Nepal | May 20, 2019

Financial inclusion: Aggressive promotion

Bhubanesh Pant

Financial inclusion is likely to continue to remain a top priority on the government’s agenda. It is the key to Nepal’s future since it empowers the poor, promotes small businesses and advances inclusive growth

Bank, financial institutions, corporate house

Financial inclusion refers to all initiatives that make formal financial services available, accessible and affordable to all segments of the population.

This implies focusing on particular sections of the population that have been excluded from the financial sector either due to their income level and volatility, gender, location, type of activity, or level of financial literacy.

The virtues of financial inclusion are robustly embedded in empowerment. Access to credit is a central link between economic opportunity and economic outcome. By empowering individuals and families to cultivate economic opportunities, financial inclusion can be a powerful agent for inclusive growth.

According to World Bank’s Global Findex Database 2014, about 2.5 billion adults are currently ‘unbanked’, most of them residing in developing countries. In the case of Nepal, a survey carried out by United Nations Capital Development Fund (UNCDF) in late 2014 divulged that financial access has been driven by both the formal and informal financial services, with 61 percent of Nepalese adults formally served, 21 percent using only informal channels and 18 percent financially excluded.

Financial access has been growing with the expansion of branches of financial institutions. As at mid-July 2016, while the branch network of commercial banks stood at 1869, followed by 1378 branches of micro finance institutions (MFIs), the number of branches of development banks and finance companies aggregated 852 and 175, respectively.

With the total number of branches of banks and financial institutions (BFIs) standing at 4274, the population per branch of financial institution was 6,562 at mid-July 2016.

A number of policy measures had been initiated in the past by Nepal Rastra Bank (NRB) for promoting financial inclusion. These included liberal licensing policy for MFIs, setting up of the Rural Self-Reliance Fund for subsidized credit to the poor, interest free loan to extend bank branches in remote and rural areas, and directives on branch-less banking and mobile banking services, among others.

Among more recent policy adjustments for enhancing financial inclusion, the NRB, through its Monetary Policy for 2016/17 announced some initiatives, including those pertaining to e-mapping and ‘one household one account’ scheme, among others.

Likewise, the NRB, in its Monetary Policy of 2015/16, made a provision of special refinance facility at 1 percent interest with the aim of encouraging BFIs (A, B, and C class) to extend loans to agriculture and small business-based income generating activities in poverty stricken areas of the country.

Similarly, the final drafts of both the National Financial Literacy Policy and the Financial Sector Development Strategy (FSDS) 2015-2020, in which financial access and inclusion serves as a pillar of the banking system, have already been submitted to the government for approval.

Though the policymakers including NRB have been cognizant of the need for equitable development and have undertaken polices aimed at greater financial inclusion over the years, this has not happened to the degree desired.

Many of the financial institutions still have not devised an appropriate, cost-effective delivery model for financial inclusion and are still not fully convinced about financial inclusion being a profitable business opportunity.

They take this to be a social/regulatory obligation and hence their efforts are only half-hearted. In light of the above, a number of suggestions can be made for fostering financial inclusion.

In the first place, financial literacy must be more aggressively and appropriately promoted for financial inclusion to be sustainable. For this to happen, National Financial Literacy Policy needs to be approved by the government as soon as possible.

Secondly, the FSDS also needs to be approved by the government at the earliest so that its action plans are effectively and timely implemented in order to meet its objectives, one such being the accomplishment of an inclusive financial system that renders affordable financial services to the poor.

Thirdly, as technology plays a pivotal role in the process of inclusion, mobile banking has ample prospects of increasing accessibility of financial services to the poor. In this regard, it is high time for digital banking players to gear up the launch of digital products and services.

Fourthly, financial institutions should revamp their business strategies to incorporate plans for enhancing access of their services to low-income group treating it both as a business opportunity as well as a corporate social responsibility for boosting financial inclusion.

Fifthly, MFIs need to play a more dynamic role in facilitating inclusion, since they are uniquely positioned in reaching out to the rural poor.

Finally, in order to monitor progress in achieving a more inclusive financial system as well as to measure their impact, reliable and comprehensive data that encapsulate various dimensions of financial inclusion is indispensable.

Financial inclusion is likely to continue to remain a top priority on the government’s agenda. It is the key to Nepal’s future since it empowers the poor, promotes small businesses and advances inclusive growth.

Still, for sustained and inclusive development to thrive, innovation is a must for ensuring that appropriate financial services and instruments are incorporated for the benefit of the poor and other disadvantaged groups.

Dr. Pant is Director at Nepal Rastra Bank


A version of this article appears in print on September 13, 2016 of The Himalayan Times.


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