Monday, October 17, 2011

Passport Series: Nepal: Part 2: Microfinance

This month’s Passport Series focuses on Nepal! Nepal is the birthplace of Buddhism and home to the tallest mountains in the world! Follow us throughout the month of October as we learn about Nepal’s background, its microfinance sector, and Kiva’s presence within its borders.

Durbar Square, Kathmandu: Photo Credit - CIA World Factbook

Microfinance in Nepal

The microfinance sector in Nepal is relatively well established and stable, especially in the non-mountainous regions where clients are more accessible. Generally the formal sector includes microfinance development banks (MFDBs), financial intermediary non-governmental organizations (FINGOs), and financial cooperatives as well as state-run regional rural development banks. These institutions are regulated by Nepal’s central bank, the Nepal Rastra Bank (NRB).1

There are currently forty-one Microfinance Institutions (MFIs) reporting to Microfinance Information Exchange (MIX), with a total loan portfolio of USD $152.8 million and over 700,000 active borrowers. Kiva currently partners with one organization in Nepal, Patan Business and Professional Women (BPW), which specializes in serving areas of high poverty and low saturation of microfinance. More on BPW later in this post.

To those living in more accessible areas of Nepal, microfinance has made significant progress over the past fifteen years. Currently, according to the Nepal Living Standard Survey (NLSS)-III, only 15 percent of households borrow from local, unregulated money lenders, down from 39 percent in the mid 1990s. This dramatic decrease has been mainly attributed to increased access to financial services due to a strong push from the NRB. About 40 percent of households currently live within about 30 minutes walking distance from a branch of a financial institution. Additionally, households borrowing from cooperatives and micro-credit organizations have increased to over 13 percent, up from about 3 percent fifteen years ago.2

Representation of recent financial growth in Nepal 3

Unfortunately; however, access to financial services for rural and mountainous populations in Nepal remains limited. Quoting from the Access to Finance in Nepal report published by the World Bank in 2007, Kiva fellow Claudine Emeott writes, “The Terai, which encompasses the southernmost band of Nepal, is home to 48% of the country’s population, which collects 72% of the country’s microfinance loans. The Hills, in the middle of the country, include 44% of the population and receive 22% of microfinance loans. The Mountains rank last, with 7% of Nepal’s population and only 0.02% of microfinance loans”. 4 This disparity between flatland and mountainous access to microfinance is a key reason that Kiva partners with BPW, who prioritizes clients with generally less access to financial services.

Kiva Partner in Nepal

Patan Business and Professional Women (BPW Patan) was established in 1995 as the Patan Chapter of Federation of Business and Professional Women (BPW Nepal) a pioneer social, non-profit and voluntary organization. BPW Patan’s office is located in Patan, also known as Lalitpur, a city that borders Kathmandu to the south and is famous for producing art and handicrafts.

In July 2002 BPW Patan became a regulated Financial Intermediary after obtaining license from Nepal Rastra Bank. BPW Patan started its micro-credit program with the main objective of improving the socio-economic status of impoverished women by increasing their access to resources for productive activities.

To qualify to be member of a micro-credit group at BPW a family must be living below the national poverty line (Nepalese Rupees 5,500, or about USD $84.00, in per capita income). Only one member of a family can become a member of the group. The eligible members are required to attend a week-long Pre-Group Training (PGT). After completing training, women are organized into small lending groups of five members. These lending groups are clustered in centers, with a center consisting of a maximum of eight groups. No physical collateral is necessary; instead, the loans are guaranteed on a solidarity group basis. Group members are jointly liable for payment in the case of a borrower’s default. BPW charges a flat interest rate of 10% on an annual basis. The repayment period is one year, and the installments are paid monthly. In addition, compulsory savings is one of the basic components of this program. Members can also contribute additional savings on top of the required amount. Members earn an annual interest rate of 5% on their savings. Savings programs have proven to be effective in reducing long term poverty for MFI clients as they help insure against financial setbacks and assist in accomplishing long term goals like paying school tuition or completing housing repairs. BPW Patan has maintained a repayment rate of 100% from the very beginning of its micro-credit operations.

Kiva has chosen to partner with BPW because of their comprehensive group loan products as well as the fact that they operate in areas where poverty levels are very high and no other banks, financial institutions or NGOs provide microfinance services.

Kiva is proud to be a part of helping you fund loans in Nepal! Next time you loan to an entrepreneur, consider lending to a small business owner in Nepal!

Stay tuned for our final post next week highlighting more about BPW borrowers!