Financial inclusion: Way forward
The global trend shows that the central banks largely have taken the leadership in developing financial inclusion framework. In line with the government policies, this calls for the NRB to address many of these issues through the monetary policy
Financial inclusion is not a choice but a necessity for the economic development of Nepal.
Extending financial services to the door-steps of the poor people would create opportunities for the rural people to be involved in income generating activities and improve their well-being.
Recognizing the importance of financial inclusion for Nepal, the government through the national budget for the fiscal year 2016/2017 has outlined some policy directions to address the inclusion issues.
Expansion of banking and financial services in the rural areas; promotion of mobile banking and branchless banking; continuation of government led programs such as Rural Self Reliance Fund (RSRF), Poverty Alleviation Fund (PAF), Youth and Small Entrepreneur Self-employment Fund; the implementation of subsidized agricultural lending program; emphasis on micro insurance, and implementation of the Financial Sector Development Strategy and the Financial Literacy Policy are some of the policy directions addressed in the budget.
A large segment of our population is still unaware about the banking services, their products, the benefits that can be derived from banks, indicating financial literacy, lack of consumer awareness and connecting population with banks and financial institutions (BFIs) have to be policy measures for the government and central bank in order to enhance the financial services in the rural areas.
The rapid growth in the number of BFIs resulted in the expansion of financial services, but also created problems of weak corporate governance, negative competition among the financial players, multiple lending, duplication of services, increased lending in real estate, deteriorating asset quality, more urban-centered services, thereby adding to vulnerability and risks to the financial system.
Microfinance institutions have played a catalyst role in expanding the financial services to the rural poor.
However with the growth in the number of MFIs, problems of duplication in services, over-indebtedness, negative competition among the MFIs, and weak governance are some issues observed now.
There is a need to restrict the borrowers to avail of loans from multiple MFIs like in India where borrowers can avail of loans from two institutions only. Consumers’ awareness and protection is another grey area that needs to be addressed by the policy initiatives of NRB.
New license should be given to provide services in the unbanked areas.
According to World Bank Global Index Data 2014, globally the number of unbanked adults dropped from 2.5 billion in 2011 to 2 billion in 2014.
This achievement is attributed to the digital innovation that largely took place in Africa, Latin America and other countries during that period.
Currently, one of the global trends in financial inclusion is embracing the technology and innovation that have transformed the delivery mechanisms of financial services from that of a traditional physical infrastructure to a system supported by other innovative channels.
Government initiatives to encourage digital innovation to increase access of financial services to the rural areas needs to be materialized through the monetary policy.
Incentives, such as non-interest bearing support, for BFIs could be offered to encourage and cover some of the costs related with digital innovations.
Looking at the dispersed societies of Nepalese population, digital banking services through the use of mobile banking, branchless banking, ATMs, digital cards and other means of technology delivery channels could be a way out to enhance finance access in the country.
Targeted programs are effective models to encourage and support members of the cooperatives and youths to initiate income generating activities and help them raise their living standards.
The policy of micro insurance would provide a safety net to the poor people at times of disaster and risks. Subsidized loans on agriculture should be encouraged.
The ”trickle-down theory” that suggests that growth benefits would eventually reach to the lower segment of population and naturally correct the inequality proved inadequate in developing countries.
Therefore, the world community in an IMF meeting last year acknowledged the need for enhancing financial inclusion to the poor people and therefore set the target of universal financial access by the year 2020.
Nepal, therefore, needs to expand the banking services to the rural people; start a campaign to open an account and bring large population to the formal system; conduct awareness and financial literacy programs on banking system, products, and channels rigorously; encourage technology development and innovation, and protect the consumers.
Regulatory and supervisory framework needs to be robust to address the emerging challenges and risks.
Financial inclusion index and monitoring framework needs to be developed and implemented to measure the outputs and outcomes. The global trend shows that the central banks largely have taken the leadership in developing financial inclusion framework.
In line with the government policies, this calls for the NRB to address many of these issues through the monetary policy in order to create a financial system that is inclusive and serves the rural economy.
Atreya is Executive Director, Nepal Rastra Bank