Microfinance in Nepal: Clients must come first
Client protection principles guide microfinance service providers to take practical steps to treat clients fairly and respectfully and avoid practices that might harm them. Are our providers adhering to these principles?
Globally, microfinance programmes are promoted and supported by the government for the important role it can play in improving the lives of the poor, particularly those who have been excluded from the mainstream banking services. In Nepal, Nepal Rastra Bank has made it mandatory that banks and financial institutions should disburse certain portion (commercial banks: 5 per cent, development banks: 4.5 per cent, and finance companies: 4 per cent) of their portfolio towards the deprived sectors. These banks and financial institutions are lending microfinance mainly by providing wholesale loans to 63 microfinance banks, 24 financial intermediary NGOs, youth self-employment centres, rural self-reliance centres, national cooperative bank, and thousands of cooperatives working across the country.
NRB data reveals that the microfinance programme has been serving 2.52 million, clients disbursing Rs 117.2 billion in loans. The Department of Cooperatives claims that 6.3 million members have been enrolled in different cooperative programmes. This figure shows that a huge amount of loan has been disbursed to large groups through microfinance.
However, one crucial question that often arises is: Does microfinance really support or protect the beneficiaries? Or, has it been only making profits from the disadvantaged sector?
Principally, microfinance is development banking, designed to provide financial services to low-income groups, particularly those excluded from the mainstream of financial services. Nepal Living Standard Survey 2011 reveals that 25 per cent of the population is still living below the poverty line. Further, the poverty ratio is high in rural areas (27.4 per cent) compared to urban areas (15.4 per cent).
According to statistics, over 400,000 youths enter the job market every year. But because of limited job opportunities within the country, over five million Nepali youths have been working abroad, mainly in Gulf countries and Malaysia and South Korea.
This scenario hence does raise a question on the effectiveness of microfinance programmes. The core issue is whether microfinance programmes are being implemented by adopting globally accepted client protection principles.
Client protection principles guide microfinance service providers to take practical steps to treat clients fairly and respectfully and avoid practices that might harm them.
There are six universally accepted clients’ protection principles.
Avoidance of over-indebtedness is one of the most important principles. Providers need to take reasonable steps to ensure that credit is extended only if borrowers have demonstrated adequate ability to repay and loans never put borrowers at a significant risk of over-indebtedness.
In Nepal, microfinance institutions have concentrated their programmes in urban areas, and there is no effective credit information bureau, resulting in over-indebtedness, which instead of improving the situation of the clients has been harming them.
Transparent pricing is another important principle. Pricing and terms and conditions of financial products (including interest charges, insurance premiums etc) must be transparent and disclosed in a form understandable to clients. In Nepal, microfinance institutions hardly deliver clear information on current pricing and terms and conditions of financial products to clients. This leads to exploitation of clients.
Appropriate collections practices are essential in microfinance. Debt collection practices of providers should never be abusive or coercive. However, in Nepal microfinance providers force the clients to pay instalments on a defined date at any cost. They rarely take the client’s problems into consideration and hardly extend the payment deadline. This has further worsened the clients’ situation.
Ethical staff behaviour is a prerequisite for the implementation of microfinance programmes. Staffers of financial service providers must maintain ethical standards while interacting with clients, and such providers need to ensure that adequate safeguards are in place to detect and correct corruption or mistreatment of clients. The survey reveals that in most of the cases, staffers working in microfinance have maintained ethics and almost zero corruption, and are treating their clients well.
Mechanisms for grievance redressal are also essential. Providers need to have in place timely and responsive mechanisms for registering complaints and providing solutions. In Nepal, microfinance institutions encourage members to say their grievances verbally during the fortnight or monthly group meeting, but there is no separate mechanism to officially collect grievances and address them.
Privacy of client data is of utmost importance. Individual client data must be dealt with respect, and such data cannot be used for any other purposes without the consent of the clients. In Nepal, microfinance institutions’ staffers disclose savings and loan status of every client after the transaction in the group during every fortnight or monthly group meeting. This is disrespect to the privacy of the client.
If Nepali microfinance institutions don’t adhere to the client protection principles, it could mean a recipe for disaster.
Pathak is pursuing MPhil in Development Studies at School of Education, Kathmandu University