MICROFINANCE IN NEPAL

MICROFINANCE IN NEPAL Experiences of RMDC as an apex microfinance organization * AN OVERVIEW OF MICROFINANCE SECTOR IN NEPAL 1. Over the past 28 years, the Government introduced a number of programs to extend financial services to the rural people focusing on the poor and women. These include mainly, the Small Farmers Development Program (SFDP) implemented by the Agriculture Development Bank (ADBN), Intensive Banking Program (IBP) implemented by two national level commercial banks (CBs) and one joint-venture private commercial bank, Production Credit for Rural Women (PCRW) implemented by the CBs and ADBN in partnership with Women Development Department of the Government, Regional Rural Development Banks namely Grameen Bikas Banks (GBBs), and the Micro-Credit Project for Women (MCPW) implemented through the CBs. Evidences indicate that these programs have not been able to substantially outreach the poor households in the country. Less than 20% of the total poor population has been estimated to have come under the fold of institutional micro-credit. 2. The Small Farmers Development Program (SFDP), incepted in 1975, have reached out about 200,000 small farmers throughout the country. But even after more than two and half decades of its operation, it failed to attain desired result. Its efficiency and loan recovery rate are found to be very low. As a result, ADBN made a strategy of stopping further expansion of the program and transforming SFDP offices into Small Farmers Cooperative Limiteds (SFCLs). Now, there are about 180 SFCLs throughout the country, and each has about 500 members. The program could not reach the real poor families, as it requires physical collateral for providing a loan. A Small Farmers Development Bank has also been recently established to cater services to the SFCLs. Under the framework of Intensive Banking Program, PCRW program was initiated in 1982 and has provided loans to about 70,000 women members in 55 districts. Micro-Credit Project for Women (MCPW) program, begun in 1994 has provided loan to around 25,000 women in 17 districts (12 districts and 5 towns). As both PCRW and MCPW programs did not have prudent targeting approach, they could reach only a meager number of the poor women although they could reach the women in general. All the above programs have also been suffered from very low loan recovery, which is in the range of 50% - 80% and have failed to attain financial self-sufficiency in their operations. Besides, most of the aforesaid programs have been seriously affected by the current Maoist movement. 3. The five Grameen Bikash Banks (GBBs) have been established in regional basis under the sponsorship of the Government and the Nepal Rastra Bank (NRB) with a view to provide microfinance services targeting specially to the poor households. Of these five, two (the Far- * A paper prepared by Shankar Man Shrestha, Chief Executive Officer, Rural Microfinance Development Centre Ltd., Nepal. 1

Western & the Eastern) were established in 1992, two (the Mid-Western & the Western) in 1995 and one (the Central) in 1996. Two NGOs namely the Nirdhan and the Centre for Selfhelp Development (CSD) began their microfinance operation in 1993 and 1994 respectively, and recently their microfinance operations have been converted into microfinance development banks namely Nirdhan Utthan Bank Ltd. and Swablamban Bikash Bank Ltd. respectively. Similarly, two other private development banks Chhimek Bikas Bank Ltd. and Deprosc Development Bank Ltd. have also been licensed by NRB for conducting microfinance operations. All of them are following Grameen model of microfinance system, and are in general called Grameen Bank Replicators (GBRs). They have altogether covered 37 districts mostly in the plain area and provided services to about 270,000 poor rural households till Mid-July 2004. Majority of them belong to the poorest of the poor. The average loan recovery rate of the banks is over 97%. Some of the GBRs have also started their operation in accessible areas of the hills. 4. There are also a large number of NGOs and cooperatives in the country, which have been embracing savings and credit activities as one of their major activities. The NGOs, because of their social orientation, seem motivated to deliver the services to the poor and women, but their institutional capacity particularly to operate microfinance services is extremely low. There are a number of rural cooperatives throughout the country, but they have not been targeted to the poor households and women as their clients. Their size of operation is also small, which is in the range of 30 150 members per cooperative. And only a very few of them have got license from NRB for limited banking operations. NRB, from its "Rural Selfreliance Fund", has also provided wholesale loan to over 100 NGOs and cooperatives for on-lending to their clients. However, their outreach is very limited. 5. In general, the outreach (in both depth and scale) of most MFIs is very low compared to what needs to be done. The major reasons are the lack of adequate institutional capacity of the institutions, limited access to wholesale funds, lack of location specific appropriate model of microfinance operation, lack of conducive policy and legal environment, poor socio-economic infrastructures and somewhere difficult geographical terrain in the country. But, presently, microfinance operations of most MFIs have been slackened off due to the fragile law and order situation in the country. ESTABLISHMENT OF RMDC AS AN APEX WHOLESALER 6. It was long felt that a separate apex organization should be created to play a lead role for the promotion and development of microfinance sector and provide wholesale funds to MFIs in need of fund for on-lending to the poor clients. Towards this end, the Rural Microfinance Development Centre Ltd. (RMDC) was established as an apex microfinance organization with the initiative of NRB and the Asian Development Bank (ADB). It was registered in 1998 as a public limited company and has got license from the central bank to operate as a development bank. It has been operational since January 2000. Its promoter shareholders are the Nepal Rastra Bank (the central bank), 13 commercial banks including the joint 2

venture private banks, 5 regional GBBs, the Deposit Insurance and Credit Guarantee Corporation and the Nirdhan (an NGO). It has a 7-member Board of Directors consisting of 7 members, out of which two members come from the central bank and remaining five from the commercial banks on rotation basis. RMDC has maintained very lean staffing of a total of 13 employees including the chief executive officer. It aims to run it in an efficient and costeffective manner with minimum staff, differentiating it from the traditional institutions in Nepal. 7. It also aims to be amongst the effective players in the efforts to reduce poverty in the country by increasing access of quality microfinance services to the poor women including the poorest of the poor through viable and sustainable microfinance institutions. It has three major functions : i) offering wholesale finance to MFIs for on-lending, (ii) providing institutional and capacity building supports to MFIs, and (iii) extending group-strengthening and skills development training supports for the MFIs clients. In addition to these, RMDC organizes seminars, workshops and provide feedbacks to the central bank and the government from time to time with an objective of developing conducive policy and legal environment for microfinance in the country. 8. For re-lending to retail MFIs, RMDC has access to about US$ 20 million loan fund from ADB under the Rural Microfinance Project. And if needed, it can also access the commercial banks to avail fund from the resources earmarked for the deprived sector finance (i.e. 0.25% - 3% of their total loan portfolio). Currently it has also access to the credit fund under the Community Livestock Development Project and the Japan Fund for Poverty Reduction of Assistance for Optimizing Productivity of Poor Water Users Association. ROLE OF RMDC 9. The main role and responsibilities of RMDC are providing wholesale credit, institutional strengthening and capacity building supports to MFIs, and upgrading entrepreneurial skills and organizational capacity of ultimate borrowers through the concerned MFIs. Providing Loan Funds to MFIs 10. RMDC provides wholesale loan to MFIs for on-lending to the poor for viable off-farm and onfarm economic activities. The target partners of RMDC are microfinance development banks, financial cooperatives, and NGO financial intermediaries. RMDC charges an annual interest rate of 6.5%. on loans to MFIs. The partner organization (PO) has to repay its first loan within 2 years. The repayment period for the second loan could be extended to 3 years and later up to 5 years for the subsequent loans based on the previous repayment record of the MFI. First 6 month of every loan is considered as a grace period, and loan repayments are to be made half-yearly installments. However, interest payments are to be made quarterly. RMDC does not impose on its partner organizations (POs) regarding their lending rate to their clients. However, it suggests them to have an appropriate interest rate so as to 3

meet operational and financial costs, and attain financial viability and sustainability over a reasonable period of time. Presently, POs interest rates ranges between 18% to 25% in declining balance. Loan sizes of ultimate borrowers range between Rs. 5,000 to Rs. 10,000 first loan, Rs. 7000 to Rs. 12,000 second loan Rs. 10,000 to Rs 15,000 third loan likewise it goes on increasing upto Rs. 30,000. Institutional Development/Capacity Building Support to MFIs 11. From the very start, RMDC has been providing institutional capacity building supports to MFIs to start-up and scale-up microfinance programs. There are a large number of NGOs and cooperatives, but they either lack minimum institutional capacity or commitment and seriousness to start microfinance program. RMDC orients the NGOs and cooperatives and helps them to establish start-up systems to begin microfinance programs. Most of the existing MFIs do not have adequate institutional capacity to scale-up outreach and provide quality services to a large number of the poor households. Till now, RMDC is the sole agency to provide capacity building supports to MFIs in the country. 12. RMDC s institutional development programs aims at achieving the following broad objectives: Developing sound delivery mechanism of micro-credit facilities to the poor and the deprived and promoting microfinance as an industry in the country. Making its POs financially viable and sustainable. Promoting and developing a substantial number of capable MFIs, which could provide quality services to the unserved population in the country. Helping in creating conducive policy and legal environment for microfinance by lobbying and organizing seminars, workshops and interaction programs with key stakeholders Developing Best Practices and Sustainable MFIs 13. RMDC closely observes the practices and performances of different MFIs in the country and abroad, and identifies the best practices, which are encouraged to be followed by new MFIs. Through different training or orientation programs, RMDC orients its partner MFIs and other MFIs to follow best practices for their financial viability and sustainability. In every program, RMDC discusses with the MFIs officials on how to increase productivity, reduce operating costs and increase operational income for sustainability of microfinance programs. Market Development 14. In order to develop market, RMDC has adopted different approaches. Besides strengthening its POs, it organizes orientation and interaction programs on microfinance operation for those interested to run microfinance programs, policy makers, academics, development practitioners, social entrepreneurs, NGOs and cooperatives. RMDC regularly 4

publishes notices about its wholesale lending program and eligibility criteria on national newspapers to inform the potential MFIs on RMDC programs. Studies and Evaluation 15. RMDC collect success stories of clients, and publish them in a book-form and in the newsletters. They are circulated to MFIs, government and other national and international agencies. RMDC conducts or supports to carry out different studies and evaluations related to microfinance, poverty reduction and women empowerment. Promoting Microfinance Friendly Environment 16. As an apex organization, RMDC plays necessary roles to create microfinance friendly environment in the country. For instance, RMDC organized two national level conferences to discuss on the major issues of microfinance and facilitate sharing of experiences of prominent microfinance institutions among practitioners and policy makers. It has also organized national level seminars with officials of the government, the central bank, MFIs and professionals to discuss on shortcomings of the Financial Intermediary Act 1998. Those two programs made some recommendations on modification of certain clauses in the Act. As a result, the central bank and concerned ministry went through the recommendations and initiate amendment in the Act. Similarly, RMDC is actively participating in different forums related to development of policies and regulations related to microfinance sector. 17. RMDC organizes interaction programs or workshops with other stakeholders, such as journalists, auditors, political leaders with the view to making them aware of the microfinance programs and their importance on poverty reduction and women empowerment in the country. RMDC also organizes national seminars and workshops to address burning issues of microfinance and sharing of experience between practitioners and policy makers. OPERATIONS AND ACHIEVEMENTS OF RMDC 18. Till November 2004, RMDC has approved Rs. 552.25 million (US$ 7.46 million) loan fund for 36 MFIs, and out of that it has disbursed Rs.387.11 million (US$ 5.23 million) to its 33 partner MFIs. The borrowing partners are 2 regional GBBs, 4 private microfinance development banks, 22 NGOs and 5 rural cooperatives. All partners have been repaying their installments on time. RMDC s 18 partners in total have extended services to over 236,000 poor households in 34 districts of Nepal. 19. Similarly, Over 5,000 staff and 150,000 clients of 113 MFIs have participated in different training programs under the technical and financial supports of RMDC. Some of the training programs have been directly conducted by RMDC through its officials or outsourcing. Most of the training programs, however, have been organized through respective MFIs with 5

necessary technical guidance and financial support of RMDC. The training programs were mainly concentrated on sound practices of microfinance, accounting, financial analysis and management, business planning, Participatory Rural Appraisal, Participatory Wealth Ranking, facilitation skills, group organization and strengthening, enterprise management, income-generating skills development etc. 20. With a view to increasing awareness about microfinance, RMDC has so far organized two national level seminars for the concerned policy makers, planners, professionals, government and semi-government officials and practitioners. Two workshops were also organized by RMDC to discuss and collect recommendations from the concerned stakeholders on the impeding clauses and articles in the Financial Intermediary Act 1998, which stood as an obstacle instead of a facilitator in implementing microfinance programs by NGOs. The workshops in fact helped the central bank and the concerned ministries in making amendments on the act, which now has been passed by the Parliament and got the Royal assent as well. The Financial Intermediary (First Amendment) Act 2002 is hoped to facilitate the NGOs in undertaking microfinance programs with more zeal. As per this amendment, an NGO registered under the act can mobilize savings of its members, which was not mentioned in the previous act. Similarly, the registered NGOs can now renew their registration in every two years instead of every year, work as an agent of a bank or financial institution, manage its administrative costs without any interference from the central bank, mobilize unused fund, etc. 21. Since, five regional GBBs are major microfinance institutions in the country, RMDC has been more concerned from its very beginning to improve the banks operational performance and financial condition. In this line, RMDC has visited the banks including their field operations, and organized interaction programs with their senior officials, branch managers as well as field staffs. Based on the experiences, RMDC prepared a proposal for improvement and rehabilitation of the regional GBBs and submitted to the central bank and the National Planning Commission (NPC) for immediate actions. With an objective to rehabilitate the banks, a High Level GBB Strengthening Committee has been constituted under the chairmanship of the vice-chairman of NPC, which has delineated a plan of actions. So far, under the rehabilitation program, the regional GBBs have been compensated the cumulative losses from the central bank and the government. And in order to enhance professionalism in their management, the central bank has recruited chief executives of the two banks from the market. Till now, NRB has been deputing its officials to the post of chief executives and chairpersons of the board of directors of these banks. Two of the banks are also in the process of privatization. However, a lot has to be done to develop them as sustainable MFIs. 22. As a large number of NGOs and cooperatives are coming up to implement and expand microfinance programs, RMDC has been playing a pro-active role to promote institutions for startup programs of microfinance. To this end, RMDC has been organizing exposure visit and dialogue programs for the board members and chief executives of the NGOs and 6

cooperatives, which have shown interest in starting microfinance programs. Besides that, on-site consultancy services are also provided to the institutions to establish basic systems to begin microfinance operation. 23. RMDC has also created a development fund to offer soft-loan fund supports to startup MFIs of hilly areas, as initial operating costs are comparatively high in the region. So far, RMDC has provided soft-loan funds to 9 hilly MFIs. In this line, RMDC has received a small grant fund from the Australian Agency for International Development (AusAID). The repayments recovered are being recycled to the hilly MFIs for on-lending to their clients. EXPERIENCES OF RMDC 24. During the last four years of operation, RMDC has acquired mixed experiences, most of which were never expected while preparing the Rural Microfinance Project (ADB loan project) and before establishing RMDC. A lot of hidden issues have been uncovered over the period. For instance, the major institutions targeted by RMDC have appeared to have financially unsound and ineligible for extending credit supports to them. The policy and legal environment have also not appeared in place as expected. Previous and on-going microcredit projects and programs have been unsuccessful in producing sustainable MFIs. A lot has to be done by RMDC, the central bank and the government to develop sustainable microfinance institutions (MFIs), develop favorable policy environment and promote new MFIs to cater microfinance services in the country. 25. At the very beginning, RMDC s lending rate (i.e. 9.75%) to MFIs, which was fixed in project agreement, appeared much higher as compared to that of commercial banks (i.e. 5-6%). This had kept RMDC s loan unattractive to MFIs specially the GBBs. The commercial banks were availing credit to the MFIs at lower rate, as the central bank requires them to disburse 0.25 3.0% of their loan portfolio to the deprived sector under the deprived sector credit program. RMDC had to borrow from the government at 6% per annum. In view of this, RMDC submitted a request proposal to the Ministry of Finance (MoF) to reduce its relending rate to RMDC to 3%, so that it can reduce its lending rate to 6-7%. It took nearly 2 years for the Government to reduce its rate by 2%. As a result RMDC reduced its previous rate of 9.75% to 6.5% on its loans to retailing MFIs, two year back, which was again found higher in the market in course of time due to further decline in the interest rate of the commercial banks loans under deprived sector. Hence RMDC rate of interest has been further reduced to 5% after the reduction of interest rate to RMDC from Government by 3 percent which took more than a year's persuation by RMDC. These things have hindered the operation of RMDC largely in the initial years. The rate of interest paid to the government by RMDC in its borrowings is still higher as compared to PKSF in Bangladesh and PPAF in Pakistan. A rigidity on interest rate is a constraining factor in the disbursement of loans to MFIs. 7

26. Another bottleneck that constrained RMDC's loan disbursement performance was the worse financial position and poor portfolio quality of the GBBs, which have large networks and have been considered maiden partners of the Rural Microfinance Project. RMDC as a professional financial institution has been following prudent appraisal procedures for approving loan to MFIs. In order to help the regional GBBs improve their loan portfolio and financial position, RMDC interacted with their officials including their Boards. In this line, RMDC made in-depth study of their programs, and provided feedbacks with reports to the concerned individuals and institutions for their immediate actions. Since, RMDC has no legal authority to exercise any control on them, it can just provides suggestions to the concerned. RMDC found that until and unless the regional GBBs have business culture and professional management, they would not improve their performance and become financially viable and sustainable. 27. The worse security situation in the country has severely affected the operation of microfinance like other developing activities. The insurgents have been threatening field staff of MFIs to continue their operation, and motivating people not to repay the loan installments. A number of looting cases also have happened to staff while coming back from group meetings with collected loan money. Some branches of MFIs also have been set ablaze. Besides, the closure of the rural branch offices of the commercial banks has also added another difficulty in managing cash by the MFIs. 28. The impacts of microfinance programs have been found very encouraging whatever is the financial position of an MFI and its scale of outreach. Its clients seem to have protected from vulnerabilities, stabilized and increased their household income and improved their living conditions. The GBRs including GBBs have been more effective in reaching the un-served poorest segment of the rural societies in Nepal. The stories of clients collected by RMDC, have clearly shown this. The labors have become micro-entrepreneurs and the poor women have come out of their veil and have started involving in economic activities and taking decisions on household activities. Children including girl child of the beneficiary households are going to school. The women clients are getting respects from their spouses and community members. Thus, microfinance has been proved to be an instrument of not only poverty reduction, but also empowerment of women in the societies. 29. Although micro-credit projects and programs in the country were started more than two-andhalf decades ago, still only a small portion of the total poor households has access to institutional micro-credit services. It is also because of inappropriate policies and in appropriate and unviable models of microfinance programs. They have not yet been free from conventional banking mentality and culture. They require collateral for extending credit. However, GBRs have shown a way that loan made to the poor without collateral security are repaid on time and their repayment rates are near to 99%. So far, not over 600,000 poor families have access to micro-credit services. Over fifty percent of the total benefited households are members of Grameen type micro-credit programs in the country. This model has been widespread throughout the Terai region including some accessible hilly areas of 8

the country. In the remote hills and mountain areas, savings and credit cooperative model seems appropriate. However, the Grameen model of microfinance has been the most effective in terms of reaching the poorest households and maintaining corruption free operation due to its transparent operation system. 30. It is well experienced globally that an MFI incurs higher costs as compared to its operating income in the starting phase. It is even more incase of MFIs operating in the hills because of difficult terrain therein. At this situation, such MFIs cannot compensate its expenses just by increasing its lending rate and fees, which could be unbearable to the poor clients. Hence, the startup MFIs focusing on the poorest of the poor and operating in the hills should be given soft-loans in their initial phase, which would build-up their confidence in moving with pro-poor microfinance programs in the difficult areas. 31. It would be very difficult to find an organization in Nepal, which is free from political influence. MFIs such as the regional GBBs are also being suffered from this problem, which has led them to their deteriorating managerial and financial performance. However, in such circumstance, RMDC has been able to work as an autonomous professional organization independent of political pressure. There is no representation of government officials in the Board of RMDC, and the chairman of the Board is being selected among the board members representing the commercial banks. LESSONS LEARNT 32. Microfinance institutions including wholesale institutions should be autonomous and refrained from political interferences. They should be structured and managed in such a way that they could work as a professional organization with a role of promoting and developing self-sustainable microfinance. 33. A wholesale microfinance institution like RMDC should be able to maintain flexibility in interest rate. It should be able to adjust interest rate in line with the commercial banks wholesaling to the MFIs. Government control in this regard defeats the organizational goal and objectives. 34. MFIs should be oriented on viability and sustainability from the very outset. They must work as a business organization. Microfinance programs should not get mixed up with charity or subsidized programs. 35. An MFI can attain financial viability servicing a large number of the poor households including the poorest of the poor. In Nepal, some MFIs, such as Nirdhan Utthan Bank Ltd, and Swablamban Bikas Bank and Nepal Rural Development Society Centre have been providing services only to the poor without collateral and have been able to attain operational self-sufficiency. They are likely to reach financial self-sufficiency in next two or three years. 9

36. Good governance and professional management are essential for sustainability of MFIs. The success of an MFI largely depends upon the Board governance and top management, which create and maintain appropriate organizational culture and system in the organization. In Nepal, some resourceful MFIs have poor operational and financial performance mainly because of poor governance and lack of professionalism in top management. 37. An MFI should charge cost-recovery interest rate on its loan to clients. Slightly higher interest rate is not a problem to the clients as the rate of return from micro-enterprises is very high. Clients' need is easy access to credit on time. Failure to charge appropriate interest rate leads MFIs to dead loss and collapse ultimately. 38. Loan recovery rate is nearly 100% in microfinance program. The poor can use credit profitably and repay loan on time, if the loan products and procedures are comfortable to them. And the clients repay their loan installments on time. Recovery rate of RMDC's partner organizations is near 100%. 39. Credit delivery through women members of the poor household is more effective. Relatively, women clients are sincere and serious on loan utilization and repayment. With microcredit, the women are becoming more active in economic activities. Besides, women are getting empowered socially and economically and have enhanced status in the family and community. 40. Sound security arrangement is a must for successful implementation of a microfinance program. The present conflict and insurgency in Nepal has tremendously affected the expansion of the microfinance programs in Nepal. At present, MFIs have to live and work under constant fear and pressure. They are always worried on how to maintain and continue their existing program. PROBLEMS AND CHALLENGES Unfavorable Policy Environment 41. Microfinance has still not been understood in right perspective particularly its strong power to play an instrumental role in poverty reduction by the politicians and policy makers in the country. Due to this microfinance has not still got an important place in national development plans although poverty reduction is the top most agenda in the last ninth and present tenth national development plans of the country. There is no national vision, policy and specific strategies for promotion and development of microfinance industry in the country. The politicians and top government officials are not found seriously concerned on the accessibility of credit to the poor masses, and the sustainability and quality of the 10

services of the MFIs serving them, rather they always spoke of subsidized credit only. They often compare the interest rate of MFIs providing doorstep services to the poor with never accessible cumbersome credit of the traditional banks. The development roles of private microfinance development banks and other microfinance institutions have not been well recognized. This has discouraged them to focus on microfinance as it incurs a lot of costs and takes relatively longer time to reach financial viability. Besides, putting credit components in all kinds of development projects and NGOs activities also have created disturbances for professional microfinance organizations in the country Poor Governance and Management of GBBs 42. The major microfinance programs in Nepal, the five regional GBBS mainly owned by the government and the central bank have been suffering from poor governance and management which in turn resulted in low performance and depleting financial position in the banks. The banks may take longer period to have commercial culture and professional management if required efforts are not taken immediately from the concerned. It would be a disaster if the GBBs are not rehabilitated soon, as they have already reached a large number of poor families. However, the concerned parties have not shown adequate seriousness in bringing them to track. Fragile Security Situation 43. All development programs including microfinance programs all over the country have been severely affected from the on-going Maoist insurgency problem. The Maoists have been threatening the local administrations and development institutions (particularly the NGOs, cooperatives, banks, etc) not to continue their development activities, and are forcing the local people to refrain from participating in their activities and initiatives. The Maoists have also been kidnapping and killing local politicians, teachers and government officials. This has created terror among the people. Most rural people have also left their villages and staying temporarily in the district headquarters. In the remote hill districts, most working people have left the villages for fear of taking them away by the Maoists. At this situation, the field staffs of MFIs are also scared and demoralized. 44. Microfinance institutions, particularly the Grameen Bank replicators, Small Farmers Development Program offices and rural cooperatives have been severely attacked by the rebels. The Maoists as well as other anti-social elements have been looting the MFI staff carrying money collected from regular center meetings to their branch offices. Besides, they have threatened their staff not to collect repayments from the members and to stop extending their services. As a result, regular center meetings and financial transactions with clients have been disturbed, and repayment problems have come up in some areas. The branches of the two largest commercial banks in different rural areas have been closed or moved away as the result of attack or looting by the insurgents. This has caused tremendous difficulties to the rural people and institutions operating therein. 11

Weak Institutional Capacity of Microfinance Institutions 45. Although there is a large number of NGOs and cooperatives, only few of them could be termed as MFIs. Besides, the so-called MFIs have very limited institutional capacity and experience in microfinance operation. Most of them are not using standard practices of microfinance, and are operating as amateurs. Although they have mobilized substantial amount of financial resources under different projects, they have not paid attention to buildup own capital base. They lack professionalism in their operations. A lot of efforts are required to be made to enable them to undertake microfinance services as a business. Developing new institutions is a time taking process; it generally takes 2-3 years to bring them to an acceptable level. Hence, RMDC's current focus has been on the institutional strengthening and capacity building of the new and potential MFIs. Inadequate Financial Infrastructure 46. Inadequate financial infrastructure is another major problem in the Region. Financial infrastructure includes legal system, information system, and regulatory and supervision system for financial institutions and markets. In general, the governments in the region have focused on creating special programs and institutions to disburse funds to the poor with little attention on building financial infrastructure, which supports, strengthens, and ensures the sustainability of such institutions or programs and promotes participation of private sector institutions in the microfinance sector. 47. For example, NGOs are found very appropriate in delivering micro-credit and mobilizing local resources for the poor in the rural areas. But, their operations are largely limited because of inappropriate legal instruments. They are not allowed to take public deposits, which could be major source of funds for on-lending to the poor. The governments or central banks neither could undertake regular supervision of the NGOs and enforce performance standards, nor do they like to transfer these authorities to appropriate institutions, such as wholesale organizations. CONCLUSION 48. There is a large proportion of the poor deprived of institutional micro-credit all over the developing region. Since micro-credit is a powerful instrument for poverty alleviation, it should reach to the large mass of population efficiently and effectively in order to attain the goal of the Microcredit Summit Campaign and reduce the incidence of poverty in the region and around the world. Experiences show that creation of an autonomous and professional wholesale funds in a country could solve the problem to a large extent. A wholesale fund is a cost-effective way of reaching the poor with micro-credit funds. It is an effective institutional option to fund start-up micro-credit programs and to streamline the scattered microfinance programs within a poor/poorest friendly regulatory framework. It can develop sustainable pro-poor retail microfinance institutions to a large number, and facilitates the 12

governments in developing conducive legal and policy environment in a country. Thus, creating a good wholesale funds can contribute to the development of sustainable microfinance industry serving the large segment of poor population which in turn would reduce level of poverty to a large extent in the country. 49. The problems and challenges enumerated above are not insurmountable. These can be addressed by an effort based on perspective vision, proper planning and implementation and an effective monitoring and evaluation system. The successful countries in the development of microfinance industry are those that have successfully tackled those challenges and problems. Microfinance industry hence still holds prospects for all those countries that are determined and dedicated to alleviate poverty, and the need is to exploit those prospects for the betterment of those large population living below the poverty line, with assistance from the international community. 13