Financial inclusion has been identified as a key enabler for seven of the 17 Sustainable Development Goals (SDGs). Increasing access to financial services clears the path for the accomplishment of several SDGs. It is a foundational component to empower marginalized communities—access to affordable and quality financial services helps individuals, households and businesses to save income, invest and overcome poverty. Along with improving financial status, financial inclusion has a direct impact on access to nutritional food, clean water, shelter, healthcare, education, and other basic needs.
According to the Global Findex Database 2021, 76% of adults owned an account at a bank or a regulated financial institution across the world. It is a significant increase from 51% in 2011. Nepal too has seen a significant improvement over the years in the percentage of adults holding an account. It has jumped from 33.8% in 2014 to 54% in 2021, giving millions of people increased access to financial services.
Nepal’s efforts and advancements in making the financial sector inclusive are a step in the right direction. However, there are still areas that require more attention and improvement. This article explores disparities present in Nepal and recommends areas for improvement to enhance financial inclusion.
Urban-Rural Divide
Nepal remains a predominantly rural country with an estimated 79% of its population living in rural areas. However, urban areas have better connectivity and big businesses, which makes them profitable for Financial Service Providers (FSPs) to set themselves there. Whereas, the rural markets have fewer commercial opportunities for FSPs. Formal financial institutions make up only a small portion of rural financial services. The Government of Nepal and Nepal Rastra Bank (NRB) have made attempts to improve the state of financial accessibility through various programs, policies and strategies. As of September 2022, such interventions have been successful in building Class-A bank branches in 752 levels out of 753 local levels. However, rural municipalities had only 251 accounts per 1,000 population in 2021—a fraction of the 3,296 accounts per 1,000 metropolitan cities in the same period.
FSPs still have not reached a majority of the unbanked population that reside in rural areas. Comparatively, rural areas fall behind in infrastructure and high-value businesses which makes urban centres a more attractive option. Furthermore, a lack of enough banking portals in rural areas prevents people from utilizing financial products. There are also disparities in the quality of education—lower quality education negatively affects the financial literacy, knowledge, and behaviour of people, which makes them less confident about using formal financial services.
Informal or semi-formal financial institutions are the major providers of financial services in rural areas. However, they have weak institutional and managerial capacity. Providing such institutions with operational training, assistance and supervision through local governments would make the services safer and of improved quality.
Limited Access for Women
Women are not included in decision-making, and have less access to financial resources, information, and training, causing them to be dependent on family members. Such dependence is further exacerbated by the income gap between men and women in terms of both opportunities for employment and the proportion of earned income. This, in turn, limits women’s participation in the financial sector, giving rise to a vicious cycle that causes women to be confined to dependency and low financial access. The female financial literacy score in 2022 was 7.5% less than the male financial literacy score. According to the Global Findex Database 2021, women from lower-middle-income countries are more likely to report that they do not have an account as a family member already had one. Nationally, according to 2021 data from NRB, women hold 687 accounts per 1,000 population—less than half the 1,314 accounts per 1,000 population held by men.
Women’s access to finance is a multi-layered challenge. While their levels of education have a direct impact on their ability to access financial services, many times educated women are also deprived of the independence to make financial decisions. Women face hardships on an institutional level, despite the numerous government initiatives to encourage economic activities of women such as tax exemptions to companies with at least 33% of women employees, collateral-free loans, and concessional loans. As of mid-June 2022, FSPs had disbursed NPR 72.38 billion as women entrepreneurial loans to 83,669 women. However, it is not a fair representation as many businesses are falsely registered in the name of a woman to secure government subsidies. Only 29% of establishments in the country are female-owned, and approximately 90% of that number depend on the informal sector to meet financing needs.
A 2021 survey showed that women increasingly relied on informal lending to meet everyday needs with around 42% of women having borrowed from informal lenders. Many informal lenders have semi-predatory practices with higher interest rates and target rural women with low financial knowledge. However, women turn to informal sources as formal banks are more hesitant to lend to women as they do not have access to collateral and assets. Only 26% of women have access to property rights, which severely limits their independent risk-taking abilities. Without the support of their family, many women would thus be unable to borrow from formal institutions. Empowering women in finances would require them to have greater control over their earned income and assets. Providing disadvantaged women with direct benefit transfers or direct payments into their bank accounts has been observed as a tried-and-tested way to increase agency.
Uneven Distribution of Infrastructure
Most of Nepal’s population and infrastructure are focused on big towns and cities. Rural areas, relatively lack basic infrastructure and services and have fewer development activities. As a result, the rural population have been excluded and faces several socio-economic challenges including a lack of education and healthcare, and low economic opportunities. Despite the rural population being larger than the urban, metropolitan cities had 45.76 branches per 100,000 population while rural municipalities only had 8.54 branches per 100,000 in 2021.
Due to a lack of infrastructure, small-sized loan amounts, and higher transaction costs, financial services in rural areas become more expensive. The high costs make it unfeasible for the consumers, and also make it less profitable for the FSPs. Digital financial services can be used to overcome the barrier of lack of infrastructure given the high teledensity and broadband subscriptions of Nepal. FSPs could partner with and leverage mobile banking services to penetrate the rural market as even rural areas have high usage of mobile banking against other services. Further, providers could look into offline mobile banking to promote inclusion in areas that do not have strong internet connections.
Way Forward
Based on the Nepal Financial Inclusion Refresh Report 2021, only 10 activities out of the 53 outlined in the Nepal Financial Inclusion Action Plan were completed including the rapid adaptation and development of digital payments and banking services. Moving forward, the NRB should view financial inclusion through a business opportunity lens. Encouraging FSPs to incorporate promoting financial access into their business strategies would assist in finding innovative ways to make financial products and services more affordable and accessible to individuals across society.
Sukeerti Shrestha holds a Bachelor's degree in Business Administration (Finance) from Kathmandu University. She is passionate about development economics and sustainability, with a keen interest in community-inclusive policy making. Currently, she works as an Aspiring beed at beed Management, building on her prior experience in management consulting and social enterprises.
