Nepal Rastra Bank together with UNCDF recently launched the financial inclusion roadmap for Nepal as part of the Making Access Possible (MAP) initiative. This study was conducted with the objective of escalating financial access in rural areas, to ultimately reduce poverty and increase the standard of living. MAP aims at encouraging the use of financial services among the poorer sections of Nepali society as financial inclusion is proven to create greater opportunities for income generating activities. During the launch, Sujeev Shakya, Chairperson of Nepal Economic Forum sat with Judith Karl, Executive Secretary of UNCDF to discuss some of the biggest road blocks to Nepal’s financial inclusion scenario.
Sujeev: It has just been 24 hours since you arrived in Nepal, what is your initial impression of the country and how does it link with some of the larger roles you lead?
Judith: Firstly, Nepal is one of the biggest programs UNCDF has in the world. We work with the Government on a lot of innovative and new approaches to drive local development. I find the Government to be very open to new types of development models which is important to achieve the localization of Sustainable Development Goals (SDG) and make the process inclusive and participatory. The Government has strong commitment towards financial inclusion and recognizes it as an important enabler for poverty reduction and eradication. There is great willingness and sprit of commitment from Nepal Rastra Bank, Ministry of Finance and other parts of the Government to promote financial inclusion, which includes digital pathways to increase access to financial services for poor vulnerable households and communities. As for us at UNCDF, we know from years of experience and results from all around the world, access to finance can greatly impact household resilience to absorb shocks and their ability to manage finances securely all the while driving greater income dynamics at the local level. Nepal is a very interesting and dynamic place for us to work, and is also one of the countries that has great deal of support and commitment from the government.
Sujeev: Talking about Nepal, what is your impression on how the country is faring in comparison to other countries that UNCDF works with on Financial Inclusion?
Judith: Nepal is facing many challenges and opportunities, similar to those countries in the same income category. There are tremendous opportunities in terms of financial access and usage through digital pathways. The government sees potential for digital pathways and some very important innovative initiatives are already underway, compared to some of the other countries, in terms of being able to leverage digital system for social protection payments, e-mapping exercises and being able to access excluded populations.
At the same time, it is facing similar challenges in terms of women’s access to financial services. Women do tend to have lower levels of access and inclusion in most of these countries than men, and certainly in this case, Nepal follows similar patterns. Other similar challenges are how to get banking services and accessible pay points to remote populations. Bridging that gap is also a critical challenge for the banking sector and financial service providers themselves. They require business models that go beyond brick and mortar banking systems subsequently providing poor people with access.
Sujeev: We opened up with the issue of graduation from a LDC country; how do you see financial inclusion linking up with Nepal’s graduation from LDC to a middle-income country?
Judith: Nepal has set 2022 as its aspirational date for graduation from a LDC country. There are multiple complex elements that go into meeting that aspiration. So I am talking about how financial inclusion can help address some of the key indicators in order to meet the aim of graduation. The three big indicators are Gross National Income, Human Assets Index and Vulnerability Index.
In terms of growth, our experiences show that financial services can boost economic activities for smallholder farmers, which is a major segment of the population in Nepal. It can boost small enterprise activities, improve the ability of individuals to engage in self-employment and other types of income generating activities. By increasing the overall income level, you also increase the fiscal space in local economy, making it possible to generate growth from within and not rely on external resources.
MAP exercise has shown that 65% of farmers are still using informal financial services, highlighting the constraints in their ability to increase productivity, access credit and avail other type of financial services, which would help to generate more income. There is strong evidence on the growth side, that financial inclusion is important contributor to growth.
On the criteria of Human Assets Index, experience has shown that increased financial inclusion is directly correlated with maintaining children in school. This is mainly because, it provides greater financial stability and greater ability to manage household finances throughout the year. It also evens out the uneven income cycles over the course of the year which in turn helps them to pay for school, medical expenses and other emergency or unforeseen expenses. So it contributes significantly to household resilience and increases their ability to borrow during emergency. All these are the elements in building human assets and capital for more resilient households and also for healthier educated households.
Finally, for Vulnerability Index, we know that financial inclusion is a big contributor in reducing both individual and household vulnerability, as it increases their ability to deal with economic shocks. Having formal access to simple insurance services can also help people get through crisis situation, reducing the likelihood to resort to informal borrowing which can actually contribute to their vulnerability rather than their resilience. Introduction of new financial services and products like collective insurance and other type of micro insurance can also help deal with disasters and weather related shocks. In Nepal right now the MAP data shows only 11% of the population have access to insurance products, so increasing the range of insurance products that are available for poor households can be a tremendous contributor.
Sujeev: Any final thoughts you have that you would like to share on Financial Inclusion in Nepal?
Judith: The MAP exercise and introduction of road mapping exercise is a tremendous opportunity for the government to have a strong platform for convening and coordinating a wide range of actors around the financial inclusion agenda. It brings together both public and private sector actors, enabling them to see where the opportunities and challenges stand, so that they can allocate resource in their programs by addressing the biggest gaps. It also shows tremendous potential of these markets by showcasing the demand side. In conclusion, financial inclusion is about recognizing that the poor also have resources. These resources with proper services can be a driver for their own resilience and development. The key to financial inclusion in our view is not a supply driven approach but a demand driven approach, which looks at how poor people live and work in their local communities as well as promote the design of financial services that addresses their needs.