In the year 2015, Nepal had a per capita income of USD 762, making it one of the poorest countries in the world. The national average poverty line is at 25.2%, attributed to the fact that poverty is higher in rural areas; with more than 81% of the country’s population living there. The geographical dispersion of the societies, lack of infrastructural development in the field of health, education, road and communication, the lack of economic opportunity, dependency of 66% of population on agriculture for livelihood and low awareness about the financial system in rural areas pose additional challenges for enhancing financial inclusion in Nepal.
Financial inclusion aims at ensuring access to appropriate financial products and services at an affordable cost and fair and transparent manner by regulated mainstream institutional players who also promote financial literacy and consumer protection. All sections of the society, including vulnerable groups and low income groups, should be able to access full range of financial services including credit, savings, insurance, pension, money transfers and remittance.
Financial inclusion is a necessity for the economic development of the country as it creates opportunities for people to be involved in income generating activities and also aids in improving well-being. The government in the recent budget for FY 2016/17, outlined the plan to expand banking and financial services in 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. Moreover, recognizing the importance of financial inclusion the government has also emphasized the expansion of micro insurance, enforcement of subsidized agricultural lending program and implementation of the Financial Sector Development Strategy. The Financial Literacy Policy formulated with the intent of educating rural people is also in the process of approval from the government
Likewise, Nepal Rastra Bank (NRB) has also adopted policy measures to encourage the use of financial services in remote areas. Commercial Banks, Development Banks and Finance Companies are required to provide 5%, 4.5% and 4.0% respectively of their total credit portfolio to deprived sector, out of which Commercial Banks are required to lend 2% on their own. Moreover, Banks and Financial Institutions (BFIs) are required to establish rural branches before establishing branches in the urban areas. In order to assist BFIs to establish branch network in the pre-defined remote districts, interest free loan is provided. Special refinance facility is also provided to the BFIs for lending to small and cottage industries and enterprises that are run by women entrepreneurs.
In terms of regional comparison of financial inclusion, Nepal is in a better shape compared to other South Asian countries. In Nepal, while poverty level is decreasing, financial outreach has increased. Moreover, the understanding among rural people regarding the facilities offered by BFIs has increased and are much more empowered than before. Despite the achievement of the country, there is a long way ahead for Nepal to achieve the global target of universal financial access by 2020.
Embracing Global Trends
Nepal needs to move along the global trend wherein as per the World Bank Global Findex Data 2014, the number of unbanked adults dropped from 2.5 billion in 2011 to 2 billion in 2014. Currently, one of the global trends in financial inclusion is embracing technology and innovation that has transformed delivery mechanisms of financial services. Government initiative to encourage digital innovation to increase access of financial services to rural areas needs to be pushed towards materialization. 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. Global trends show that central banks have taken leadership in developing financial inclusion frameworks. In line with government policies, this calls for NRB to address many of these issues in order to create a financial system that is inclusive and serves the economy.