Academic journal article Contributions to Nepalese Studies

An Examination of the Socioeconomic Implications of Microfinance Programmes: An Alternative Approach in Nepal

Academic journal article Contributions to Nepalese Studies

An Examination of the Socioeconomic Implications of Microfinance Programmes: An Alternative Approach in Nepal

Article excerpt


In Nepal, development planning was started with the implementation of the First Five-Year Plan in 1956. Despite experiencing improvements, Nepal still remains one of the poorest countries in the world with a human development ranking of 129 out of 167 countries (UNDP 2001). Since the installation of a multi-party democracy in 1990, the Eighth (1992-1997) and Ninth (1997-2002)Five-Year Plans have shifted policy towards liberalization of the economy and decentralization of power to try and promote development. In particular, poverty alleviation has been the major focus of these two Plans, with a wide range of policies being instituted to try to improve the situation of the poor.

One strategy that the Nepali Government has been following to combat poverty is the use of microfinance as a tool to improve the socio-economic situation of the poor. While the use of microfinance to help combat poverty has become widespread throughout the world, debate still remains as how it can be best used to alleviate poverty in a sustainable manner. On the one hand, it is argued that the creation of a healthy and competitive financial landscape is the best way that microfinance can be used to alleviate poverty, while others argue that the provision of both financial and basic social services can better tackle the problems of poverty. The purpose of this paper is to provide a general understanding of this debate by giving a brief historical account of the development of the microfinance. With the help of flowcharts the paper also provides an understanding of how microfinance works to alleviate poverty. Secondly, an overview of the various microfinance programmes in Nepal is provided in order to gain an understanding of the Nepali microfinancial landscape and the problems that it is facing. Lastly, from all of these discussions, a conceptual framework for an alternative model is proposed that might help to improve the effectiveness and sustainability of microfinance programmes, given the severe poverty conditions existing in Nepal today.

Brief Overview of the Development of Credit Programmes

The provision of credit to those living in rural areas of the developing world has been a tool that has widely been used to try and promote development. First-generation credit programmes of the 1960's and 1970's provided low interest loans for agricultural purposes to facilitate the adoption of higher yielding technologies. While the intention of these programmes were to enable the poor to gain access to loans, the system utilized to distribute credit was incompatible with their socio-economic condition. (1) In fact, tempted by interest rates that typically went as low as 2%, the rich used their political power to gain access to this credit that was not intended for them. Also, despite the fact that the rich received these low interest loans, the repayment rates were extremely low. Unable to recover money that was lent out, rural financial institutions (RFI) found it impossible to cover their costs of operations and were considered to be a resounding failure.

The development of the Ohio State University Rural Financial Market Theory (2) in the early 1980s provided a good understanding of why these programmes failed. While space limitations make it impossible to fully outline the theory, the basic criticism it makes about the first-generation credit programmes is that they did not allow for the proper development of the financial markets in rural areas. The subsidization of interest rates only served to distort the credit market leading to the mistargeting of credit to the rich. It is argued that rural financial institutions (RFIs) need to provide good quality banking services (3) in rural areas and charge interest rates that reflect the cost of doing business in these areas. In doing so, RFIs will be better able to serve the rural population and overcome the problems experienced in the past.

At around the same time that this theory was being proposed, the Grameen Bank in Bangladesh was experiencing success in lending small amounts of money (microcredit) to the poor, without collateral, while experiencing high rates of repayment. …

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