Last week, the governor of Nepal Rastra Bank (NRB), the central monetary authority of the country, issued a strong moral suasion to banks and financial institutions (BFIs) to find their merger or acquisition partner before the central bank announced its monetary policy for the fiscal year 2019-20. Including 91 microfinance finance institutions and one infrastructure development bank, there are 176 BFIs currently in operation in Nepal's financial system. About 13 percent of financial transactions are claimed to have been carried out by some 13,000 saving and credit cooperatives which the government prefers to portray as institutional inclusion of financial services—despite the fact that these cooperatives are out of the prudential regulation ambit and often suffer from rampant management dysfunctions.

There are several obvious reasons why NRB is so persistent about the merger and acquisition of these BFIs. First, although no systematic research exists, there is a general perception that Nepal has more BFIs than what the market actually requires. Second, the urban population is perceivably overbanked while the rural population’s access to formal financial services is still very limited. Third, out of 28, only 15 ‘A’ class commercial banks cover 70 percent of total banking transactions, leaving only 30 percent of the market to the rest of the 160 BFIs. Fourth, the capital base of these BFIs is relatively low, thus posing a systemic risk which NRB expects to consolidate by speeding-up the mergers and acquisition process. However, in spite of Nepal Rastra Bank’s decade-long encouragement to merge, recent statistics show that the number of BFIs licensed by it has gone up to 176 in mid-May 2019 from 151 exactly a year ago.

Hollow victory

The most puzzling question here is: why did the NRB license such 'unnecessary' numbers of BFIs in the first place, which it now finds difficult to rein in? And, why were they licensed without ensuring a reasonably risk-hedging level of paid-up capital? The only plausible defence of those responsible for allowing the mushrooming of BFIs between 1995 and 2010 revolves around the dire need to create financial service architecture in the remote hinterlands and providing access to the services for financial inclusion—demographically and spatially.

Nevertheless, the state apparatus, particularly the central bank itself, failed to achieve these goals as per expectations, largely due to poor institutional efficiency and incessant leadership experimentation; thanks to unabated political meddling. However, some progress was seen on the number of individuals opening accounts.

Global Findex (2018)—the global financial inclusion database of the World Bank which provides insight into how adults in different economies of the world access accounts, make payments, save, borrow, and manage financial risk—shows that only 45.4 percent of the adult population (over 15 years old) in Nepal owns a bank account in any type of financial institution. This is an increase from 25.3 percent in 2011. The number itself is not unimpressive at all. But the same study found that 14.5 percent of the accounts were inactive which effectively means that active users of financial services are only about 31 percent. This effectively tallies with the data on savings activity of 17.1 percent and access to loans of 13.6 percent of the account holders within this age bracket. This shows that about 14 million Nepali adults, exactly half of the total population, is yet to be exposed even to basic banking services.

Financial education

These experiences of Nepal and comparable economies of the developing world establish that only policy announcements and wishful goals that policymakers have of financial inclusion are not enough. They have to be accompanied by a strong framework of financial education. Nepal faces the problem of defining what exactly financial education stands for. Our financial and economic policy practices, policies and literature are still far from embracing the globally recognised 'trinity' principles of financial inclusion, financial education and financial consumer protection, for example, as espoused by the International Network for Financial Education (INFE) promoted under the Organisation for Economic Cooperation and Development (OECD) which now has become the global benchmark. Instead, Nepali policy-making seems to be predisposed to a monolithic obsession for the access to finance narrative, which is generally confined to at least one bank account for each family.

One of the grossly ignored aspects in policy formulation and market exercise related to 'financial education and inclusion' is the apparent conflict of interests of the market participants vis-a-vis their profit objectives. Contrary to universal norms, activities such as obligatory corporate social responsibility (CSR) and product promotions—like account opening schemes of an individual bank—are allowed to be counted as a contribution to access to finance. At the same time, exaggerated product information is counted as financial education.

One ridiculous example of policy distortion is that the monetary policy itself makes it mandatory for BFIs to spend 1 percent of their profit on CSR which they spend for supposed 'financial education' as mentioned.

In addition, Nepal's institutional arrangements aimed at financial inclusion are not pragmatic, outcome weighed and reformed in a timely fashion. For example, microfinance and cooperative models of financial access are proving to be more myth and hollow rhetoric than contributing to concrete and economically beneficial inclusion of the marginalised population. According to a study by United Nations Capital Development Fund, 73 percent of Nepal’s bank account holders live in urban areas, the gap between the ownership of bank accounts between adult males and females is more than 8 percent and the gap between the rich and the poor is 12 percent.

These data only vindicate that policies announced year after year for inclusion, such as priority and deprived sector lending, uncollateralised and subsidised loans, interest incentives to different targeted groups have, for all practical purposes, miserably failed. Policies on the promotion of SMEs, microcredit, micro-insurance for agricultural products and other guided lending schemes have met a similar fate. One common and insurmountable bottleneck to financial inclusion has been the exorbitant cost of funds; effectively above 30 percent. It is coupled with the sheer lack of entrepreneurship skills in the 'excluded' population. Mergers and acquisitions are less likely to remove this key barrier to financial inclusion.

Wagle is a professor (adjunct) at Kathmandu University School of Management. He tweets at @DrAchyutWagle. All views are his own.