MICROCAPITAL STORY: Nepal Rastra Bank (NRB) Considers Separate Body to Supervise Microfinance Institutions (MFIs), Cooperatives and Non-Governmental Organizations (NGOs)

Nepal Rastra Bank (NRB), the central bank of Nepal, is considering creating a separate regulatory organization to supervise microfinance development banks by reassigning its present responsibilities to it. According to Gopal Prasad Kafle, Executive Director of Nepal Rastra Bank, the central bank is developing a preliminary plan for the Micro-Finance Act, which would provide for the establishment of this body. After the Act goes into effect, Nepal Rastra Bank will transfer its present responsibilities of regulating microfinance, cooperatives, and non-governmental organizations (NGOs) to the new regulatory body. The same Act will also have a provision for establishing a national microfinance development fund to back micro-credit institutions and strengthen their capacity.

According to Mr. Kafle, the move is aimed at making Nepal Rastra Bank more focused on its core functions instead of a growing number of smaller operational procedures. The country has 25 commercial banks, 58 development banks and 79 other finance companies in operation. “We want to focus on [the] big financial institutions,” Mr. Kafle said. Meanwhile, the action is aimed to strengthen the supervision of the lending activities to micro-entrepreneurs operating in the informal sector. In a book entitled Regulatory Architecture for Microfinance in Asia (p:8), Dr. Gilberto M. Llanto, a Senior Fellow at the Philippine Institute for Development Studies (PIDS), argues that in Nepal the licensing of non-governmental organizations for limited banking functions was a strategy to promote microfinance and provide accessible financial services to the poor. In this vein, Nepal Rastra Bank has licensed 12 microfinance development banks and 16 non-governmental organizations to carry out limited banking activities. However, Dr. Llanto also reports that, “it has been found in practice that large number of cooperatives and NGOs in remote areas are still undertaking lending and deposit-taking activities without any approval from Nepal Rastra Bank. Even the licensed cooperatives have been accepting saving deposits from non-members i.e., from [the] general public.”

Executive Director Mr. Kafle, who also participated the drafting of the Act, further mentioned that Nepal Rastra Bank would be mainly responsible for generating operating resources for the new regulatory organization. However, it has not been decided whether the new regulatory body will be overseeing microfinance banks, cooperatives, and non-governmental organizations which have received their licenses from government institutions besides Nepal Rastra Bank.

Nepal Rastra Bank was established in 1956 to assume central banking responsibilities, including guiding the development of the emerging domestic financial sector. It has seven offices located in Biratnagar, Janakpur, Birgunj, Pokhara, Siddharthanagar, Nepalgunj, and Dhangadhi. In July, 2008 the bank reported the total assets of 211.4 billion Nepalese Rupees, equivalent to over 2.7 billion US dollars.

By Yanni Hao, Research Assistant

Additional Resources:

Kantipur Report: “NRB Mulling Separate Body to Oversee Microfinance”

Nepal Rastra Bank: “Home” “Introduction” “Nepal Rastra Bank Annual Financial Statement”

Philippine Institute for Development Studies: “Home”

“Regulatory Architecture for Microfinance in Asia” Published by the Asian Productivity Organization, 2006