphasize and dominate policy. The role of Government, the private sector and donor agencies
has not been clearly mentioned in this policy. Large scale micro finance outreach can only be
achieved by strengthening private initiatives, i.e. the expansion of micro finance in Bangladesh
(Grameen, ASA, BRAC and many other micro finance institutions/programs) has been mainly
due to private initiatives with limited regulation.

CMF Nepal 23

Survey Findings

5 SURVEY FINDINGS
A rapid assessment survey based on qualitative interviews and using a checklist was conducted
to gauge market participant’s perception of microfinance policy and regulatory issues. The
survey also identified suggestions for the improvement and practical implementation of an
enabling microfinance policy and regulatory environment for Nepal.

5.1 SURVEY COVERAGE
The survey was conducted in forty-four (44) organizations including various types of MFIs, policy
formulating agencies, donors and INGOs.

Table 6: MFIs and Organizations surveyed during Policy Diagnostic

Organizational Type No of MFIs Percentage

MFDBs 7 15.9

FINGOs 6 13.6

Co-operatives 16 36.4

SFCLs 4 9.1

Policy Organizations 6 13.6

Donor Agencies / INGOs 5 11.4

Total 44 100

5.2 POLICY ISSUES AWARENESS
Eighty percent of the respondents said that they were aware of microfinance policy issues. The
awareness level on policy issues was found to be sufficiently high to meet the needs of the
survey.

.

CMF Nepal 60

Survey Findings

Table 6: Level of Awareness

Awareness MFDBs Co-operatives SFCLs FINGOs Policy Donors/
Organizations INGOs

No % No % No % No % No % No %

Yes 6 86.0 9 56 4 100 6 100 6 100 4 80

No 1 14.0 7 44 100 0 0 0 0 1 20

Total 7 100 16 100 4 100 6 100 6 100 5 100

5.3 POLICY ISSUES RAISED BY THE ACTORS
5.3.1 CO-OPERATIVES
Co-operatives responded on various issues of concerns including:

• Currently, the minimum number of persons required to form a co-operative is 25. Fifty-six
percent expressed this as adequate while 44 percent believed this is too low and proposed
that at least 100 people should form a co-operative society.

• Most of the respondents opined that the minimum paid-up capital should be at least NRs.
1000 per person while the remaining stated that it should be left to the members. In terms
of the area of operation, 69 percent stated that the existing area policy was appropriate.

• The interest rate spread of 6 percent that was recently introduced by the Department of Co-
operatives was view as suitable by 50 percent of respondents while 31 percent do not see
any reason behind it and 13 percent believe that there should be no regulation at all.

• The Loan Structure ratio with a maximum of 80 for the cooperative and a minimum of 20 for
an individual was also thought to be correct, but many of the respondents felt that it should
be 70: 30 or even 60:40.

• Eighty-seven percent stated the PEARLS system introduction should use selected indicators
instead of all 44 ratios.

• Sixty-three percent expressed a strong opinion that co-operatives should not be taxed, 31
percent suggested to have a 5 to 10 percent tax rate and 6 percent felt it should be in the
range of 10 to20 percent.

• Most of the respondents were in favor of audit uniformity (similarity of formats), easy of
access to wholesale, improvements in accounting systems (4 Ledgers), and showed concern
regarding duplication, and emphasized the need to have a system of credit information and
insurance.

CMF Nepal 25

Survey Findings

• Regulatory restriction on dividend payment to members (not exceeding 15 per cent)
invoked a mixed response. Some were happy with the current regulation while others
suggested it should not be regulated.

Other suggestions included:

• Transactions with non members should be allowed within the rules and regulations
• Loans should be available at low interest rates.
• If more than 10% of cooperative members want, this should be the quorum necessary
to convene an AGM
• Priority should be given to selecting women for decision making position
• Co-operative categorization should be done according to the tax rate; and be regulated
• The NRB should be more flexible in regulating cooperatives.
• Unhealthy competition should be removed
• Permission should be required to open a branch

SFCLs, a special category of small farmer co-operative, have almost similar views. On taxation
issues 100 percent of the SFCL respondents suggested that there should not be tax on co-
operatives. Other suggestions given by SFCLs included:

• Corporate governance should be strengthened in cooperatives
• Government should have a concrete policy towards cooperatives
• There should b a flexible environment for the smooth operation of cooperatives
• Farmers should be given ownership
• Flexible policy is needed to introduce new products in the cooperative
• Frequent monitoring is required
• The Central SFCL Federation should be more active

5.3.2 FINGO S
Most FINGOs selected were well aware of the policy and regulatory issues. They showed
concern on the geographical area restriction (recent NRB circular), the licensing restriction for
an unknown period, taxation and most argued for a new approach in provisioning. Almost all (83
percent) were against board member’s personal guarantee for obtaining wholesale funds. Some
also expressed that the MF loan limit of NRs. 60,000 should be raised to NRs. 100,000. Others
suggestions given were:

• According to their progress and performance FINGOs should be given permission to
expand their working area, especially in the hill areas,
• While paying down a loan an IC note should be allowed
• Should be reachable for the poorest of the poor
• No Tax on MFIs

CMF Nepal 26

Survey Findings

5.3.3 MFDBS
Most of the MFDBs interviewed believed that the capital requirement was sufficient for
establishment purposes. They also believed that the capital adequacy ratio was acceptable. In
term of liquidity requirement 50 percent of the respondents said it was acceptable. On resource
mobilization all opined that NRB should allow them to have access to public deposits with some
conditions attached.

Some suggestions provided by MFDBs were:

• The NRB should give permission to collect deposits
• The corporate tax rate (31.5%) should be zero
• Government should scrap the deposit tax rate for MFIs
• Establish a Microfinance Department and unit related to microfinance in the Ministry of
Finance
• The NRB Microfinance Department should be strengthened and have more specific
terms of reference
• Development Banks, FINGOs and cooperatives should act together for the betterment
of MF policy
• Transactions with non members should be permitted
• Some accounting procedures not related to MFDBs should be removed
• The MF Act should be formulated and further monitoring and regulation should be
strengthened
• In Grameen banks the board of director’s structure should be supported by the NRB as
board members are located in Kathmandu. As it is very difficult to conduct a board
meeting outside the Valley, NRB should manage to depute members from the local
level.

5.3.4 POLICY ORGANIZATIONS
Policy organizations refer to organizations that make and implement policy and
regulations on financial services. They are the NPC, Ministry of Finance, NRB,
Beema Samiti and Women development division. All of them are well aware of
the MF policy environment. Most of them agree on the non involvement of the
Government in financial services to the poor. Rather, they stress the need to
provide funds and capacity building services to MFIs using a systematic
approach. All agree that donor organizations should work with local partners
rather than provide the financial services themselves.

Some of their suggestions include:

• NRB’s monitoring, policy making, amendments and linkage development should be
strong,
• Buildup capacity of MFIs,
• A free Interest rate regime is very necessary
• Wholesale fund organizations should make funds available on demand
• Research on product diversification

CMF Nepal 27

Survey Findings

• Enterprise development should be encouraged
• Micro insurance products need to be developed. MFIs, MFI networks, Government, the
NRB and Beema Samiti should have the necessary discussions
• CMF and NRB should have close linkages in the area of research, training, policy
development and study
• Cooperatives, MFIs, and small enterprises should be structured in one form for
development
• Monitoring, supervision, tools development, financing should be done by NEFSCUN for
financial co-operatives
• Identify enterprises for the poor should be prioritized
• Business and market linkages are necessary for microfinance promotion
• Other federation should meet their members needs, provide advocacy & support to
strengthen them and integrate MFIs
• On the spot training/capacity building should be provided
• Associations should act as good network for sustainable MF and also for benchmarking,
monitoring and supervision
• Suggestions can also be expected for developing implementation mechanisms
• Facilitation on development work with network and associations i.e. CMF

5.3.5 DONOR AGENCIES / INGOS
Most donor agencies and INGOs (80 per cent) are aware of the policy environment. They are in
favor of an enabling and regulatory role for Government. In their own programs they also have
given an emphasis on providing MF services in the hills and mountains areas, the necessity of an
MFI tax rebate facility, embedding micro-insurance and health insurance services within the
services provided by MFIs and MFI capacity building. They also believe that MF wholesale funds
and programs need to be restructured.

High operating costs, dispersed populations, lack of economic opportunities and infrastructure,
a rigid MF model, the absence of a clear cut MF policy, lack of coordination between donors,
lack of an appropriate microfinance act and the absence of BDS services at the community level
are considered some of the hindrances to MF sector growth.

Some of their suggestions include:

•Services should reach into the hill areas
•Private social investment should serve as a good indicator rather than public social
investment
•Only the deprived sector should get microfinance services
•There should be more awareness program based on local development
•Plans for community awareness building should be linked
•The National Planning Commission (NPC) and Ministry of Finance (MOF) should help
develop new plans for microfinance
•The Microfinance Act should be promulgated soon
•Government should only play an enabling role

CMF Nepal 28

Survey Findings

•Existing MFIs need strengthening
•Promote increasing the number of MFIs
•Coordination with the Poverty Alleviation Fund (PAF)

Overall, stakeholders in the micro-finance sector are interested in the development of the
sector in Nepal. Therefore, it is time for stakeholders to implement suitable strategies, policies,
plans and programs to support the sector.

CMF Nepal 29

Recommendations

6 RECOMMENDATIONS

The study team incorporated the issues raised by the Taskforce and made recommendations to
the various stakeholders including: Government, the NRB (Central Bank), apex funds (wholesale
lending micro-finance institutions and programs), microfinance institutions and others.

6.1 LEGAL/REGULATORY FRAMEWORK
• The current legal arrangement for regulation and supervision of banks and financial
institutions appears to be acceptable to MFDBs and FINGOs.

• Most MFDBs viewed the proposed Micro-Finance Act (earlier draft) as not suitable for
the growth of the sector. It was also found not suitable for regulation and supervision
purposes. The main reason was a mix-up of MFIs and non-MFIs, equity based and non-
equity based organizations in the same legal framework. MFDBs, FINGOs, SACCOS and
even CBOs need to have different legal identities to better address their separate
activities If there is commonality in some areas of activities, they can be addressed by
the reform of regulations for each. Therefore, it is important that each type of MFI have
its own required legal framework reviewed separately to accommodate ‘best practices’.

• There could be an STI established for supervision purposes only for the various types
of microfinance institutions. This STI would be subject to the regulation and supervision
of the NRB. The supervision of SACCOS, other than NRB licensed ones is an issue that
must be dealt with separately.

• Access to Public Deposit: The Bank and Financial Institution Act, 2006 has a provision
that MFDBs can access public deposit with Nepal Rastra Bank approval. This provision
needs to be activated but not for everyone at this time. Nepal Rastra Bank could set
conditions and based on fulfilling such conditions MFDBs could be permitted to have
access to non-member deposits. This is also necessary for future MFI growth in
outreach, expected phasing out of the deprived sector credit directives, shrinkage in
donor funds, wholesale fund not being expended as expected and providing financial
services to local residents who are not members of MFDBs but poor villagers. Some
conditions that could be set include:

- Experience of at least …. years.
- Having a net profit in the last….. years.
- Having a capital base of NRs. …. million
- Having written off all pre-operational expenses.
- Can provide only saving services in the program area and cannot access current
(demand) deposits.
- Subject to higher liquidity requirement as other DBs and FCs for non member
deposit.

CMF Nepal 60

Recommendations

- Subject to fund management policy approved by the board of directors.
- Not exceeding a percentage of total resources

- MFDB has not been penalized by NRB.

• Establishment and Expansion: The MCR regulations required for the establishment of
MFDBs is reasonable except for the expansion provisions, which needs to be updated.

• The BASEL principles on capital and supervision may not be suitable for MFDBs, FINGOs,
and SACCOS. Their use would also be burdensome to the Central Bank or other
designated bodies. Therefore, drawing on CGAP, ACCION and WOCCU practices and
experiences, it would be better to use the PEARLS rating system.

• Loan Loss Provision: Currently, the loan loss provision is similar for all banks and
financial institutions based on due date periods (0 to 3 month, 3 to 6, 6 to12 and above
12 months for the overdue category). Better methods for micro finance institutions
exist i.e. minimum of 1 percent and adding as per PAR. (Portfolio at Risk) Some
microfinance institutions have the provision that if the due date is more than 6
installments (GBB's own regulation) or 2 percent flat with an evaluation at the end of
every year. If some microfinance institutions are comfortable with the higher
percentage for LLP (within 5 percent limit), it should be agreeable to the tax authorities.

• Micro-enterprise Loan: Nepal Rastra Bank accommodates micro-enterprise loans not
exceeding NRs. 150,000 to members using the ‘ladder’ model (enhancement approach)
with collateral. This approach appears to be abused by some MFIs. Instead, ladder
model loans could be restricted to graduated members only (new member needs)
otherwise MF may face a crisis after some time. If it is strictly for graduated members,
collateral could be considered as optional with appropriate risk management tools
adopted (Insurance, marketing network, guarantee, etc.).

• MFIs having experience over X years would be allowed to enter into a micro enterprise
loan at a higher limit (i.e. 500,000) within their working area if the enterprise focused on
local employment generation.

• Lending methodologies: There is the need to develop innovative individual lending
methods apart from the traditional group lending methods. The focus on women is well
understood but single men in rural or urban areas should not be excluded. Another
important area for reform is in the lending methodology applied, i.e. MFIs should be
allowed to lend to local, community-based SACCOS, SCOs, SHGs, CBOs, and user groups
of different types and village banking units. This will reduce MFIs operational costs
dramatically and allow them to increase outreach more quickly. It also ensures that
more MF services will reach the hilly districts. (Uprety, 2002) MFIs need to develop their
loan assessment guidelines for this to ensure safety and soundness.

• Regulations on Corporate Governance: The regulation that restricts any bank or
financial institution Board member from being on the Board of Directors of another
bank or financial institution has affected MFDBs and FINGOs. The Board of member of
any bank or financial institution could be allowed to be on the Board of at least one

CMF Nepal 31

Recommendations

microfinance institution to share their knowledge, skills and networks. Separate
qualifications and experience also need to be set for MFDBs professional director.

• Reporting Requirement: Reporting requirements and accounting policy for MFDBs
should be simple, and comparable across other micro finance institutions in Nepal and
globally. CGAP, Mix Market Format (with modification) could be a starting point. The
current trends in development such as inclusiveness should be incorporated into such
an industry wide database.

• Capital Adequacy Ratio and liquidity regulations are acceptable as they are because they
are market friendly as perceived by current microfinance practitioners.

• MFIs should be allowed to deal with already existing groups if they are satisfied with
modalities confirm to be MF best practices. This will reduce the cost and help achieving
higher outreach in a faster time.

The role of Government, the Central Bank and the donor agencies should be clearly mentioned
in the policy and should be kept at the end of the document. The Government can help provide
for the research (such as an impact assessment), capacity building (creating a training institute),
and recognizing and rewarding best practices (awards and prizes etc.). Based on the principles,
best practices and the mentioned background elements, a policy document should include:

• No participation by Government and the Central Bank from now on in implementing
microfinance programs or creating new retail micro-finance institutions.

• Existing micro-finance institutions/program will be handled by the private sector within
3 years.

• There will be no ceiling on the interest rates charged by microfinance institutions.

• The Government and Central Bank will help MFIs in capacity building and institutional
development by growth oriented regulatory provision and support (financial and other).
Government may provide land and physical facility to create a national level
microfinance research and training institution to be run on a free lease basis by private
sector microfinance experts.

• The Government and Central bank will privatize RSRF (or merge it with an appropriate
apex organization i.e. Rural Micro Finance Development Centre or PAF. The creation of
parallel institutions having the same purposes can create unhealthy competition and
develop inefficiencies

• The Government and Central Bank can form a "National Level Micro-finance Promotion
Council" to oversee and facilitate growth with private sector MFI leaders as members
and chaired by an internationally reputed microfinance expert. High-level policyholders
could benefit from sitting on this Committee. This will help create future leaders in
microfinance policy and practices. Government and the Central Bank can also provide
financial support for an institution of reputation i.e. Center for Micro-finance (CMF).

CMF Nepal 32

Recommendations

• Government will provide tax incentives to individuals and organizations which provide
donations/funds to MFIs There could be tax exemptions of various kinds to further the
develop of the microfinance sector.

• A 50% lower corporate tax rate (15% if it is 30% for other bank and financial
institutions/companies) for MFDBs, SACCOS doing micro-finance and no tax for FINGOs.

• There should be waiver in dividend tax for micro finance institutions shareholders.

• Individual donations, corporate donations, and seed money can be deducted for the
purpose of tax calculation. (Limit can be fixed).

• The Government and the Central Bank will arrange an annual visit program within Nepal
and foreign countries to observe best practices in micro-finance and attend "micro-
credit summits" and events.

• The Government and Central Bank will coordinate with donor agencies to develop
consensus guidelines and promote ‘best practices’, self-regulation, performance
standards, rating tools, etc.

• The Government and Central Bank will conduct impact assessments of microfinance
services on poverty reduction and the macro-economy in at intervals (i.e. every two
years). This can be outsourced to private sector research institutions (i.e., Centre for
Micro-Finance, INAFI. The Nepal Rastra Bank Microfinance Department could serve as
the catalyst agency for co-coordinating with donors, Government, microfinance
institutions, microfinance institutions network and microfinance experts.

The NRB is considering the creation of a Second Tier Institution (STI) for the supervision of MFIs.
The creation of an STI could be established based on the approaches discussed below:

• Regulation can be done/improved as per current framework (with modification by the
respective organizations i.e. Central Bank and Department of Co-operatives and/ or
NEFSCUN).

• The proposed STI would have responsibility for supervising and inspecting (off-site and
on-site) MFIs (except SACCOS) and taking supervisory actions as delegated by the
Central Bank. It would act on behalf of the Central Bank but with some autonomy. It
would submit a detailed annual inspection and supervision report to the NRB with which
it would work in close co-operation. The NRB would supervise it at given intervals of
time based on performance indicators.

• The STI would prepare a self-regulatory framework, performance standards, rating
tools, benchmarks and financial ratios to be monitored in consultation with related
stakeholders.

Recommendations for changes in various laws affecting MF operation: Regulations can be
made within the current legal framework. If there are areas of improvement respective laws

CMF Nepal 33

Recommendations

can be amended. These laws are Bank and Financial Institution Act, 2063, Co-operative Act,
2048 and the FINGOs Act, 2055.

Bank and Financial Institution Act, 2063

At present this Act does not need to be amended as its provisions are market friendly to MFDBs.
Future amendments might be needed, however, to address different types of institutional needs
i.e. RMDC, SKBB and MFDBs. Since RMDC and SKBB are wholesale lenders, their regulations are
not the same as MFDBs (retailers). An example would be that shareholders of BFIs cannot
borrow from the same bank or financial institution where as for an SKBB one must be
shareholders to be eligible to borrow.

Co-operative Act, 2048

There is a need to redraft the chapter on Saving and Credit Co-operatives and the sub-chapter
on SACCOS involved in Microfinance. Some of the points to considered are:

• SACCO membership criteria (Restrict over the counter membership and promote best
practices of co-operative principles)

• Saving first approach - Co-operative members must be involved in a saving activity
period (i.e. 6 months) to be eligible for borrowing. After that there should be a lending
limit also (i.e. 3 times savings for the first time and a maximum of 5 times there after)
with or without collateral. This could go up to 10 times savings with collateral plus 2
additional member's guarantee.

• Implement rating tools (PEARLS) and disclosure mechanism.

• All SACCOS needs to be the member of district level SCC federation.

• Sacco’s registration can be done in 2 stages, the first step being the pre-co-operative
stage (where there will be limited activity, system development etc.) After NEFSCUN
approved district federation’s recommendation then they will be registered fully (High
level task force report - National Planning Commission, 2004).

• NEFSCUN (strengthening intervention required) can be entrusted to have the regulatory
and supervisory role for SACCOs. (Government and donors can work together to provide
a budget for 5 to 7 years).

• Develop a chapter for the regulation of the National Co-operative Bank. Define its
objectives, establishment procedures, governance, prudential regulations, do's and
don'ts, wholesale, retail and micro-finance activities. This Bank must be regulated and
supervised by the Central Bank.

• SACCOs, co-operative banks and federations have argued that the Co-operative Act
needs to be modified to suit present conditions. Separate chapters for regulations and
supervision of SACCOs and a sub-chapter for micro-finance SACCOs are required to
establish the do's and don'ts to make a strong co-operative.

CMF Nepal 34

Recommendations

• One also needs to consider the co-operative principles accepted worldwide i.e.
democracy, autonomy, member control, best practices, alliances, etc., while protecting
them and their members from the effect of unsound practices. The NRB regulation to
licensed co-operatives could work as a starting point for drafting such regulations, with
appropriate modifications.

• Define various types of members in the co-operatives i.e. associate members,
provisional members etc. a well as introduce the concept of groups and group
representation in the Board.

• Currently, co-operative members do not enjoy the benefits of managing a co-operative
well. For example, if a co-operative has a general reserve several times greater than
required and a member needs to sell shares he would need to sell without premium
causing a loss. It also restricts a member’s intention and willingness to raise capital.
Therefore, there needs to be a revision in the law to accommodate good financial
practices.

FINGO Act, 2055

The provisions of this Act (after amendments) seem to be market friendly for new FINGOs. But
as the number of FINGOs grow, the existence of some large and many smaller FINGOs will make
It necessary to amended the Act.

• The areas of amendment could be in promoting self-regulation for smaller FINGOs
(providing a threshold i.e. below NRs. 10 million) and prudential regulation for larger
FINGOs. This could be based on the size of member and associate members savings
(ASA- Bangladesh, Grameen Bank Bangladesh model), total loan portfolio above the
threshold, varieties of services (products) and associate risk calculation.

• For the promotion of FINGOs and MFDBs could be waived for licensed MFIs. This would
enable professional experts in banking and microfinance to contribute to the
development of microfinance.

• Restrictions on FINGOs to operate in additional district other than its home base are not
suitable. The NRB should therefore reconsider on this. It may develop the pre-conditions
for area expansion but should not be restrictive.

• The personal guarantee of Board members for wholesale loans to FINGOs is too
restrictive. Wholesale lenders could develop alternative risk management models and
be satisfied with the institutional guarantee.

6.2 PERFORMANCE STANDARDS/INDICATORS
All types of financial institutions must engage in sound financial management. Financial
management requires periodic review of financial performance which can be done by using
standards in the form of ratios. These financial ratios serve as indicators of a MFIs performance
in terms of sustainability, profitability, growth, capital adequacy and problems from activities.
MFIs need to be advised and implemented performance ratios; declare periodically to

CMF Nepal 35

Recommendations

regulators; and disclose through annual report to their stakeholders. Some of the ratios that
could be used include:

• Portfolio Quality – The ratios on Repayment rate, Arrears rate, Portfolio at risk (PAR),
Number of delinquent borrowers, Loan loss, Productivity and efficiency needs to be
introduced for the promotion of good MF sector practices.

• PEARLS ratios (Protection, Effective financial structure, Asset quality, Rate of return,
Liquidity and Sign of growth)

• Sustainability Ratios – OSS, FSS (Operational Self-sufficiency and Financial Self-
sufficiency)

6.3 MODEL MICROFINANCE REGULATION ACT 2009
The Taskforce sub-committee finalized the draft model Microfinance Regulation Act 2009
(Annex-1) and submitted it to a wider Stakeholder, Steering and Taskforce Meeting on January
26, 2009. The suggestions received at this meeting are attached as Annex-2. CMF will
incorporate these issues during the reports publication and submission to NRB and the Ministry
of Finance.

6.4 OTHER SUGGESTIONS
• Participation in policy formulation: All stakeholders’ voice need to be heard, through a
mechanism in policy formulation.

• Urban model: Government, donors, NRB and MF practitioners need to address urban
poverty which is increasing at a fast rate.

• Promote SACCOS involved in MF.

• Promote an inclusive approach in the co-operative and MF sector.

• Capacity building of multipurpose co-operatives and SACCOs should be considered as a
strategy to enhance rural finance.

• The provision that restricts SACCOs to promote BFI or buy BFI equity share should be
revoked.

• Facilitate transformation of NGO/SACCO MFIs to BFIs doing MF activities for enhancing
outreach and sustainability.

The use of this framework could be used for all type of MFIs. This is beneficial to all MFIs
whether they are regulated MFDBs, SACCOS, FINGOs or self regulated SACCOS, SHGs, CBOs
or projects/ programs. All MF services need to be safe, sound and able to be active in the
financial market for a longer period of time to serve the unserved and deserving poor
clients. Only then there will be lasting impact.

CMF Nepal 36

Annex-1

ANNEXES
Model Draft 2: Formulated by the Center for Microfinance (CMF)

August, 2009

Model Micro-Finance Regulation Act

Preamble

The Legislative Assembly of the Republic of Nepal,

Having regard to the proposal from the Nepal Rastra Bank,

Having regard to the opinion of the stakeholders,

Whereas, the Legislative Assembly recognizes the importance of micro-finance and
cooperative societies as important instruments for sustainable development and for
reducing poverty among urban and rural poor strata by creating the necessary mechanisms
and conditions for self employment, employment, income generation, professional training,
entrepreneurship development and self confidence;

Whereas, the Legislative Assembly is aware of the insufficient institutional structures and
legal framework, necessary to formulate and implement a national microfinance policy;

Whereas, the Legislative Assembly is aware that in order to develop an entrepreneurship
culture among the poor strata and priority sectors, it is necessary to create institutional
mechanisms and a structure to coordinate, simplify, promote, set standards and regulate,
and monitor at the national level the flow of micro-credit and to facilitate the access to
credit of the poor strata and priority sectors;

Hereby, the Legislative Assembly has adopted this Act to regulate the microfinance services
and microfinance institutions with a view of ensuring responsibility towards customers,
transparency, sustainable development, and the promotion of services and institutions in
the area of microfinance.

Chapter 1

Preliminary Provisions

Article 1. Definitions:

(1) “Authority,” means the National Microfinance Authority.

(2) “Microfinance Institution,” means an institution established to perform microfinance
functions.

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Annex-1

(3) “Microfinance Services,” means the provision of a broad range of financial services such
as deposits, loans, payment services, money transfer and insurance to the poor and low
income households and enterprises, or other services as determined by the Authority.

(4) “Approved Institutions,” means those microfinance institutions approved to operate
microfinance services.

(5) “Board,” means the Board of the National Microfinance Authority.

(6) “Chairperson,” means the Chairperson of the Board.

(7) “Member,” means any member of the Board, including the Chairperson.

(8) “CEO,” means the Chief Executive Officer of the Authority.

(8) “Customer,” means any person who receives service(s) from microfinance institutions.

(9) “Service tax,” means the fee, which is to be paid by microfinance institutions to the
Authority.

(10) “Rastra Bank,” means the Nepal Rastra Bank.

(11) “Governor,” means the governor of the Nepal Rastra Bank.

Chapter 2

Competencies and Responsibilities of the Authority and the Board

Article 2. Establishment of the Authority and the Board

(1) The National Microfinance Authority is hereby established to regulate, supervise and
monitor microfinance services and microfinance institutions in Nepal.

(2) The Authority shall be an autonomous body.

(3) The Board of the Authority is hereby established to adopt general policies in the
microfinance area and oversee the functioning of the Authority.

(4) The CEO shall represent the Authority in its relations with third parties.

(5) The Authority shall have a seal of its own for its operations.

(6) The Authority may manage solid or liquid assets. It may use, save, sell, or manage them
accordingly.

(7) The seat of the Authority and the Board is in Kathmandu. The Authority may open on its
initiative branches, other offices, or send representatives to any part of Nepal, if the Board
considers it necessary. The Board shall regulate the functioning of the branches and offices.

CMF Nepal 38

Annex-1

Article 3. Competencies and Responsibilities of the Authority

(1) The Authority shall classify microfinance services on the basis of services and capital of
microfinance institutions, as well as on the basis of the access of the poor strata to such
services.

(2) The Authority shall classify microfinance institutions on the basis of capital and
services provided by the said institutions, as well as on the basis of the access of the poor to
the said institutions.

(3) The Authority shall prepare the standards of performance according to international
best practices of financial and social efficiency. It shall enforce the said standards to the
functioning of microfinance institutions.

(4) The Authority shall inspect on a continuous basis the functioning and records of
microfinance institutions. The inspection and supervision functions over the microfinance
institutions shall be carried out in conjunction with other institutions specialized in the
microfinance area.

(5) The Authority shall permit the functioning of rating agencies of microfinance services
and institutions.

(6) The Authority shall make the necessary arrangements for the functioning of
microfinance institutions in rural areas.

(7) The Authority shall make the necessary arrangements to provide microfinance services
to the poor strata, women, and minorities or communities.

(8) The Authority shall make the necessary and suitable arrangements to function as a
representative of financial institutions and commercial banks to working microfinance
institutions in rural areas.

(9) The Authority shall establish the necessary structures and take the necessary and
appropriate actions to implement the goals and objectives of this law.

Article 4. Composition of the Board

(1) The Board of the Authority shall consist of the following members:

(a) The Governor of the Nepal Rastra Bank, as the President of the Board;

(b) A representative of the Nepal Rastra Bank, member;

(c) A representative of the Registrar of Cooperatives, member;

(d) A representative of the Ministry of Finance, Joint Secretary level Officer,
member;

(e) A representative of the National Planning Commission, member;

CMF Nepal 39

Annex-1

(f) Four persons nominated by the Nepal Government from distinguished experts,
who have provided an important contribution in the microfinance area. The Board
shall recommend four candidates to the Government within three months of its
constitution;

(g) The Chief Executive Officer (ex-officio), member without voting rights. The CEO
shall serve as the Secretary of the Board.

(2) The tenure of the Board members shall be five years, with the right to be reappointed
for another term.

Article 5. Exclusivity Question

(1) The Board has the exclusive right to adopt general policies in the microfinance area.

(2) The Board has the right to adopt internal regulations for the functioning of the
Authority, as well as regulations and recommendations in the microfinance area.

(2) The Board may delegate authority to a member, or a committee to carry out its policies
and implement its decisions.

Article 6. Meeting Allowances for the Board

The meeting allowances and/or other facilities of the President or Members shall be
determined by the Board.

Article 7. Board Meetings

(1) The Board shall meet at least once a month.

(2) The Board meetings shall be chaired by the Chairperson of the Board. In the absence of
the Chairperson, the meetings shall be chaired by any Board member selected from the
majority present of the Board members.

(3) The Board is convened ex officio, within two months after the entry into force of this
Act, or upon the initiative of one of its Members.

(4) The President of the Board may not be absent without any reason for more than 3
consecutive meetings in a year.

(5) Members may not be absent without any reason for more than 3 consecutive meetings
in a year. The Board shall determine the sanctions for absent members.

(6) At least 5 members must be present to establish quorum.

(7) The decisions of the Board shall be taken with the majority of the votes present. In the
event of a tie vote, the Chairperson, or the meeting’s chairperson, shall cast the decisive
vote.

CMF Nepal 40

Annex-1

(8) The agenda, the minutes of the Board meeting, and the roaster of members present
shall be recorded. All members present are required to sign that document. In the event of
dissent, a member can record his/her dissent in the document.

(9) Board decisions enter into force immediately or as provided.

Article 8. Conditions of Service and Appointment of the Chief Executive Officer

(1) The Board shall appoint a Chief Executive Officer within three months of its first
meeting.

(2) In appointing the Chief Executive Officer, the Board shall make a selection based on an
open and competitive process from persons who have at least a Master’s Degree in
Economics, or in Management, or in Financial Management from reputed educational
Institutions, or from persons who are certified public accountants, and have been working
for at least five years in banking, financial, and microfinance areas.

(3) The Chief Executive Officer shall be the main administrator of the Authority.

(4) The tenure of the Chief Executive Officer shall be for five years, with the possibility re-
appointment.

(5) The CEO shall give three months notice to the Board in case of resignation.

(6) The remuneration and other conditions of service of the Chief Executive Officer shall be

Article 9. Competencies and Responsibilities of the Chief Executive Officer

(1) To implement the decisions of Board, and to supervise and control the functioning of
microfinance institutions.

(2) To prepare the annual budget and working plan of the Authority and submit it to the
Board for approval.

(3) To manage the human resources of the Authority according to the rules, and regulations
adopted by the Board.

(4) To carry out tasks assigned by the Board.

(5) The Chief Executive Officer shall be fully responsible for its actions before the Board.

(6) The Chief Executive Officer shall report to the Board periodically and on any issue
required by the majority of Board Members present in Board meetings.

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(7) The Board has the right to be consulted by the Chief Executive Officer for any action
taken by the Authority.

(8) The Board may sanction the Chief Executive Officer for non performance, negligence or
abuse of power.

Article 10. Personnel of the Authority

(1) The Authority shall employ the necessary personnel to assist with its operations.

(2) The Board shall establish recruiting committees composed of the CEO, a Board member
and an external expert to conduct the recruitment for all officer positions. The CEO may
recruit on its own initiative the necessary personnel for logistical support and other
technical positions.

(2) The conditions of service, remuneration and other facilities of the personnel shall be

Chapter 3

Supervision and Auditing of the Authority

Article 11. Supervision by the Rastra Bank

(1) The Rastra Bank may monitor the functioning of the Board.

(2) The Rastra Bank may demand written reports from the Board on the activities of the
Authority.

(3) Conflicts between the Rastra Bank and the Authority shall be subject to mediation, as
determined by the parties, and if that fails, to the court of second instance.

Article 12. Funding of the Authority

(1) There shall be a separate fund of the Authority, composed of the following
contributions:

(a) The amount received from the Rastra Bank;

(b) The amount received from the Nepal Government;

(c) The amount equal to the amount of government tax paid by microfinance
institutions and received by the Nepal Government;

(d) The amount received from international organizations and institutions;

(e) The amount received from other sources.

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(2) The Board shall secure permission from the Rastra Bank before taking a loan from any
international organization(s).

(3) All the expenses of the Authority shall be supported from the fund.

(4) The Authority may receive donations to conduct its activities.

(4) The funds shall be deposited in an account with the Rastra Bank, or with any financial
institution in Nepal.

(5) The Board shall regulate the operation of the account.

Article 13. Accountancy and Auditing

(1) The accounts of income and expenses shall be kept in accordance with existing laws and
accounting standards in Nepal.

(2) The Board shall make the necessary provisions regarding the internal auditing.

(3) The auditing of the Authority shall be done by the Auditor General, or an auditor
assigned by the Auditor General.

(4) If the Rastra Bank finds it necessary, it may inspect the documents or accounts of the
Authority at any time.

Chapter 4

Licensing of Microfinance Services and Institutions

Article 14. General Provisions

(1) An institution or organization may not operate microfinance services until the Authority
has published in the media the notice of approval.

(2) This article shall not apply to those institutions already functioning in the microfinance
area.

Article 15. The Application Process

(1) Any institution or organization must apply for permission to operate microfinance
services to the Authority according to the format and procedure adopted by the Board.

(2) Any institution or organization applying for permission to the Authority shall enclose
the fee published by the Board along with the documents prescribed by the Board, and in
particular the following:

(a) A notarized copy of the original registration certificates of microfinance
institutions;

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(b) A notarized copy of the articles of association and bylaws;

(c) An organizational chart of the institution or organization;

(d) A statement that demonstrates the capacities and intent to initiate and operate
microfinance services;

(e) A statement of the current capital or funds;

(f) A notarized copy of the internal regulation regarding the salaries, privileges,
allowances, administrative account section and internal administrative activities;

(g) The payable service tax.

Article 16. Response Time

(1) The Authority shall provide an answer to the application within 90 days after it receives
the application along with all the necessary supporting documents and the fee.

(2) The Authority shall examine the application materials on an unbiased basis. It may
order an investigation or request other supporting documents if it deems necessary.

(3) The Authority may reject the application if it concludes that the applicant has failed to
provide the necessary documents.

Article 17. The Classification of Microfinance Institutions

(1) The letter of approval shall be classified on the basis of the nature of the microfinance
institution, depth of reach and the volume of services, as “A”, “B”, “C”, or “D” classes.

(2) The microfinance institutions, classified according to the provision of clause 1, must
have the minimum capital or fund as prescribed by the Board.

Article 18. Denial of Application

The Authority may deny the letter of approval in the following circumstances:

(a) In the case of false statements; or

(b) If the microfinance institution does not have the minimum fund prescribed by
the Board;

(c) If the application does not meet the standards established by the Authority.

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Article 19. Conditions Prescribed by the Authority

(1) The Authority may prescribe conditions in the letter of approval to the applicant
microfinance institution. The Authority shall monitor the compliance with the said
conditions.

(2) The Authority may alter, add, or drop the conditions in the letter of approval to the
applicant microfinance institution based on the performance of the institution.

Article 20. Exemptions from Licensing

The Authority may exempt a microfinance institution or organization, classified as “c” and
“d,” to operate microfinance services in any geographical or economic sector.

Article 21. Revoking or Suspension of the License

(1) The Authority may suspend partially or fully the operation of microfinance services by a
microfinance institution in order to protect its members and depositors in the case of non
compliance with the regulations and laws.

(2) The Authority may revoke the letter of approval in the following circumstances:

(a) Upon the request by the approved microfinance institution;

(b) When an approved microfinance institution cannot initiate and operate
microfinance services within six months after the letter of approval is published in
the media;

(c) If the results of an investigation by the relevant authorities reveal that the
microfinance institution has transacted in a serious manner against the welfare and
rights of its members or depositors;

(d) If the results of an investigation by the relevant authorities reveal serious
violations of regulations and laws;

(e) If the prescribed conditions of the Board are not complied with;

(g) In the case when insolvency proceedings have started against the microfinance
institution;

(h) If it is discovered that the letter of approval is issued based on false statements;

(i) If the approved institution is merged with another institution.

(3) If the approved institution applies to have the letter of approval revoked, the Authority
shall make a decision within 45 days.

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(4) The Authority shall establish a committee to investigate the cases when a letter of
approval shall be suspended or revoked.

(5) The Board shall adopt the necessary rules for the functioning of the investigative
committees.

(6) The letter of suspension or revoke shall contain the decision and the basis for the
decision.

(7) The decision of the Authority may be appealed to the Board, which in turn establishes
an ad hoc committee to investigate the decision.

(8) In the case of suspension proceedings, the Authority shall give a deadline to the
approved institution by which the approved institution shall report to the Authority on the
steps it has taken to address the problem. If the steps taken by the approved institution are
not satisfactory, then the Authority shall proceed with suspending, partially or fully, the
services of the approved institution.

(8) The Authority shall publish the letter of suspension of revoke in the media.

Chapter 5

Provisions on Micro Finance Institutions

Article 22. Stability of Fund

Approved institutions must ensure the operability of the fund within the time prescribed by
the Board.

Article 23. Capital Fund

(1) Approved institutions shall establish the capital fund in the ratio prescribed by the
Board on the basis of its total assets or risk weighted property.

(2) An approved institution shall inform the Authority if it becomes unable to establish the
capital fund. In such a case, the approved institution shall include the reason of its inability
to establish the capital fund as well as a plan or program to maintain it.

(3) The Authority may sanction an approved institution in cases when the said institution is
unable to fulfill its obligations.

Article 24. Risk Supporting Fund

Approved institutions shall establish a risk supporting fund in ratio of its total assets and
risk related to its liability as prescribed by the Board.

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Article 25. General Reserve Fund

Approved institutions shall establish a separate general reserve fund as prescribed by the
Board.

Article 26. Liquid Assets

Approved institutions shall maintain liquid assets as prescribed by the Board.

Article 27. Observation by the Board

(1) The Authority has the right to observe and inspect the functioning of approved
institutions at any time.

(2) The Authority may adopt the necessary acts to protect customers.

(3) The Authority may delegate the observation or inspection of approved institutions to
other institutions specialized in the microfinance area.

(4) The Authority may summon an officer of an approved institution or external experts to
demand information or explanations.

(5) Approved institutions have the duty to provide costs, statistics, statements, information,
and other necessary documents to the officers, specialists, and relevant institutions
authorized by the Authority.

(6) The designated officer shall conduct its observation or inspection in a comprehensive,
transparent and unbiased way, having in mind the customers’ rights and privileges.

(7) The designated observer or inspector shall submit to the Board a report within 30 days
after finishing its work.

Chapter 6

Accounting, Records, Statements, Reports

Article 28. Accuracy of Accounts

(1) Approved institutions shall keep accurate account files, books, or records.

(2) Approved institutions shall keep their balance sheets, profit and loss account or cash
flow statement or other financial statement according to the format prescribed by the
Board.

(3) Approved institutions shall audit their balance sheets, profit and loss accounts and cash
flow statements, and other financial statements as determined by the Board within 3
months following the end of the fiscal year. In such statements, at least, the signature of
account manager, chief executive, one director or auditor, is necessary.

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(4) If an approved institution is unable to audit within the allowed period, it may request
the Authority to grant an extension of no more than 3 months.

(5) If the approved institution cannot audit within the allowed time, the Authority shall
appoint an auditor to audit the account(s) of the approved institution.

(6) The auditor appointed according to clause 5 shall submit the auditing report to the
approved institution and to the Authority.

(7) The Authority shall determine the remuneration for the appointed auditor according to
clause 5. The approved institution shall remunerate the appointed auditor as determined by
the Authority.

Article 29. Conditions under which a person cannot be appointed as an auditor

The following persons cannot be appointed or maintain the position of the auditor:

(1) The director of the approved institution or a family member.

(2) Staff members of the approved institution.

(3) Former employees of the approved institution.

(4) Debtors of the approved institution.

(5) Persons condemned for crimes related to auditing, corruption, and fraud.

(6) Shareholders of the approved institution.

Article 30. Duty of Disclosure

In the process of auditing, the approved institution shall submit account, ledger, file and
account to the auditor.

Article 31. Competencies and Responsibilities of the Auditor

(1) The competencies and responsibilities of the appointed auditor shall be in accordance
with existing laws and regulations.

(2) In addition to complying with existing laws, the auditor shall address the following
questions in the report:

(a) Whether the approved institution has provided satisfactory answers;

(b) Whether the balance sheet, profit and loss, account and cash flow statement and
other financial statement are in the format prescribed by Board;

(c) Whether the account, ledger or files are kept according to existing laws;

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(d) Whether the staff or officials of the authorized company have complied with
existing laws;

(e) Whether the services of the authorized company are satisfactory from a
customer protection perspective;

(f) Whether the capital fund, or the risk supporting fund, are at a sufficient level;

(g) Whether the debt is amortized;

(h) Other matters that should be informed to shareholders or members.

.

Article 32. Reporting to the Authority

(1) The auditor shall submit separate copies of the auditing reports to the approved
institutions and to the Authority.

(2) The Authority may request the auditor to submit all documents pertaining to the
auditing.

Chapter 7

Provisions on Non Compliance and Sanctions

Article 33. Violations

The following actions shall be deemed to be in violation of this Act and subject to sanctions:

(1) Operation of microfinance services without permission or against the permission, or
conditions prescribed by the Authority, or against the provisions of this Act, other laws, or
regulations adopted by the Authority.

(2) The breach of secrecy of microfinance services, accounts, books, ledger, and files.

Article 34. Sanctions

(1) Anyone who initiates or operates microfinance services without permission shall have
its property confiscated. If it is difficult to confiscate the property, then, according to the
degree of violation, that person shall be sanctioned no more than 5 lakhs.

(2) Anyone who takes savings or interests against the regulations of the Authority shall be
sanctioned at no more than twice the amount of the deposits.

(3) Any responsible official who does not keep the secrecy of the microfinance services,
accounts, books, and shall be charged no more than 2 lakhs.

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(4) The Authority shall punish any violation of this Act or its regulations according to the
seriousness of the violation. In addition to the other forms of sanctions, it may issue a letter
of warning, or a letter of reprimand.

Article 35. Duty to Inform

The Authority shall report to the relevant authorities any breach of this Act or of its
regulations by any approved institution.

Article 36. Procedure of Appealing Decisions

Any approved institution or any officer of the said institution may appeal a decision of the
Authority to the court of second instance within 35 days from the day it receives the
decision.

Chapter 8

Termination

Article 37. The Rural Self-Reliance Fund

(1) After the entry into force of this Act, the Rastra Bank shall transfer to the Authority all
the property and liabilities of the Rural Self-Reliance Fund.

(2) The Authority shall establish, within a year after this Act enters into force, a company to
manage the Rural Self-Reliance Fund for developing microfinance services.

Article 38. Voluntary Termination

(1) An approved institution cannot be voluntarily terminated without the permission of the
Authority.

(2) If an approved institution submits a letter of voluntary termination, the Authority shall
inquire whether the said institution is able to pay its debt and fulfill its responsibilities. In
the case of satisfactory answers, the Authority shall permit the approved institution to fulfill
any prescribed condition and terminate itself accordingly.

Article 39. Priority of Liabilities in the Case of Termination

If an approved institution is to be terminated, after taking the permission of the Authority
and according to existing law, payments of liabilities shall be based on merit or priority, as
following:

(a) The expenditure in the time of winding up;

(b) Payable payment to the depositor;

(c) Payable fees, tax according to existing law;

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(d) Payable salary allowance, reserved fund, gratuity and other types of cash to
staff;

(e) Other loans taken by the approved institution.

Chapter 9

Final Provisions

Article 40. Jurisdiction of the Judiciary

Disputes created between other branches of the government and the Authority shall be
subject to the jurisdiction of the court of second instance.

Article 41. Right to Privacy

(1) The contents of account books, ledger, register, file or account statements of the
approved institution and its relation with the customers shall be confidential.

(2) The following acts shall not be considered a violation of secrecy:

(a) If the information is given to the Authority according to this Act, rules and
regulations under this Act, as well as under issues directives and orders of the
Authority;

(b) If the information is given to the investigation officer in support of investigation
and prosecution;

(c) If the information is given to the auditor in process of auditing;

(d) In the process of obtaining or managing loans, to the least extent possible;

(e) Information given to the relatives.

Article 42. Right to Regulate

(1) The Authority shall adopt the necessary regulations pursuant to this Act.

(2) All provisions of laws and regulations contrary to this Act are hereby abrogated.

Article 43. Entry into Force

This Act shall enter into force immediately after adopted.

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Microfinance Summit Nepal 2008

Stakeholders Meeting on Model Draft Microfinance Act

and the Micro Insurance Policy Taskforce

January 26, 2009

Hotel Annapurna, Kathmandu

Meeting Minutes

The stakeholders meeting for consultation on Model Draft Microfinance Act and Micro
Insurance Policy Taskforce was organized by the Center for Microfinance (CMF), Nepal on
26th January,2009 at Hotel Annapurna, Durbar Marg, Kathmandu.

The agenda for the meeting

1. Model Draft Act prepared by draft act formulation subcommittee of policy taskforce

2. Micro Insurance Policy Taskforce

3. Micro-Insurance Company concept by NUBL

4. If any others

Deliberation and decisions:

Meeting started by the welcome speech from Ms. Sushila Gautam, Sr. Program Officer of the
Center for Microfinance (CMF) and introduction among the committee members was held.
Agenda-wise discussion was started after the agenda highlights by Mr. Tejhari Ghimire,
Chief Executive Officer of CMF.

1. Model Draft Act prepared by draft act formulation subcommittee of policy
taskforce

Mr. Ganesh Bahadur Thapa, Chairperson of the CMF and Coordinator of Draft Microfinance
Act Formulation Subcommittee (DMAFS) made presentation on Model Draft Microfinance
Act 2065 formulated by the subcommittee. The presentation was followed by the floor
discussion on each of the points mentioned in the Act. Major areas of discussions and
questions raised on the Act were as follows

Mr. Shree Ram Shrestha, USC Canada Asia

• Microfinance promotion through facilitation is a very good idea

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• Regulation itself is facilitation, it is not a control.
• Do the registered MFIs should again obtain license as mentioned in this Act? If yes it
is not practical for the MFIs located in remote areas like Humla and Jumla and also
for small savings and credit cooperatives.
• Should have a promotion package for the remote areas

Dr. Laxman Pun, MEDEP

• We need to reach in rural areas where very limited access on the microfinance
services is exists and provide them a special attention.
• We should support and develop small development banks to reach to the poorest of
the poor groups and remove the word non bankable.
• Thanked to the working group and also appreciated the contribution that
microfinance has made to poverty alleviation.
• Goal of authority should be clear. The overall cost will increase, if we did not bring
the large commercial banks in this act.

Mr. Yagya Raj Dhungel, Janasachetan Savings and Credit Cooperative Society Ltd.

• The word cooperative should be defined clearly.
• Savings and Credit is Microfinance and Credit Union should be under new
registration and regulation
• Wholesale lending should be included in the Act.
• There has been a difficulty in regulation and registration. The present Act has also
not presented the clear idea to the cooperatives.
• Instead of making another company of the Grameen Swalamban Kosh, wholesale
lending should be included so that poor will have access to funds.

Mr. Gokul Pyakurel, MEDEP-UNDP

• Informal Sector should be included in the Act.
• The Act should not conflict with Microenterprise policy.
• Board composition should be reviewed.
• Since 1990 we have an act but when we look at it there is only coverage of 40% and
the remaining area is departed.

Mr. Min Raj Kandel, NEFSCUN

• Coordination between Nepal Rastra Bank and Microfinance sector should be clear
• Member based institutions should be included in the authority composition.
• Five year is a very long time for board of authority.
• Approval-6 Chapter: cooperatives should be also included.
• Microfinance department representative should be mentioned for the board of
authority instead of representative of NRB.
• Deputy Governor would be ok to chair the authority in stead of Governor
• PERLS Monitoring should be included

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• Provision should made for members to audit the MFIs
• There should be market regulation mechanism in the case of rate of interest
• FINGO act should not be rejected
• Role of Second Tier Institution (STI) should be clear
• The word Bima should be given to use legally.

Mr. Tara Prasad Joshi, Poverty Alleviation Fund

• The Act mentioned only the word “client” but cooperatives has members so
members should be included in the definition of clients
• Definition of the board has to be mentioned. Classifications and criteria of the board
have also to be mentioned.
• Is this Board? Or Authority.
• There should be a separate provision for existing institution and new institutions
• Objective-chapter should be included
• Definition - MFI and microfinance to be cleared.
• Governor should not chair

Mr. Pitambar Prasad Acharya, MIFAN

• Financial Intermediary art should not be collapsed
• Information Technology (IT) is needed evaluation of MFIs
• FINGO provision should come in this Act
• Approval always should not be needed
• FINGO Should also be safeguarded in the Chapter 6
•
Mr. Megh Raj Gajurel, RMDC

• Wholesale lending institutions should be included in this Act.
• Cooperative interest rate, location determination process should be included in the
objectives of the Act.
• Minimize overlapping- 30%of duplication of the borrower
• Home ministry should also be included in the authority.
• Secrecy should not be included. it should be transparent
• There should be a fund instead of a company.

Mr. Tulasi Prasad Uprety, CMF

• Savings and credit co-operatives are those cooperatives which monitors in their
objectives as Microfinance.
• Fund provisions should be included in the act
• Political workers may come in Board it should be cleared
• What do we do about fees and penalty?

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Mr. Bharat Upadhaya, CEAPRED

• The act should encourage reaching out to the poor people
• Organizations should be promoted
• Existing MFIS should invest certain % of their income for poor clients.
• Development organizations promoted institutions should be included in this act.
• Provision for representation from the development organizations to be done.

Ms. Pampha Devi Rai, CMF

• Definition: Cooperatives should be defined clearly
• The members should come from the elections. They should not be nominated by the
government
• The Chairperson should not be a Governor
• The 10th chapter will control the MFIs. It will not facilitate the MFIs
• If cooperative will not take the approval, what will the act do?
• Cooperative and Microfinance should be cleared.

Mr. Yan Kerer, GTZ-INCLUDE

• What is the role and function of authority? What is the role of federation like
NEFSCUN?
• The role of the authority should be to protect the money of the poor people and
strengthen the microfinance sector, grow them by providing training to the poor
people.
• Roles of federations should be mentioned in the act.
• Small cooperatives should be excluded by the regulation.
• How this (RSRF) money are reaching to poor people this should be checked?
• Only two re-finance institutions could not reach to the poor and work in future.

Mr. Nibedan Baidya, GTZ

• Under pradhikaran kosh amount should be clearly specified.
• The role of IT should be specified for quick delivery mechanism.
• Should we take IT in rural areas?
• Where is the fund of authority? Fee should be included.
• What is the role of apex body?

Mr. Dharma Raj Pandey, Paschimanchal Grameen Bank Ltd, Butwal.

• Act should be specific and clear
• Development fund should be mentioned in the preamble.

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• The Objective of the authority should be reach to the poor all over the countries.
• The word Affiliation or Certification should be mentioned instead of Approval.

Mr. Ram Chandra Joshi, Chhimek Bikas Bank

• Provision for prize and award to the institutions to be included.
• Tax facility should be provided
• How do we get approval for remittance and insurance activities?
• Clear statements for new banks should be given whether NRB will provide
registration/licensing to them or not

Mr. Suman Dhakal, Winrock International

• Happy with this act and thanked to all.
• It should be an independent act.
• RSRF should be given to professional organizations.
• Sustainability approach of the authority to be taken
• Promotion, capacity building and technical assistance to MFI should be provision

Mr. Ramesh Kumar Gautam, SNV Nepal

• Micro leasing should be included as one of the microfinance products
• Provision for credit information bureau
• Penalty of deprive sector lending should be included as the fund for authority.

Mr. Rajan Dawadi, Department of Cooperative

• Cooperative sector should be included in the chapter
• We should keep the representative from Cooperative Sector in the authority
• Re-registration information should be given to the authority
• Promotion should be done by the authority
• Central bank should incorporate all the elements of this model draft

Mr. Udaya Raj Khatiwada, Neighborhood Society Service Center

• The should be an pen ended definition

Mr. Gopal Kafle, Nepal Rastra Bank

• This is good recommendation for the act and by laws
• This is a good task done by CMF
• Government is in hurry for this act and 50% structure is ready at NRB

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• We can always improve weakness
• Donor suggestions will also be incorporated
• Central bank is coming with more liberal way
• Development aspect should also be involved in the act such as; STI regulation,
development fund, and commercial bank deprive sector
• Microfinance bank should not go beyond this act. Even commercial bank should
come under this act.
• The central bank interest should also be included in this act
• Microfinance development work record is not available in the country. All the
information should come under this act.
• We will borrow good aspects of this act
• It will help the draft committee of Nepal Rastra Bank.

2. Micro Insurance Policy Taskforce

The meeting decided Dr. Harihar Dev Pant to be the Coordinator of Micro Insurance
Taskforce. Rest of the members will represent as mentioned in the Summit Declaration. The
secretariat, CMF, will follow up for rest of the taskforce members and next step activities.

3. Micro-Insurance Company concept by NUBL
Dr. Harihar Dev Pant, Coordinator of Steering Committee, Microfinance Summit Nepal,
made presentation on Micro Insurance Company Concept. The presentation was followed
by the floor discussion on each of the points mentioned in the presentation. Major areas of
discussions and questions raised on the presentation were as follows

• Dr. Harihar Dev Pant facilitated discussion about establishing micro insurance
company.
• All the participants were interested to open a separate Micro Insurance Company
• Although it is very difficult to establish the micro Insurance Company but all the
participants were committed to collect the required amount NRs. 25 Corers from
the sector and will establish legally a company to do micro insurance of the MFIs.
• According to the act it is not possible to invest more than 10% of the core capital.

4. If any others

Dr. Rama Basyal raised question about the next step of the microfinance summit Nepal.
Date of next Microfinance Summit was declared by Dr. Harihar Dev Pant, Coordinator of
Microfinance Summit Nepal 2008 for February 14-16, 2010. Mr. Tejhari Ghimire, Member
Secretary of Microfinance Summit Nepal 2008 offers the meeting participants for the
support for upcoming Microfinance Summit 2010. He requested to let secretariat know if
some organization want to support financially and any other way.

Conclusion & Decision

The meeting made decisions as follows.

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1. The meeting agreed to provide an updated version of the Model Draft Microfinance
Act 2065 incorporating feed backs made by the meeting participants to Nepal
Rastra Bank and Ministry of Finance.
2. The meeting nominated Dr. Harihar Dev Pant as Coordinator of Micro Insurance
Taskforce which will form formally as mentioned in the Declaration and will meet
soon for Micro Insurance Policy.
3. The meeting dedicated authority to The Micro Insurance Taskforce to facilitate the
environment to initiate Micro Insurance Company for MFIs as most of the meeting
participants were agree to establish a company.
4. The meeting agreed to provide authority to the Secretariat of Microfinance Summit
Nepal, CMF, to proceed for next summit 2010.

Dr. Harihar Dev Pant, Chairperson of the meeting thanked to all the participants.

Recorder: Diksha Guragain, Intern, CMF

The following individuals were present in the meeting:

1. Dr. Harihar Dev Pant, Coordinator, Steering Committee, Microfinance Summit Nepal
2. Mr. Ganesh Bahadur Thapa , Coordinator, Model Draft Microfinance Act
Subcommittee
3. Mr. Saroj Adhikari, MCP-DP Manager, Women Cooperative Society
4. Mr. Madhab Poudel, Manager, VYCCU Savings and Credit Cooperative Society Ltd.
5. Mr. Ramesh Pant, Coordinator, NERUDO
6. Mr. Pitamber Prasad Acharya, Executive Director, DERPRSC
7. Ms. Ambika Pradhan, Principal Director, Manushi & CMF Board Member
8. Mr. Keshar Bahadur Shrestha, CEO, Swabalamban Bikas Bank
9. Mr. Rudra Bhattarai, General Manager, NACCF
10. Mr. Shiva Raymajhi, OD Advisor, UMN
11. Mr. Anurag Mishra, Head OCC, Standard Chartered Bank
12. Mr. Mukunda Bahadur Bista, Executive Director, CSD Nepal
13. Ms. Pampha Devi Rai, BOD, CMF
14. Mr. Ramesh Kumar Gautam, Micro finance Advisor, SNV Nepal
15. Mr. Laxman Sharma, Section Officer, Department of Women Development
16. Mr. Gopal Prasad Kafle, Executive Director, Nepal Rastra Bank
17. Mr. Narayan Shankar Shrestha, Officer, MPGB Bank, Nepalgunj
18. Ms. Saraswati Shrestha, Director, WCS
19. Mr. Manohar Pathak, Assistant Coordinator, NMBA
20. Mr. Ramchandra Khanal, Coordinator, World Education
21. Mr. Fatta Bahadur KC, Chairperson, Beema Samittee
22. Mr. Navaraj Upadhya, Manager, National Cooperative Bank
23. Mr. Gokul Pyakural, ID and MFS, MEDEP
24. Mr. Dharma Raj Panday, CEO, PGBB, Butwal
25. Mr. Min Raj Kadel, Chairperson, NEFSCUN
26. Mr. Tara Prasad Joshi, Portfolio Manager, PAF
27. Mr. Upendra Bahadur Karki, General Manager, SKBBL
28. Mr. Bharat Prasad Upadhyay, Executive Director, CEAPRED
29. Mr. Rabindra , Senior Officer, MGBB
30. Mr. Jan Kerer, Senior Advisor, GTZ

CMF Nepal 58

Annex-2

31. Mr. Nibedan Baidya, Advisor, GTZ
32. Mr. Sushil Acharya, Credit Officer, AEPC
33. Mr. Manu Binod Aryal, Program Officer, AEPC
34. Mr. Mahendra Shahi, Program Manager, Mercy Crops
35. Mr. Megh Raj Gajurel, Senior Manager, RMDC
36. Mr. Prahlad Thapa, CECI
37. Mr. Uday Raj Khatiwada, Program Coordinator, NSSC
38. Mr. Yagya Raj Dhungel, Chairperson, JSCSS
39. Mr. Tusli Prasad Uprety, BOD, CMF
40. Mr. Suman Dhakal, Research Officer, Winrock International
41. Dr. Lakshman Pun, National Program Manager, MEDEP/UNDP
42. Mr. Shree Ram Shrestha, Representative, USC- Canada Asia
43. Mr. Rajan Prasad Dawadi, Department of Cooperative
44. Ms. Rama Basyal, Associated Professor, TU
45. Mr. Ashok Shrestha, Team Leader, ADRA-Nepal
46. Mr. Ramesh Pokherel, General Manager, National Cooperative Bank
47. Mr. Raj Kumar Aryal, Legal Officer, Insurance Board
48. Mr. Radesh Pant, Chairperson, NBA
49. Mr. Ram Chandra Joshi, Executive Director, Chhimek Bank
50. Mr. Charles Pradhan, CCO
51. Mr. Sanjaya Atreya, Team Leader, MDM France
52. Mr. Tej Hari Ghimire, CEO, CMF
53. Ms. Sushila Gautam, Sr. Program Officer, CMF
54. Mr. Ganesh Bista, Sr. Administration and Finance Officer, CMF
55. Ms. Ruchi Bhagat, Program Officer, CMF
56. Mr. Jagdish Tiwari, Program Officer, CMF

CMF Nepal 59

Bibliography

BIBLIOGRAPHY
ADB, 1999 - Micro-finance Development Strategy Asian Development Bank, Manila

Chaves, R. A. and Gonzalez-Vega, c. (1992) – Principles of regulation and prudential
supervision, occasional paper no. 1979 The Ohio State University, USA

Christen, R. P. (1997) – Issues of regulation and supervision of Micro-finance in ‘Margin to
mainstream’, Accion international

Dhakal, N.K. (2005), Impact of Micro-finance Services on Poverty Reduction in Nepal,
INAFI/SAP, Nepal, Kathmandu.

Fukaya, K. and Shadagapan, N. (2001), Micro-finance Regulation in India, Sa-Dhan, New
Delhi, India.

Ghate, Prabhaker, Dr. (1999) Supervision and regulation of MFIs – Draft paper submitted
for discussion at ADB seminar on Micro-finance development Strategy, Manila

Ledgerwood, Joanna (1999): Micro-finance handbook: An International and financial
perspective, The World Bank, Washington D.C,

Liza Valenzuela and Public Young (1999), Consultation on Regulation and Supervision of
Micro-finance of Workshop Report, USAID, Micro-enterprise Best Practices (MBP).

McGuire, P and Convoy, John D. (1999) The role of Central Banks in Micro-finance – A
concept paper – ADB services on micro-finance development strategy, Manila

Meagher, P. et. al. (2006), Micro-finance Regulation in Seven Countries Final Report to Sa-
Dhan, India by IRIS Center, University of Maryland, USA.

Pradhan, K.K. (2005), Development Finance and Nepal Rastra Bank.

Rock, Rachel (1997) Introduction (Chapter-1) in ‘From Margin to mainstream’, ACCION
International,

Sharma, S.R. (2003), Banking Development and Poverty Alleviation efforts in Nepal,
Seminar Paper, Kathmandu, Nepal.

Sharma, S.R. (2003), Role of Financial Institutions in Socio-Economic Development of Rural
in Nepal, Seminar Paper.

Shaw, Edward S. (1973) Financial Deepening in Economic Development. Oxford University
Press, New York.

CMF Nepal 60

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Shrestha, G.K (2000) Legislation, regulation and supervision of MFIs in Nepal, a paper
presented in APRACA-IFAD, Micro-serve workshop to be held in Cambodia on March
13-18,

Uprety, T.P. (1999) Issues in Building sustainable micro-finance in Nepal. Arunodaya,
Kathmandu, Nepal

Uprety, T.P. (2002), Review for Micro-Finance Services in the Hills of Nepal- Center for
Micro-finance (CMF), Kathmandu, Nepal.

Uprety, T.P. (2005), Micro-finance in Nepal, Impact, Opportunities and Challenges, Seminar
Paper, Kathmandu, Nepal.

---- Financial intermediation Act, 1998 and by laws 1999 – Nepal government and NRB.

… (1998), Micro-finance – An Interim Action Plan, Asian Development Bank, Manila,
Philippines.

… (2000), The Role of Central Banks in Micro-finance in Asia and the Pacific, Country
Studies, Asian Development Bank, Manila, Philippines.

… (2001), An overview of the Micro-finance Sector in Nepal CECI for IFAD, Kathmandu,
Nepal.

… (2003), Micro-finance Consensus Guidelines, CGAP, Washington D.C.

… (2005), Draft Law "Co-operatives and Micro-Finance Act, 2062) Submitted to Nepal
Government by Nepal Rastra Bank, being re-considered again at the moment.

… (2005), Draft paper on "Micro-finance"- Submitted by Nepal Rastra Bank to Nepal
Government for consideration- Nepal Rastra Bank webside, www.nrb.org.np

… (2005), Unified Regulations – Nepal Rastra Bank.

… Bank and Financial Institution Act, 2063 (2006), Nepal Government

… Bylaws of Respective Acts.

… Co-operative Act, 2048 (1992), Nepal Government.

… Financial Intermediation by Societies Act (FINGO), 2055 (1998)

… Monetary policy issued by Nepal Rastra Bank for the F.Y. 2006/07, 2005/06 and
2004/05.

… Nepal Rastra Bank Act, 2058 (2002)- Nepal Government.

CMF Nepal 61

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… Regulations issued to limited banking licensed SACCOS, 2060 (2003).

… Various Issues of ADB/N Publication- "Micro-finance Development in Nepal." (2003, 4, 5),
ADB/N, Kathmandu.

***

CMF Nepal 62

Final study report for publication december 17, 2009

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Final study report for publication december 17, 2009