- The financial cooperative movement, with regulatory oversight, can still be effective in boosting the economy
Feb 14, 2018-
Economic liberalisation in the 1990s led to a substantial increase in the number of banks and financial institutions (BFIs) and transaction volumes. This trend continued even during the conflict period, fuelled by urban migration and remittance inflow. BFIs have been categorised in descending order of paid-up capital and their functional activities. It is difficult to use any yardstick to determine whether the number of BFIs has reached a saturation level and if they are fulfilling the mandatory norms and conditions. However, the potential size of the economy can be used as a better proxy to estimate the tentative size of the financial sector.
The beauty of a liberal economic regime is that individuals or groups are free to enter if there is room for return. Nonetheless, a free exit, which bears equal merit, cannot compare easily with other sectors since the financial sector deals with public deposits. Nepal Rastra Bank (NRB), as the regulatory and supervisory authority, has ordered that the paid-up capital be increased up to four-fold to keep with international practices and rationalise the number of BFIs as a step towards the second generation of liberalisation. With the view of leveraging this process, NRB opted for mergers and acquisitions as some sort of solution, which might not be easily and successfully applicable as expected due to matching and marking problems between BFIs.
The much awaited financial cooperative system as a role model of rural financial evolution could not be streamlined even though NRB had suggested to the government as early as two decades ago to establish an independent prudential regulatory and supervisory authority with the aim of providing initial support for capital, manpower and technical knowhow. Contrary to the constitutional spirit of the three-pillar economic model, the vested interest of the so-called legislation makers turned it into partial pitfalls by weakening the pro-rural organised financial system.
From potato chips to computer chips
If an independent authority is established for prudential regulation and supervision, there is no hard and fast reason to restrict financial cooperatives from mobilising public resources. Looking at the overall geographical structure and pathetic dwelling of the rural populace, the much talked about establishment of one banking branch in each local government area will neither offer sufficient access to the rural poor nor be cost-effective for big BFIs. The lesson of the financial cooperative movement is sufficient to show how this system transformed South Korea from a potato chips economy into a computer chips economy.
Obviously, rural inclusion in the financial sector has not been judiciously addressed. It is the core function of NRB, as the apex body of the financial system and the advisor to the government, to advise a fairly feasible role model for the rural financial system in a more cost-effective manner. There is also a moral obligation for the government to act accordingly.
Increasing rural access
It is but natural as elsewhere that the mushrooming growth of Nepal’s financial sector is urban-centric due to economic viability. This needs to be addressed with pro-active positive policy discrimination in favour of rural areas. Looking at the poor financial accessibility in rural areas, merely implementing a federal structure will not suffice to improve it. This calls for further positive discrimination to a pro-rural approach with a flexible and micro financial cooperative-type mechanism backed up by an independent and prudent regulatory and supervisory authority in addition to NRB to energise the rural financial system.
There is no doubt that the existing large number of financial cooperatives have mostly been discredited mainly due to the misuse of the hard earned financial resources of poor people. Moreover, the worrisome non-regulated expansion of financial cooperatives is still largely urban-centric. Mimicking the cooperative culture of saving and lending, the number of savings groups, mother groups, consumer groups and ‘dhukuti’ groups has been burgeoning and emerging as a threat to the organised financial market.
Empirically, a well established feedback relationship of cause and effect between economic growth and financial sector development has not been able to validate how much the latter’s growth has contributed to the former in Nepal. The financial sector’s contribution to the gross domestic product (GDP) is being used as a yardstick to assess the impact in the overall economy. Obviously, the problem of the absence of income disclosure in the past has been overcome to some extent by efforts to ensure a ‘white income’ culture by the compulsory disclosure system.
NRB and BFIs could easily convert into provincial structures, but the relocation of urban branches to the local level is neither viable nor sustainable with the given infrastructure. However, NRB can strengthen its off-site and on-site supervision through its provincial network more efficiently and prudently. However, it is highly important for policymakers to rigorously analyse a feasible visionary approach when meeting the needs of rural finance; accessibility is more important than the interest rate.
It is also necessary for the organised institutional sector to curb the exorbitant interest rates charged by the unorganised financial sector like money lenders. The increased tendency of swapping loans between banks or repaying loans through cheaper loans from other banks clearly indicates unsound and out of performance deals. The pertinent issues to be addressed are prudential regulation and supervision based on the federal structure, infrastructure, financial literacy focused on the saving habit, project-oriented lending, credit guarantee and simplification of loan processing are necessary for successful financial federalism.
Paudel holds a PhD in economics and is a former economic advisor to Nepal Rastra Bank
Published: 14-02-2018 08:12