UNDERSTANDING FINANCIAL ECOSYSTEM AND MICROFINANCE MODULE 1: LESSON ONE UNDERSTANDING FINANCIAL ECOSYSTEM AND MICROFINANCE

NEPALESE FINANCIAL SYSTEM Structure of Nepalese Financial System Banks and Financial Institutions Commercial Banks Development Banks Finance Companies Microfinance Development Banks Insurance Sector Life insurance Non-life Insurance Capital Market Nepal Stock Exchange Company Listed Companies Brokers Non-bank Financial Institutions Employment Provident Fund Citizen Investment Trust Cooperatives Sector Cooperatives with Limited License Savings and Credit Cooperatives Multipurpose Cooperatives Agricultural Cooperatives Dairy Cooperatives Non Government Sector Financial Intermediary NGOs NGOs engaged in savings and credit scheme

NEPALESE BANKING AND FINANCIAL INSTITUTIONS: OVERVIEW

PRINCIPLES OF MICROFINANCE Details 1 The poor need a variety of financial services, not just loans 2 Microfinance is a powerful instrument against poverty 3 Microfinance means building financial systems that serve the poor 4 Financial sustainability is necessary to reach significant numbers of poor people 5 Microfinance is about building permanent local financial institutions 6 Microcredit is not always the answer 7 Interest rate ceilings can damage poor people’s access to financial services 8 The government’s role is as an enabler, not as a direct provider of financial services 9 Donor subsidies should complement, not compete with private sector capital 10 The lack of institutional and human capacity is the key constraint 11 The importance of financial and outreach transparency

CHALLENGES TO COMMERCIALIZATION OF MICROFINANCE Inappropriate donor subsidies Poor regulation and supervision of deposit-taking MFIs Few MFIs that mobilize savings Limited management capacity in MFIs Institutional inefficiencies Need for more dissemination and adoption of rural, agricultural microfinance methodologies

TARGET MARKET ANALYSIS Direct Targeting Indirect Targeting

IDENTIFYING TARGET MARKET Characteristics of population group Type of microenterprise being financed

CHARACTERISTICS OF THE POPULATION GROUP Focusing on female clients The level of poverty Geographic focus Ethnicity, caste, and religion

TYPE OF MICROENTERPRISE BEING FINANCED Existing or start-up microenterprises Level of business development Type of business activity (Agriculture, production, services) Criteria (use of loan proceeds, loan term, amount of collateral available)

Transport & Processing REALITIES OF THE AGRICULTURE FINANCING Input Supplies Crop Farming Post-Harvest Transport & Processing Distribution & Export Retail & Marketing Pre-Harvest Finance Warehouse receipt collateral management Post - Harvest Working capital Trade finance

Commercial smallholders REALITIES OF THE AGRICULTURE FINANCING Corporate farms Commercial farmers Emerging farmers Commercial smallholders (cash crops) Subsistence farmers Traditionally bankable Relationship approach, lending and capex needs, cross sell trade, forex Retail/SME approach with "agriculture twist" lack of financials, need for benchmarking, technical assistance on agro & financial skills Traditionally Un-bankable Scheme based approach (eg out grower schemes), use coops for coordination and aggregation Via SACCOs, coops, saving based loan schemes, etc

USERS AND NON-USERS OF FINANCIAL SERVICES Individual / Household / Firm User of Financial Services Non-Users of Financial Services Voluntary Self-Exclusion No Need Cultural / Religious reasons not to use Involuntary Exclusion Insufficient income / high risk Discrimination Contractual / Informational Framework Price / Product Features

REASONS FOR FINANCIAL EXCLUSION Demand Side Low awareness: information issue, e.g. clients do not know what the financial market offers, Low understanding: financial literacy issue, e.g. clients do not know how to use a savings account, and Low utilization: attitude issue, e.g. consumers are afraid of debt Supply Side Environment and infrastructure: low market, weak economic environment, poor physical access Failure to meet clients needs: core product parameters issue, e.g. credit package does not meet the needs for advisory services, Failure to provide affordable access: price-cost issues, e.g. the current delivery model is too costly, Failure to give attractive access: actual/augmented product issues