Rural finance: Tool for social change

Rural finance is accepted as a tool for poverty alleviation and to improve the lifestyle of the unprivileged worldwide. In Nepal, rural finance is used to provide banking services

to the rural sector, where commercial banking is not easily available.

Poverty is a major problem in Nepal. Around 38 per cent of the population lives below poverty line, and out of this, 17.1 per cent are considered extremely poor. Various Five Year Plans have stressed on poverty alleviation schemes to enhance the economic, social and educational status of the rural poor. The government agencies and NGOs had run programmes for this, but no concrete improvement has been seen in the lives of the poor. Thus, to provide loans for various purposes like agriculture, livestock rearing, local industries, etc., rural financial institutions were promoted in the country. Such institutions were focused with the view that the “banks have to go to the people.”

Generally, rural finance system is used to finance agricultural-based small-scale industries and to help the poor get away from the grip of cunning landlords. Rural finance is being used in Nepal since the last three decades when Nepal Rastra Bank brought out the provision making it compulsory for the commercial banks to invest some per cent of their deposits in rural areas. The NRB implemented the priority sector loan programme and made provisions to provide three per cent loan investment in the underdeveloped areas.

After the financial sector liberalisation, a number of banks came up in the country. In total, 17 commercial banks, 35 development banks and 63 financial institutions came into operation. Five rural development banks, four small loan providers and 47 other financial organisations are currently in operation. Similarly, 2,345 cooperative societies are engaged in the rural financial sector. But these organisations have only covered 10 per cent of the rural population. It is thus time to rethink whether these organisations have been successful in achieving their objectives of upgrading the lifestyle of the rural people.

However, it is not true that the financial sector has not contributed to poverty alleviation at all, but there are some problems like improper financial structure, indiscipline and lack of monitoring system. Also, tedious administrative process, high interest

rates, compulsion of guarantee and bureaucratic and political interference have affected the growth of the rural financial institutions. Lack of trained staff and unionism has caused a negative impact. Unfortunately, there is no Act governing rural finance.

On the other hand, there is the lack of tradition to use financial sector for business in the rural areas. The poor have no capacity to produce guarantees for loan, which restricts them from approaching the institutions. There is also the problem of continuity and sustainability of the institutions run with donor assistance.

Although the financial institutions are seen not to be too effective in generating income, they have contributed to social awareness and empowerment of the rural people. It will certainly help in poverty alleviation in the long run. If the problems confronting the financial sector are addressed appropriately, the rural financial institutions could prove to be a powerful tool for social change.