The Turmoil in the Nepalese Microfinance Industry

Muhammad Yunus, the Father of Microfinance, mentioned that he founded Grameen Bank (Microfinance) to provide loans to traditionally unbankable people. Yunus said that the Grameen Bank works with the poorest and often illiterate, providing uncollateralized micro-loans for tiny business enterprises by which they can lift themselves and their families out of poverty.

However, the idea of microfinance, which Yunus developed and successfully tested in his native land, Bangladesh, and multiple other countries, has failed in Nepal.
The Central Bank of Nepal (NRB) data shows that sixty-three microfinance companies operate in Nepal. And the majority of them are now in crisis.

The question that arises is: HOW?

Microfinance provides loans, mostly without collateral, to people of low-income groups who do not have access to financial services. Its primary objective is to improve the living of the low-income group.

For example, a family needs a loan of 10,000 rupees to buy goats, but the big banks in operation do not disburse such microloans. During such times, microfinance provides loans without collateral, but at the same time, they charge exorbitant interest to the debtors as well.

The Nepalese microfinance industry is in crisis because numerous individual debtors have taken loans from multiple microfinance companies. And now those debtors are trapped in the ‘Debt Trap,’ where they have no financial backup to repay the loan and its interest.

In the case of Nepal, the above individual who took a microloan of ten thousand rupees to buy goats could not repay the existing loan and its interest in time. To repay his old loan and its interest, he took an additional loan from another microfinance, and the vicious cycle of debt continued. That individual who took a ten thousand loan to buy goats now has thousands of loans in multiple microfinance companies.

Now, the majority of those microloan debtors are in the street; some fled from their homes, and some of them even took their own lives, and the only reason behind it is ‘loans from microfinance.’

After the crisis in the industry, the Central Bank issued a circular to the microfinance companies, and now debtors are restricted from taking loans from multiple microfinance companies. Also, microfinance companies must allocate fifty percent of the profit in reserve while distributing dividends higher than 15 %.

However, the circular of the NRB does not address the current problem of the debtors and won’t solve the current crisis.

The study by the World Bank in the year 2022 estimates that more than 500 million people have directly or indirectly benefited from microfinance. But the result is the exact opposite in the context of Nepal.

The regulator, i.e., Nepal Rastra Bank and the Government of Nepal, are responsible. The regulator has failed to regulate and forecast the crisis in microfinance industries. Similarly, the government also has been unable to address the problem of the general public on time.
But still, we have time for course corrections. The government and the NRB must consider the crisis and amend its policies accordingly. Or, just due to the loans from microfinance companies, a larger group of people might be homeless in the future.

(Originally published on LinkedIn on February 25, 2023)