KATHMANDU, MARCH 26

As an economist, Professor Muhammad Yunus recognised that traditional banking systems in Bangladesh were not providing credit access to the poor. In response, he lent $27 from his pocket to 42 local women in 1976 and later established the Grameen Bank in 1983 to alleviate poverty.

For his remarkable work in empowering the poor socio-economically through the concept of microcredit, he was awarded the Nobel Peace Prize in 2006. This model, with its collateral-free and group-based lending system for the poor, became popular worldwide for poverty reduction.

Nepal adopted this model in the early 1990s to reduce poverty and provide access to financial services for the unbanked people.

As of January 2023, Nepal has 64 microfinance institutions (MFIs), which are classified as D class financial institutions, and are regulated by the Nepal Rastra Bank.

The implementation of the Grameen model has had a significant impact on the lives of many marginalised communities in Nepal.

However, there has been a recent rise in opposition to microfinance, with protests taking place on the streets.

Although microfinance is a tool for financial inclusion and poverty reduction, why are people against microfinance, and what are the prime reasons driving the protests? Questions persist, such as whether the protestors' voices truly represent the unheard poor, whether the MFIs have forgotten their social mission of empowering the marginalised, and whether the MFIs should promptly adopt a new regulatory framework. It is time to rethink, review and revive the microfinance framework to ensure that it is moving in the right direction.

Milton Friedman, a Nobel Laureate in Economics (1976), famously said, 'The poor stay poor not because they are lazy but because they have no access to capital.'

This statement is still relevant today because access to finance is crucial for innovation, job creation and growth. Microfinance serves as a powerful tool for financial inclusion, providing collateral-free microcredit to unbanked individuals in rural and marginalised areas. This approach encourages productive in-

vestment, increases income and improves living standards. Many research studies confirm that microfinance effectively reduces poverty, empowers women, creates employment opportunities and transforms the socio-economic status of the poor.

Microfinance programs have the potential to transform microcredit into micro-businesses and mi-cro-enterprises by enabling the productive application of loans. However, several challenges are associated with microfinance in Nepal, such as multiple borrowing, unhealthy competition, high-interest rates, poor financial literacy, and over-indebtedness. These challenges can threaten the sustainability of the microfinance sector.

Additionally, some criticism remains regarding whether microfinance services are reaching the poor and marginalised individu-als who need them most.

There is concern that microfinance institutions have shifted away from their social mission of serving the poor. To address these issues and steer the microfinance sector in the right direction, regulatory authorities must take prompt corrective measures.

The multiple borrowing system offered by MFIs canlead borrowers into a cycle of excessive debt. Due to unhealthy competition and high concentration in urban and semi-urban areas, many people end up borrowing from multiple lenders and becoming over-indebted.

This situation is worsened by poor financial literacy and unproductive investments. When microfinance institutions exert pressure on borrowers to repay their loans, some individuals are driven to leave their homes or even resort to suicide due to theincreased stress. Therefore, it is essential to prioritize building a responsible microfinance system that takes into account the financial literacy and well-being of the borrowers.

There are two different schools of thought when it comes to microfinance: minimalist and maximalist.

The minimalist approach is focussed on commercial gain and solely provides financial services, while the maximalist approach is socially guided with the mission of providing both financial and non-financial services to impoverished and marginalized individuals.

In Nepal, most microfinance institutions are currently practising a minimalist approach. To enhance the effectiveness of microcredit programs, the MFIs can collaborate with government and non-governmental organisations.

Rural and remote areas are still reliant on informal lending systems where the lender imposes meter interests.

A high number of meter interest cases in Nepal highlightthe necessity of expanding financial services and financial literacy to unbanked individuals, particularly in the rural areas.

The expansion of financial inclusion is essential in creating a more inclusive environment and scaling up operations in the nation.

Similarly, financial literacy programmes must be made mandatory for clients before microcredit disbursement. Additionally, establishing a healthy competitive environment among the MFIs is crucial for sustaining microfinance services in Nepal.

A collaborative effort among the microfinance institutions, the government and other stakeholders is necessary to strengthen regulations and control financial chaos. Responsible microfinance is required for moving MFIs inthe right direction and empowering the people.

A high emphasis on converting microcredit to successful micro-businesses and micro-enterprises may be an effective strategy.

Moreover, financial literacy programmes, reducing multiple borrowing practices and maintaining reasonable interest rates ensure the sustainable operation of the microfinance programmes in Nepal. The government, regulatory authorities and the MFIs must pay adequate attention to building responsible microfinance in the country.

A high emphasis on converting microcredit to successful micro-businesses and micro-enterprises may be an effective strategy to help the poor

A version of this article appears in the print on March 27, 2023, of The Himalayan Times.