Financial illiteracy hits access to finance

Kathmandu, December 24

Many people in the country still have limited access to finance despite tremendous growth in the number of banks and financial institutions (BFIs), because of high financial illiteracy rate, says a latest study conducted by Nepal Rastra Bank (NRB).

“Efforts presently being made to raise people’s access to finance are not effective because of low financial literacy rate,” says the Working Paper titled ‘Financial Literacy for Increasing Sustainable Access to Finance in Nepal’ prepared by NRB Assistant Director Ramesh Prasad Chaulagain. “This calls for simultaneous promotion of financial services and financial education.”

As of last fiscal, the country had 30 commercial banks, 79 development banks, 50 finance companies, 36 microfinance development banks and 13,378 savings and credit cooperatives. Commercial banks, development banks and finance companies alone have 2,699 branches while microfinance development banks have 861 branches. Despite presence of all these financial intermediaries, around 60 per cent of population does not have access to formal financial services.

Worse, 90 to 100 per cent of the working age group in rural areas do not have access to formal financial system, says an NRB report published in 2014. Due to this, many still have to rely on informal sector to park savings and acquire credit.

“This shows quantitative expansion of finance service providers do not necessarily ensure access to finance because of concentration of financial intermediaries in urban, semi-urban and privileged areas,” says the working paper.

This can be seen through presence of BFIs in some of the most rural parts of the country.

In Bajura district, for instance, which ranks lowest in the country’s human development index, each BFI caters to 72,026 people. The situation is the same in Bajhang, where each BFI provides banking services to 69,043 people, and in Kalikot, where each BFI caters to 48,962 people.

The situation is opposite in urban areas. In Kathmandu, the capital city, each BFI provides banking services to 3,654 people. The situation is even better in Kaski, where each BFI caters to 3,419 people.

BFIs are urban centric because most of the economic activities take place in cities and in the vicinity of the cities, whereas rural areas are still dependent on agriculture, mostly subsistence. To address this problem, NRB has barred opening of new Class ‘A’, ‘B’ and ‘C’ financial institutions, which are urban-centric.

Also, NRB does not allow BFIs to open a branch in Kathmandu Valley unless they open three outside the Valley. Moreover, NRB also extends incentives to commercial and development banks intending to establish branches in 14 districts — Bhojpur, Okhaldhunga, Manang, Rukum, Salyan, Jumla, Mugu, Humla, Kalikot, Dolpa, Jajarkot, Bajhang, Bajura and Darchula — where presence of BFIs is very low.

“Despite these efforts, effectiveness of action plans and policies is still in question. One possible reason for this is the authority seems unable to make financial market accountable to people,” says the working paper, stressing on the need to raise financial literacy rate in the country.

Financial literacy can increase financial knowledge, consciousness and skills, as well as confidence of individuals, using which they can select better and appropriate financial services from the competitive market, says the working paper, adding, “Financial literacy of individuals increases the likelihood of access to sustainable finance. It also helps individuals identify and consume appropriate financial services.”

In this regard, financial access and financial literacy are interrelated. “Yet, access to finance should not just be limited to having a bank account, but ensure convenience and safety of account. Also, these services should be fairly priced, meet customers’ needs, and be offered by solid institutions that will be around over the long haul to help customers.”

“Policymakers should, therefore, formulate appropriate financial literacy policy, strategy and action plans — albeit financial literacy is not a sufficient condition to enhance access to finance or solve all the financial problems of individuals,” adds the working paper.