Sustainable Development Of Nepalese Microfinance Institutions

Many developing economies are facing the problems of widespread poverty, lack of financial inclusion, lack of financial resources and lack of proper financial institutions to provide financial services to the poor household. The innovation of microfinance became one of the best alternatives to cope with these problems. Growing trend of MFIs raises the issue of its sustainability and issue of institutions’ sustainability has attracted the attentions of many microfinance practitioners, government authorities, researchers and donor agencies.In the meantime; microfinance crisis, usurious interest rates, forced loan recovery, mission drift issues raise scepticism over MFIs. These factors, including commercialization of MFIs, justify the importance of a thorough study on the sustainability of MFIs that are destined to reduce poverty.Nepal is a developing country, where82per cent of its population lives in rural areas.25per cent of its population lives below poverty line and only20per cent of its people borrow credit from formal banking and financial institutions. Considering this background, microfinance became an important mechanism to provide financial services in Nepal’s rural areas to improve economic status of poor household. The rapidly growing number of MFIs and wide spread poverty condition makes Nepal an ideal character for research.In Nepal, the concept of modern microfinance is new. But a part of modern microfinance has been practiced since1975with commencement of Small Farmers Development Programme under Agricultural Development Bank of Nepal. Microcredit practice as integrated with co-operative is not new for Nepal. Traditional types of co-operative practices used to exist since immemorial time. On the other hand, modern types of MFIs are established following Bangladesh’s Grammen Bank microfinance model. The first Grammen Bank replicator microfinance banks are established under government initiation in1992by forming five Regional Development Banks. In mid90s, NGOs and private microfinance banks also started microfinance programs in the country. Within two decades, Nepal’s microfinance industry has significantly developed and brought positive impact to rural financial sector.This dissertation studies Nepalese Microfinance Institutions (MFIs) from financial sustainability view point. Furthermore, it analyzes whether different MFIs’ modalities make differences in their financial performance. In Nepal, there are mainly four modalities of MFIs in operation viz. the Government initiated microfinance development bank-GIMFB, Privately initiated microfinance development bank-PIMFB, Financial intermediary Non-Government Organizations-FINGOs and Saving and Credit Cooperative Societies-SACCOS. This research takes20sample MFIs from four types of MFIs (GIMFB, PIMFB, FINGOs and SACCOS). The basis of selection is ownership structure, operating period and size. The study utilizes seven consecutive years’data from2005to2011.To test the significance of the differences among four sample means F-distribution technique called the "Analysis of Variance-ANOVA" is used. ANOVA-F test is a statistical method, to detect if there is a statistical difference between the means of the populations. Set the null hypothesis "The financial performance of four different modalities of MFIs is same. There is no any significant difference in their financial performance."Results proved that the overall financial performance of PIMFB and FINGOs are sound as they have more assets and large number of members. SACCOSs’ performance is only satisfactory since it has comparatively low assets and members. Finally, despite having more assets and large number of members GIMFB’s performance is weak. Nepalese MFIs are allowed to collect deposit from the members though it is not effective except for SACCOs. In effect, dependency in external funding sources is high.Remarkably, there is a huge gap between number of depositors and borrower s in Nepalese MFIs. Only limited members are active in credit transaction. Other than SACCOS, all MFIs are gender based and targeting to women member. Both governments initiated and privately initiated MFDBs are operating in large scale with covering large geographical area and outreach in large. PIMFB and FINGOs have higher Return on Assets and Return on Equity ratio and their earning level is also higher than other two. GIMFB has negative ROA and ROE ratio. So, institutional improvement is required in GIMFB. The government, as the main stakeholder of GIMFB, has adopted privatization policy and sells its share to private investor. Hopefully, privatization and merging of these weak performers will result in a new spirit and strategy to regain their market share. Recently, Nepal Rastra Bank, the central bank is encouraging banking and financial institutions to go for merger procedure towards developing strong financial institutions that would easily affect the whole microfinance industry.Nepalese MFIs except for GIMFBs are running in operational self-sufficient level. Based on the empirical data, it is proved that the financial performance of Nepalese MFIs varies in accordance with the applied modalities of the MFIs.Rural financing gap and poverty alleviation are existing challenges for emerging China Chinese government and authorities are giving focus on "Sannong" problems concerning rural development. Establishment of new-type financial institutions and microcredit companies is important policy level decision taken by Chinese authorities, which support to minimize financing gap in rural areas and increase financial inclusion. China’s political and economic condition is totally different from the other developing countries. Microfinance practice in market socialist system is a unique example for the rest of the world. Except for poverty alleviation programs and commercial banks, five major financial institutions are providing microfinance services in China viz. NGO-MFIs, Microcredit companies, Village and Township Banks, Rural Mutual Credit Co-operatives and Rural Credit Cooperatives.Theoretically, financial repression in the form of controlling interest rate leads to stagnant financial development and further seriously restricts the financial development in developing economy. In China, interest ceiling is fixed for MFIs up to four times of basic interest rate. From the philosophical approach, microfinance is a service business targeting to uplift socio-economic status of poor, low and middle income people. Microfinance borrower should prevent from excessive usury imposed by commercial MFIs. In this base, the interest cap on lending for MFIs in China is reasonable but for deposit taking institutions interest cap should not be imposed.In order to promote and encourage more MFIs in rural area, Chinese government should adopt a relaxed tax policy, remove discriminating tax and interest cap policy, permission should be given to collect deposit from members, and government intervention must be avoided for the smooth operation of MFIs.The innovative approach of ’Sannong’ to deal with rural development issue, establishment of new-types rural financial institutions to provide more financial services in rural area, promotion policy for RCCs and MCCs, microfinance link with banks and companies and interest cap to prevent from usury are the major lessons of rural and microfinance in China. These are useful for other developing economies. Likewise, use of co-guarantee loan, innovative mortgage loans (Forest tenure and livestock) and third party involvement (business enterprise and companies) ideas can be applied in other countries.Based on the research, Nepalese MFIs should pay attention on product innovation and design, build cooperation with rural financial institutions, introduce new technology (wire transfer, mobile banking), reduce dependency on deprived sector loan and grants from donor agencies, and build incentive system for both members and staff for sustainable development. More importantly, Nepalese MFIs should immediately correct the fraudulent practice, mission drift and maintain double bottom line viz. social bottom line (providing financial services to poor, low income households) and financial bottom line (operational self-sufficiency or reasonable profit).One of the objectives of this research is to prescribe suitable model and institutions for different income level people. This author recommends;’Poor Household+Poverty Alleviation Programme/Development project+Group Lending’ modality can be applied for extremely poor community. Extremely poor household need special subsidized program from government or donor agencies to meet the demand of consumption and income generating loan. To minimize the credit risk, group lending method may be useful. MFIs viz. SACCOS, FINGO and MFDB can be suggested for moderate and low income household. Particularly SACCOS is recommended for hill and remote area where population is scattered and regular centre meeting (Gramen Bank method) is not convenient. For this group;"Poor/low income household+Third party involvement+Group/individual lending" modality is prescribed.MFDB and commercial banks are more suitable for middle income level and micro-entrepreneurs."Household/entrepreneur+Company+Bank+Individual lending" modality can be used for this group.The study mainly consists of seven chapters. The first chapter presents the introductory part with statement of problems, significance of the study, objectives of the study, research methodology, innovation and limitation of the study.The second chapter is theoretical review. This chapter presents the financial development theory for developing countries, particularly financial deepening theory and financial repression theory. Likewise, it elaborates the emerging issues in rural finance and microfinance sector in the world. This chapter also presents the review of literature regarding various studies conducted and articles written by different scholars, organizations in microfinance.The chapter three refers to overview of Nepalese economic condition. This chapter describes current economic status of country and major problems in economic development of Nepal. Likewise, chapter deals with the historical development of modern financial system, review poverty alleviation program and current credit condition of Nepal.The chapter four elaborated historical development of Nepalese microfinance and current status of Nepalese MFIs.The chapter five analyses the financial performance of Nepalese microfinance institutions. For data analysis, author takes financial performance data of sample20MFIs from four different types of MFIs microfinance service providers. Here, financial sustainability of the MFIs is analyzed through seven parameters, financing Structure, operating performance, revenue, expenses, efficiency and productivity and risk management.The chapter six refers to microfinance development and practice in China and major characteristics of Chinese MFIs.The chapter seven presents the legal, policy framework of Nepalese microfinance institutions. Author critically analyses, the current legal and policy framework of Nepalese microfinance and puts forward some important policy recommendation to solve the existing problems in Nepalese microfinance and for the sustainable development of Nepalese MFIs.The last chapter concludes and summarizes the whole dissertation. Through the analysis of Nepalese MFIs and study of Chinese microfinance development and practice, author draw policy recommendation for the sustainable development of Nepalese Microfinance institutions and prescribe suitable model and institutions for different income level people.