Micro Financing through Cooperatives and Banks for Solar Home

Systems in Nepal

Minor Project Report

Submitted by:
Ranjana Sharma

In partial fulfillment for the

Degree of MBA (Infrastructure)

Submitted to:
Department of Policy Studies
TERI University
IHC, Lodhi Road, New Delhi-03
INDIA

August 2010

ACKNOWLEDGEMENTS
First of all I would like to thank Mr. Amit Kumar, Head- Northern Region of Tata Bp Solar India
Limited for granting me to write this dissertation on "Micro Financing through Cooperatives
and Banks for Solar Home Systems in Nepal". I would like to express my gratitude to my
supervisor Mr. Rajeev Seth, my Finance professor of Teri University for his guidance, valuable
suggestion comment and encouragement in completion of this entire dissertation. I am also
indebted to Mr. Binod Thapa, Director of Energy International Pvt. Ld, distributor of Tata Bp
Solar, Nepal for his help and support.

I would like to thank the employees of Alternative Energy Promotion Center(AEPC) Nepal for
kind cooperation and for providing me contact details of persons and providing literature for the
study and my thanks also goes to staff of Bank of Kathmandu and Clean Energy Bank for kind
cooperation in providing me with the basic data.

My gratitude goes to all my professors and my family members who inspired me to do MBA
and to choose this research topic. Specially, I would like to thank all respondents who co-
operated kindly and answered all my questions without hesitation during interview and
discussion. I must appreciate the kind help of all my colleagues during the preparation of this
dissertation.

Date: July 2010

Ranjana Sharma
MBA Infrastructure
TERI University

CONTENTS

Page

2
LETTER OF COMPLETION 1

ACKNOWLEDGEMENTS 2

CONTENTS 3

LIST OF TABLES 4

ABBREVIATIONS 5

CHAPTER ONE: INTRODUCTION 6

1.1 Background 1

1.2 Statement of the problem

1.3 Objectives of the Study

1.4 Significance of the Study

1.5 Theoretical Framework

1.6 Organization of the Study

CHAPTER TWO: REVEIW OF LITERATURE

2.1 Theoretical Review

2.2 Nepal Micro finance: A glimpse

CHAPTER THREE: RESEARCH METHODS

3.1

3.2

3.3 Limitation of Study

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS

CHAPTER ONE

INTRODUCTION

3
1.1 Background of the study
Poor people must have access to modern energy services if global poverty and inequality are to
be reduced. By itself, energy is of little interest to most people. Instead, it is the services that
energy provides that are central to practically all aspects of people’s lives, such as access to
water, agricultural productivity, health care, education, job creation, gender equality, and
environmental sustainability.

Access to energy services can truly transform peoples’ lives in a way that cuts across all
development issues. For example, it would not be possible to supply safe water without energy
for pumping or clean fuels for boiling/treating water. Issues of gender equity cannot be resolved
if young girls are unable to attend school because they have to collect scarce fuel wood for
family subsistence. The provision of health care services should be coupled with modern lighting
to enable a safe and clean work environment and refrigeration to preserve vaccines. Furthermore,
productive and income-generating activities are enabled as a result of access to energy services.
For example, farmers can better irrigate arable land that generates saleable crops or shopkeepers
can serve cold drinks and stay open later. Entrepreneurs can earn extra income charging mobile
telephone batteries, and fishermen can get their products to market through access to
refrigeration.

In the twenty first century, energy is life; energy is the basic need for the people, society and
country. Per capita energy consumption reflects the advancement of any country, quality of
living, and as Millennium Development Goal (MDG) put forward by UN is development
milestones for every developing country to be met by 2015. Every one of the six goals requires
the usage of energy to meet the goals:

Halving extreme poverty: energy for income generation

Halving the number of people living with hunger: energy for agriculture and food processing and
irrigation

Achieving universal education: energy for lighting, communication and internet

Promoting gender equality: reduce burden of firewood collection and cooking time and indoor
pollution, opportunities for education

Reducing mortality/improving health: reduce indoor pollution, vaccinations using refrigerators

Ensuring environment sustainability: reduction in the

MDG 2015
firewood, reduce production of greenhouse gases.
Halving extreme poverty.
People living in poverty, like everyone else, need a
diverse range of financial instruments to run their Halving the number of people living with
hunger.
businesses, build assets, stabilize consumption, and shield
themselves against crises. Microfinance offers many of Achieving universal education.
the financial services needed by the poor—working
Promoting gender equality.

4 Reducing mortality/improving health.

Ensuring environment sustainability.

capital loans, consumer credit, savings, deposit facilities money transfer services, pensions, and
insurance. By reducing vulnerability and increasing earnings and savings, financial services
allow poor households to make the transformation from every-day survival to planning for the
future.

Access to modern energy services can be greatly enhanced if people also have access to
microfinance loans to pay for these services. Over the last 20 years, microfinance has played an
important role in enhancing the economic opportunities available to poor people, but the
experience to date with loans for energy services and products is limited. On the energy side,
especially for people living in rural areas, energy services may not be available because energy
companies do not typically view them as a strong, viable market for their products and rarely
offer company-provided financing options. Microfinance institutions, however, can expand
access to energy for poor clients by offering credit and/or loans for energy products and by
partnering with local energy companies to help them branch out into new markets that include
poor and rural people. As linkages are built between the microfinance and energy sectors,
financial institutions may be more willing and able to channel capital into loans for energy
services.

Access to modern energy services provides a multitude of health, environmental, educational,

and gender-equality benefits, but when utilized productively, energy services offer new options
for diversifying and increasing incomes—an urgent need throughout developing countries.
Investment in modern energy systems by clients of MFIs and by energy companies can become
more attractive if these investments are coupled with increased economic productivity. MFIs
adding energy lending to the portfolio can result in more customers for the energy enterprises
and the creation of energy entrepreneurs—resulting in improved productivity and quality-of-life.

1.2 Statement of the Problem

Nepal is one of the poorest countries in the world where more than 30.9% of the rural population
in the country lives below the poverty line (ADB fact sheet, 2004). The income inequality in
Nepal is highest in South Asia. The difficult terrain, lack of awareness, political conflict and
poverty are the major reasons that rural communities could not change its status. The
infrastructures like road, electricity, communications and health facilities are basic requirement
for development of any societies but rural societies are deprived of all the facilities. There are
more women than men living in poverty and they have difficult time compared to men due to
their socio-cultural roles. They spent more hours in colleting fuel wood and doing other
unproductive works. This limits their ability to engage in productive and income generating
activities. Poor health conditions, lack of awareness, work burden are the problems that most
women face. Diverse topography and lack of access to financial services has been one of the
major obstacles to accelerate the socio-economic strata of disadvantaged community people
living in remote and inaccessible areas of Nepal. The difficult topology and the inequality in
income have left poor and ultra poor especially living in rural and remote areas lagging behind
and feeling excluded from the development mainstream.

Nepal with population of 26.43 million (CIA World fact sheet report) consists of 4,253,220 no of
HHs with 84/16 rural/ urban population distribution ratio (AEPC International workshop, 2008).

5
With more (approx. 44 %) population residing in rural areas and lacking in access to any other
sources of energy fuel wood supplies almost 80 percent of total energy demand whereas,
electricity supplies only one percent of total energy consumption. Hence in rural Nepal mostly
household times are consumed in daily chores like cooking and collection fire wood in daylight
and as there is no source of light after sunset they are unable to do any productive work after
sunset which means in 24hours a day only 10 to 12 hrs they can work or do any productive work
like studying, sewing etc and for social and economic development of a country adequate and
consistent availability of usable energy sources is one of the prerequisites. The notion of
providing energy even to meet basic needs has been a big challenge mainly because of poor
infrastructure development and lack of fund for investment in the generation and management of
energy sources. Even after four decades of “modern” periodic planning, the country still suffers
from the dogma of inefficient use of energy sources. The un-electrified rural households in Nepal
need basic source of light and the expansion of central grid is very costly due to remoteness and
difficult terrain, the investment cost on modern forms of technologies (renewable) is very
expensive which the poor community cannot afford. Even the energy facility and consumption
gap between urban and rural community is very high. The rural community has to pay the cost
before they get the access to the technologies where as urban pay the cost after getting the
facilities and the best way to provide them the lighting facility is via SHS. It is estimated that
more than 60% of the total population are still deprived of access to reliable electricity and spend
their life under darkness. The high costs associated with connectivity via micro-hydro projects or
even the national-grid; make it more feasible for a stand-alone Solar Home System (SHS) which
can be installed at the will of the household as against the will of the whole community needing
electricity and the worst case solar energy availability is between 3-5 kWh/m2/day in Nepal. The
huge potential of solar energy is also illustrated in WECS (1984).

Lack of adequate financial facility in rural areas is a major cause of low socio economic status
and unelectrified rural households. Only 26 percent of Nepalese households have a bank account,
and banks’ procedures are perceived as being the most cumbersome among financial institutions.
Accordingly, clients prefer not to save in them. Banks dominated in urban areas and among the
wealthiest.

Financial NGOs and cooperatives run a close second as largest provider of deposit accounts,
serving 18 percent of households. These institutions are the preferred provider for low-income
households, but are close to banks even for wealthier households. Microfinance and regional
rural development banks are a distant third provider of deposit accounts, serving only 4 percent
of households— mainly poor, rural ones. About 38 percent of Nepalese households have an
outstanding loan exclusively from the informal sector, 16 percent from both the informal and
formal sector, and 15 percent from only the formal sector (that is, a bank, finance company,
financial NGO or cooperative, or microfinance or rural regional development bank). Family and
friends are by far the largest informal providers of loans to households—and, contrary to
common belief, family and friends often charge interest. Most households who borrow from
informal providers do not bother trying to borrow from financial institutions, mainly because
formal institutions cannot meet their financial needs on time.

Microfinance and regional rural development banks are the third largest providers, serving
mainly in rural areas and in the Terai. Finance companies are the least preferred formal lenders,
and operate mainly in the Kathmandu valley.

6
In sum, both supply and demand indicators show that, formal financial institutions do not serve
the needs of most of the Nepalese population. And while access to and use of formal financial
services are limited in general, the problem is more acute for energy sector and low-income
households. Indeed, both access and use are closely correlated with loan size and household
income.

1.3 Objectives

The basic objective of this study is to find the ability as well as readiness of the banks & micro
financing institutions who invest in SHS energy program in accordance with the policy of the
GoN for micro financing in relation to solar energy technology.

1.4 Significance of the Study

The significance of the study can be listed as below:

a) This topic is one of the major burning issues on the field of energy and micro financing as
well as new area for the research.

b) There is no other previous detail and specific study on situation analysis of FIs in
investments in energy sector in particular SHS in relevant to Nepal.

c) This study provides the investments in energy sector by banks and cooperatives in SHS.

d) This study identifies the number of banks and cooperatives investing in SHS at present

e) This study will be helpful to students, researchers, planners, policy makers and so forth as
well other people who are interested in MFIs of SHS.

1.5 Theoretical framework

The variable of primary interest in this research/ study is the dependent variable of prevalence of
poverty in rural Nepal. Other independent variables are used in an attempt to explain the
variance in prevalence of poverty. These variables are financial situation and energy.

The literature review has indicated that lack of finances and energy are major reasons of poverty.
Lack of finances has an influence on use of energy and that are major cause of prevalence
poverty. Both finances and energy have a negative correlation with poverty. With good financial
situation use of energy or access to energy increases so the level of poverty decreases.

1.6 Organization of Study

The study has been carried out in five chapters. Chapter First deals with introduction with
general background, statement of problem, objective of the study, conceptual frame work and
organization of the study. Followed by chapter second with literature review, third research
methods fourth observation and analysis. The final chapter five includes summary, conclusion
and recommendations.

7
 CHAPTER TWO

REVIEW OF LITERATURE

2.1 Theoretical Review

MICRO LOANS ARE OF key importance in alleviating poverty. Prof. Yunus realized this with
his work in Bangladesh and set up the Grameen banking system. In the search of practical
measure to alleviate poverty, the microfinance movement offers a set of powerful tools for social
and economic development. Whether in terms of addressing problem of malnutrition and disease,
flight from rural to urban areas in the search of work, environmental degradation or the

8
breakdown of families and communities, programs that provide small scale loans and economic
training to resource- poor people are one of the brightest spots in the new development paradigm
(Yunus 1980). The underlying success of microfinance programs stems, in part, from the fact
that the principles are based not only on sound economics but also the practical application of
spiritual principles. The sounding principles of the movement is a belief in the inherent nobility
of humankind-of the integrity innate capacities and commitment of the resource-poor to work
hard , take responsibility for their own lives , and repay credit. From those principles and from
other essentially spiritual values like trust and self-reliance, the methodologies of successful
microfinance programs worldwide have emerged (Lidgerwood 1998).

2.2 Nepal Micro finance: A glimpse

Microfinance Institutions in Nepal working as Non Government Financial Intermediary

Organizations (FINGOs) registered under Society Registration Act 2034 and licensed under
Financial Intermediary Act 2055. FINGOs are working in 38 districts with coverage of 63% hill
districts and 36% Tarai districts.

Microfinance service providing organizations mainly target excluded (dalit, janajati) and low
income level people especially women living with hard economic conditions. These institutions
have been playing significant roles to reduce social and economic poverty in rural and urban
areas. Microfinance sector in Nepal is seen as a joint effort of Government and private sectors
implementing various financial programs including Grammen replications, savings and credit
cooperative activities, number of informal credit groups promoted through different donor
supported programs, such as Poverty Alleviation Programs and the other activities supported by
different donors and INGOs.

After the decade of 1990s, the dawn of economic liberalization is started in Nepal where the
institutions involved in community based financial activities were started to give legal
recognition and licensed by Nepal Rastra Bank (NRB) so as to create conducive policy support
environment to formalize the micro financing services. As a result, there are 45 institutions
currently in operation to serve poor community people for the microfinance services. But the
number of such institutions has not been increased due to restriction on licensing to additional
FINGOs; whereas over the last decade, new commercial, development banks, and financial
institutions are emerged as mushroom in the streets of major cities in Nepal receiving license
from Nepal Rastra Bank.

The existing microfinance institutions however are serving the poor and destitute in a restricted
environment and capacity, covering about 375,000 poor women members, generating more than
NRs. 1 billion local saving, utilizing about NRs. 2 billion bank loans, and having NRs. 2.75
billion outstanding credit. These institutions have been facing various challenges to fulfill the
objective to reach poor households with service related to microfinance services.

In Nepal, Government policy came vividly to fight against poverty after the restoration of
democracy. Realizing to uplift the poor family's socio-economic status Microfinance Banks,
institutions & cooperatives are opened. It was Nepal Rastra Bank (NRB) initiated and led to
setup Microfinance Banks regionally with the share capital of Govt , NRB & commercial Banks

9
as Grameeen bikas banks & directed & systemized to commercial Banks to provide deprived
sector loan three percent of their transaction I,e, loan to microfinance banks & institutions in
simple interest rather than other business loan. And then many Mf Banks & institutions came
into exist. Again the direction of deprived sector loan is 2 percent to Dev Banks & 1.5 to finance
companies. Apart from this NRB provides a little loan to MF Banks & institutions from RSRF.
Thus mf banks operated in rural area providing micro credit & saving mobilization, informal
education, first aid health services training on skill development.

With the pace and expansion of microfinance in the villages & rural areas the program gain
popularity because of office stationed in village, contact to the poor family, select women in the
group member, access of micro credit without collateral & other development activities.
Agriculture, livestock development, small irrigation, products marketing, & renewal energy are
the main products in credit component as well as saving mobilization of the members and group
center's meetings informal education which learned to plan their activities.

In the 1990s the government also created the Rural Self-Reliance Fund the independently
managed Rural Microfinance Development Center, which lends funds to financial NGOs and
financial cooperatives; and the Small Farmers Development Bank, which lends to Small Farmers
Cooperatives (those created by the Agricultural Development Bank’s Small Farmers
Development Program. All three of these are apex microfinance institutions—that is, they
receive funds from different sources at subsidized rates and lend them to retail microfinance
institutions. But in Nepal the apex institutions do not pass on the subsidies to the final borrowers.
Micro financing is not development aid but self-help assistance and microfinance institutions
benefit from providing micro credits. As per studies carried out by the United Nations (UN) 4
billion people who live on less than 1,400 USD a year, only 40% (World Bank development
indicator, 2008) have access to basic financial services and microfinance is one promising way to
bridge this gap.

CHAPTER THREE

RESEARCH METHODS

3.1 Methodology

In order to accomplish the set objectives mainly secondary source of data is used. Reports of
GoN, AEPC, Banks and case studies etc of few cooperatives are the source of secondary data.
Some information has been collected from primary source as well. Primary source includes
discussion and interview with AEPC, Banks (3), SHS distributors and RMDC employees.

10
However, social and financial performance of cooperatives and banks for lending loan to SHS as
presented in the findings is entirely based on the study report of AEPC/ESAP, Banks and
RMDC. Telephonic Interview method of primary source is used as cooperatives are located in
very remote area and it is not possible to reach due to lack of time and resources.

3.2 Limitation of the study Area

During the study, the researcher found that there are three cooperatives that have invested in SHS
through banks and are located in very remote area of Nepal which makes it difficult to reach
them physically and only three banks are at present who have invested in SHS. So collection of
primary source of information is limited to three banks in Kathmandu only.

CHAPTER FOUR

OBSERVATION AND ANALYSIS

4.1 Energy consumption pattern

Nepal’s Energy Consumption Pattern 2007/08 by Fuel Type

11
Nepal’s Energy Consumption Pattern 2007/08 by Sector

4.2 Solar Energy need and potential

Nepal has immense potential to enhance rural livelihoods with all RETs - biogas, solar home
systems improved cook stoves, mini hydro etc and have very diverse and difficult topography
where grid connection is very costly and time consuming, so Nepal is dependent on stand-alone
technologies like solar home systems and biogas for energy and lighting. RETs are capital
intensive products which rural communities generally can’t pay upfront.

Because of the relatively high average available solar energy in Nepal (about 5.5-6 kWh/m2/ day
(Zahnd et al. 2005)) small and simple solar home systems (SHS) can be a viable alternative
where no grid extensions are planned in the near future. Given the financial and educational
situation of these areas, low-cost, low-maintenance and easy operation are the main requirements
of such a system design. The typical one-home system consists of a 10-50 watt peak power solar
PV module, 1-5 high-efficiency DC lamps, a charge-controller and a battery bank. Depending on
the social/geographical aspects of the given village, these solar home systems can supply single
homes or can be set up to power a cluster of them (Zahnd et al., 2009).

4.3 MF Activities in SHS

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Energy Sector Assistance Program (ESAP) is one of many programs under the auspices of
Alternative Energy Promotion Center (AEPC), the Nepal Government’s executing agency to
reduce poverty and to provide opportunity to rural poor households with electricity. ESAP
promotes Micro-Hydro Projects, Solar Home Systems (SHS) and Bio-mass Energy with the help
of subsidy and micro financing to build capacity and increase awareness among poor. SHS is
one of such technologies for which there is provision of subsidy between 30% and 50%,
depending upon the size of the system and the geographical location of the user.

Winrock is another organization which has been working with rural poor households, the
government, micro finance institutions (MFIs), energy companies, commercial/development
banks to develop market mechanisms for the mutual benefit of all stakeholders. Through
USAID’s Microfinance Capacity Building Program, Winrock catalyzed construction of more
than 2,000 solar PV systems from 2003 to 2006.With the support from AEPC/ Energy Support
Assistance Program AEPC/ESAP, Winrock together with two implementing partners, National
Cooperative Federation of Nepal, and Sana Kisan Kendria Sangh has designed the Credit
Financing of Solar Home Systems project to increase access to SHS through micro financing.
Twenty one MFIs were selected from six pilot project districts. The pilot project has been
successful in creating awareness, and generating demand of about 5,500 SHS. About 1165 SHS
have already been installed against the target of 1000.

Studies show that the users spend about Rs. 300 per month to purchase other sources of energy
such as kerosene, fuel-wood, battery, candle, etc. The time and hassles involved in buying the
other sources far outweigh the high initial costs associated with buying a SHS. Therefore, a
piloting, namely “Credit Financing SHS – 2065” was launched in order to search for a viable
model which will enhance rural peoples’ access to credit for purchasing the system.

The implementation of solar home system through local MFI has been started from 2009 in order
to bridge the fund gap for upfront investment. Considering the inability of poor community to
purchase the system, providing the access to isolated society and replace the kerosene,
involvement of local MF institutions has been introduced by AEPC/ESAP.

AEPC/ESAP supports in capacity building of banks and banks provides loan to their respective
local financing institutions. The private companies supplies the technologies, they ensure quality,
and provides after sales service, whereas bank support for loan to the users. There is mutual
understanding between company and local financiers so that there is cooperation in between for
lending the loan and supply of technologies. It is also compulsory that every user should be the
member of local financier.

Till June 2010 twenty one MFIs have approved a loan of Rs. 8.5 million to over 2400
Households in six districts. The banks have already disbursed a loan of Rs. 6 million. All
partners have been repaying their installments on time.

The project has been renewed for accommodating eight more districts, namely: Kalikot,
Achham, Doti, Surkhet, Dhading, Makwanpur, Dadeldhura and Bajura parterining with seven
more banks and 23 MFIs.

4.3.1 Subsidy policy of GoN for SHS

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Subsidy provided to households for installing SHS of 10-18 Wp, and more than 18 Wp from now
onward as mentioned in following areas:

Geographical region 10-18 Wp (NPR) More than 18 Wp

(NPR)
Karnali and adjoining districts* and very 7,000 10,000

remote VDCs# categorized A in other districts

Remote VDC# categorized B in other districts 6,000 8,000
Accessible VDCs 5,000 6,000
* Humla, Jumla, Kalikot, Dolpa, Mugu, Rolpa, Rukum, Jajarkot, Bajhang, Bajura, Achham,
Dailekh, Darchula

# The very remote and remote VDCs of the remote districts are as per Ministry of Local
Development (MoLD)/GoN notification in the Nepal Gazette. The category “A " comprises of
very remote VDCs, while category “B” represents remote VDCs.

In order to provide quick relief from kerosene tuki and jharo etc. in the rural areas a small solar
system based on White LED will be promoted. A subsidy of NPR 2,000 per system will be
provided to a SSHS consisting of at least 5Wp solar panel along with two sets of solar lamp.

Subsidy can be taken by Nepali citizens residing in area where no other means of electricity is
available. SHS must be installed by company or dealer authorized by GoN. Subsidy is given only
once to one Households.

HH benefitted by subsidy

District SHS installed with

subsidy (up to 30
sep’08)
Dhading 4113
Surkhet 2177
Makawanpur 3709
Total 9999

4.3.2 Present Procedure of micro financing

AEPC/ESAP supports in capacity building of banks and banks provides loan to their respective
local financing institutions. The private companies supplies the technologies, they ensure quality,
and provides after sales service, whereas bank support for loan to the users. There is mutual
understanding between company and local financiers so that there is cooperation in between for
lending the loan and supply of technologies. It is also compulsory that every user should be the
member of local financier.

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The following calculations show how a why SHS user will be paying the installment without any
additional financial burden:

Current expenditure on different sources of energy:

Amount in Rupees.

Source Price Consumption Total expenditure

Kerosene ~Rs. 80/ltr. 1 ltr. Per week Rs. 320.00

Battery ~Rs. 20 Per month Rs. 20.00

Total Rs. 340.00

Source: field visit

Amount in Rupees.

Capacity Price Subsidy Equity Average EMI (2 EMI (3

Loan years @ years
20% p.a.) @
20%
p.a.)
20watt Peak 20,000 5-10,000 1-3,000 7,000 356.27 260.15
Source: loan calculator (Annex 1)

If we compare the above two table, it can be clearly seen that a three year repayment plan with
an interest rate of 20% p.a. will be suitable for those users who are spending as much as Rs.340
Per month for different sources of energy. It is up to the users to decide whether they need a
20wP or a 10wP capacity for their use.

15
4.3.4 Area wise installation of SHS

Area 2000/0
Classification 1 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 Total

A(Very Remote
area) 89 807 1816 4139 6557 3158 3637 20753 14764 55720

B(Remote area) 138 496 745 931 2410 1875 963 246 260 8064

C(Acessible
area) 1916 10962 14791 6636 10074 2233 6247 17684 27439 97982
16176
Total 2143 12265 17352 11706 19041 7266 10847 38683 42463 6
Source : AEPC/ ESAP

4.3. 5 Table: 1 Category of Rural Finance Institutions

Category Institutions Licensing/Regulation

Formal Agricultural Development Bank Licensed and supervised by NRB

Limited

Small Farmers Development Bank

Grameen Bikash banks (regional

development banks)

Private commercial banks

District development banks

Private micro-credit development

banks

Finance companies

Savings and credit cooperatives

Microfinance NGOs (licensed

Semi Formal Microfinance NGOs (unlicensed) Registered under various acts such
as
Savings and credit cooperatives
the Cooperative Act (1992) and the

Societies Registration Act (1977)

Informal Money lenders, traders, families and None

relatives, self-help

16
 groups, etc.

NGO = nongovernment organization, NRB = Nepal Rastra Bank.

Source: Asian Development Bank.

Table 2 : Growth of Financial Institutions

Type of Institution 1980 1985 1990 1995 2000 2005 2006 2007 2008 2009

Commercial bank 2 3 5 10 13 17 18 20 25 26
Development bank 2 2 2 3 7 26 28 38 58 63
Finance company 21 45 60 70 74 78 77
Micro-credit development bank 4 7 11 11 12 12 15
Savings and credit cooperative 6 19 20 19 17 16 16
Microfinance NGO 7 47 47 47 46 45

Total 4 5 7 44 98 181 193 208 235 242

Note: Years refer to the fiscal year of the Government of Nepal, which ends on 15 July, e.g., 2009 begins on 16
July 2008 and ends on 15 July 2009.
NGO = nongovernment organization.
Source: Nepal Rastra Bank.

Table 3 : Formal and Semiformal Rural Finance Institutions

Category Type Number Numbers of loan provided by

institutions

Formal Commercial banks (including Agricultural 1 300,000

Development Bank Limited)

Development banks (district)

48 150,000

Micro-credit development banks (excluding

regional rural development banks) 7 104,000

Regional rural development banksb

(Licensed) Savings and credit cooperatives 5 170,000

(including Small Farmers Development

Bank)
16 160,000

(Licensed) Nongovernment organizations

47 39,000

Semi (Unlicensed) Savings and credit Over 2,300 .......

Formal cooperatives

(Unlicensed)Nongovernment organizations
Over 15,000 .......

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Informal Money lenders, traders, families and ....... .......
relatives, self-help

groups, etc.

… = not available.
a 2009 estimates.
b Under the Nepal Rastra Bank classification, regional rural development banks are part of micro-credit development
banks.
Source: Nepal Rastra Bank, Asian Development Bank estimates.

4.4 ROLE OF COMMERCIAL banks in microfinance- the current scenario

In most cases, microfinance and MFIs are supported by grant funding. In order to achieve scale
and viable business operations, need of capital infusion and funds / loans available in a larger
and more organized manner.

At present, commercial banks have been channelizing funds into microfinance to fulfill
mandatory requirement only. On the regulatory front, there is a requirement under “Deprived
Sector Loan” (DSL) which states that 3% of net bank credit would have to be directed towards
deprived sectors. Keeping in view the role played by MFIs in reaching the rural masses, NRB
(Central Bank) has allowed bank lending to MFIs to be clubbed under DSL. Since the penalty for
not reaching the DSL target by banks is stringent, banks offer debt funds at minimal and a very
competitive rate to MFIs.

At present, the funding available through three commercial banks for SHS source is
approximately NPR 30 million However, a huge gap still exists between the required and
available fund which can be filled in by a more proactive and sustained participation by
commercial banks.

4.5 ROLE OF cooperatives in SHS- the current scenario

At present twenty one cooperatives are selected by AEPC for funding in SHS in which only three
are in funding process of SHS and it's mainly due to lack of funding available to them.

SHS loan cycle figure:

4.6 Private Sector and the SHS Business

In 1991/92 first solar company was registered but after establishment of AEPC numbers of solar
companies have increased. As of 2010, there are 60 solar PV companies registered and operating
in the country, out of which 25 have been qualified to participate in dissemination of SHS under
ESAP until 2008/2009.In Nepal SHS have market driven approach and private sectors are
involved in construction, distribution, installation and technical support. Due to difficult
geographical locations to reach solar companies have made local shopkeepers and local people
as distributors and working through them. As per now there are 700 dealers and agents to market
the product, install and provide after sell service.
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Figure: SHS market cycle

4.7 Other Players in the Sector:

Besides AEPC, ESAP and the private sector companies, there are a number of other
organizations working in one way or other to support in dissemination of SHS in Nepal. Council
for Technical Education & Vocational Training (CTEVT), Royal Nepal Academy for Science &
Technology (RONAST), Nepal Bureau of Standards & Metrology (NBSM), Rural Area
Development Committee (RADC) and Centre for Energy Studies (CES/IoE) are the major
government or semi-government organizations having direct or indirect relation with the sector
and the program.
Local NGOs focusing on the PV sector are Centre for Renewable Energy (CRE), Himalayan
Light Foundation (HLF), Solar Electric Manufacturers’ Association Nepal (SEMAN) and Nepal
Solar Energy Society (NSES). Other programs or organizations like Rural Energy Development
Program (REDP), World Wildlife Fund (WWF), Kadoorie Agriculture Aid Association, Nepal
Trust, Eco Himal, Environmental Camp for Conservation Awareness (ECCA) and Hoshiyar
Sanskritik Pariwar are also involved in supporting SHS dissemination by integrating other
development programs they have been undertaking.
Finally, Agriculture Development Bank and Rastriya Banijya Bank are involved in providing
credit to users for purchase SHS.

4.8 Microfinance and its Sustainability

Achieving financial sustainability is crucial for microfinance institutions, as it not only assures
their existence but also guarantees financial services to the poor on an everlasting basis. A
microfinance institution requires covering its costs of funds and other forms of subsidies when
received at market prices to achieve financial sustainability. It is also important for an institution
to adopt recognized accounting practices of income recognition, portfolio analysis, losses and
expenses. For a long time, microfinance has existed in the realm of the informal sector and
achieving financial sustainability has been an uphill task. But as microfinance edges towards the
formal sector, financial sustainability can no longer be disregarded.

4.9 Microfinance Banks are moving ahead facing the problems as follows,

4.9.1 Resource (fund) constraint

According to the direction of NRB, Commercial banks, dev banks & finance companies has to
provide deprived sector loan 3 pc, 2 pc & 1.5 pc of their transaction to MFIS but credit on
micro hydro, hospital, youth for employment & small housing is countable in microfinance
which is almost half of the resource altered for MFIS from last year. MF Banks are expanding
areas in villages & unreached districts but resources are going to be limited. NRB &
Government should deeply initiate to the fact that 3 pc deprived sector loan must be available to
MFIS.

4.9.2 High interest on deprived loan

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 Micro finance program is one of the major tools of poverty alleviation, analyzing the fact NRB
set the deprive sector policy to provide resources for the MFIs. Every commercial Banks,
Development Bank and Financial companies has to provides 3, 2 and 1.5 percentage of their
transactions in low interest rate (3-5%) But now these Bank revised their deprive sector lending
rate (11-14%) which is the very higher rate for the MFIs. Due to high interest rate cost of funds
has increased that poverty alleviation program has directly affected and has been difficulties to
MF Banks to sustain. So NRB should take effective steps to reduce deprive sector lending rate
to strengthening of MF Banks so that these banks could reach further remote areas.

4.9.3 High tax rate

All financial institutions are divided in to four categories by NRB. MFIs are lies in category
"Gha" In these categories there is different types of rules for their establishment, maintain CRR
and other aspects. But the corporate tax is equal to other commercial banks.

The profit of MF Bank's is lower than other banks, in this profit Nepal Government charged 30-
% corporate tax which is maximum higher rate for MFIs. If Nepal government exempted
corporate tax for MFIs, the rebate amount of tax would be used to have expansion service on
poor family, institutional strengthening and capacity building of its staffs as well as client too.

4.9.4 Capacity building

Study, research & information are weak in micro finance banks. Without these progressive
phenomena banks are in difficulties to achieve the objective of poverty alleviation, the top
priority program of the Govt. That is why

Capacity building is one of the burning issues of MFIs to provide microfinance services to the
rural poor in long-term, micro finance institutions should be strong and sustainable. When MFIS
are being strong, they would be able to provide new products and services to the rural poor. For
that NRB, Nepal Government and other related agencies should be committed to enhance the
capacity building of Micro Finance Banks vertically & horizontally that is intuitional capacities,
staffs capacities and as well as client's skill development.

4.9.5 Public deposit

Bank & financial institution act 2oo6 has provision that Micro finance Banks can accept public
deposit with the approval of NRB. It has been essential that public deposit be opened to maintain
the fund scarcity. However NRB is positive. Now it is collected some deposit from the members
which is small amount & is to learn the banking transaction to the poor. In other South Asian
countries like Bangladesh have been permitted continuously & successfully activating public
deposit.

4.9.6 Voice not heard

Policy level has not heard the voice of micro finance. There are problems and prospects in this
program as development phenomena. Current problems and constraints in this program has been
presented to the Government for years but Government has not taken it seriously and studying
the trend and prospects. Big and Government owned bank's loan were written off more than 6

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billion at the rate of 30 thousand loan and interest and also the interest up to 100 thousand. It
affected to the micro finance banks directly but not a single pie and any sympathy were
prevailing to MFIs.

4.9.7 Sustainability and viability

Due to all the surroundings & policies microfinance banks are in cross-road. Tax is equal to
commercial bank, Interest on Deprived sector loan is increasing highly day to day, lack of
infrastructure, scattered houses reaching, motivation & service provide to poor in center/group
level (ward/block) is costly and atmosphere is not supporting to MF banks. Knowing the fact that
microfinance is the significant tool to reduce poverty micro finance development
Banks/institutions should sustain & viable that is why GOvt. & NRB should decide to exempt
tax and resource availability soon. So that poor family will understand that the policy level is
for poor.

4.9.10 Nepalese MFI should work very effectively and efficiently (Sharma 2003). Nepalese
MFIs are not being able to reach the poorest due to inability of proper identification of the poor
and lack of commitment and clear vision of their action. At present these institutions are
suffering from the problems such as inadequacy of resources, inappropriate regulations, and loss
of confidence of depositors, narrow level and area of operation, excessive overhead and
ineffectiveness of activities. In addition to these, peace and security situation of the country,
strategic planning, government policy environment, operational planning, financial viability and
sustainability, operation cost and interest rate, delinquency management, human resource
management, evaluation, monitoring and follow up system are equally challenging for the
coming days (Sharma 2003a). Nepalese microfinance institutions should need to enter in a new
paradigm of financial market and for their sustainability. In order to develop favorable
environment for microfinance institutions there are three major areas for improvement: develop
conducive policy environment, create suitable financial base and give proper attention for
institution development (Thapa 2001) Microfinance institutions need to adopt strategic
approaches in order to address these management challenges as supportive policy with one door
controlling and monitoring mechanism, effort to linkage formal and informal financial sectors
involved in micro-financing program and flexibility in financial management regulation.
Additionally, financial institutions themselves need to develop business planning practice and
efficient management of human resources within the institution. Expansion of financial services
in general does not necessarily enhance the outreach of the poorest of poor to institutional credit.
Nor commercial banks and finance and finance companies are the suitable institutions do deliver
rural credit. Microfinance programs are better suited for this. However, high cost of service
delivery and low rate of loan recovery, among other, have constrained microfinance programs
from being effective in uplifting the level of income and employment of the poor households
through the channel of credit and other services. Therefore, expanding microfinance programs
along with restructuring the whole financial system is essential so as to ensure financial system
to better serve the rural economy. In light of the need for most MFIs to reach financial
sustainability, consideration must be given to the tradeoff between minimizing costs and
focusing on the poorest clients (Wilson 2002). While serving the ultra -poor may indeed be
possible in a financially sustainable way, it is likely that the time frame to reach or grants based
on clients serving to reach financial self -sufficiency will be shorter for MFIs serving the
economically active poor. If the target market identified is the poorest of the poor, donors and
practitioners alike need to be committed to supporting the institution over a longer period.

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 CHAPTER FIVE

CONCLUSIONS AND RECOMMENDATIONS

5.1 Conclusions

There is immense demand and market for SHS in remote areas. However, the districts to be
chosen have to have financial intermediaries, such as cooperatives and MFIs.

There is also a need for involving more urban banks and cooperatives for implementing more
SHS projects, as it will enhance the possibility of building long-term partnership. The need for
having as many manageable partners as possible is also very urgent and imperative because of
multiple benefits that the sector can have. The field verification is also equally important as the
cooperatives in the first phase were found to be less credit-worthy during the visit later on than
they were found during the desk study of the documents.

Income generating activities, alongside promotion of credit for SHS market creation was also felt
necessary as it will ensure sufficient cash generation to repay the loan without fail. While
promoting IG activities, building capacity of the solar companies and financial institutions is
worthwhile for a long term partnership.

The emphasis is to be given on security of loan. Tools such as credit insurance, accidental
insurance, enforceable procedures for confiscation of financed solar panels in case of default and
involvement of local administrative body would be necessary in order to gain confidence of
urban financiers.

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Remoteness and un-electrified areas make it difficult. Therefore, field trip costs can be shared
among the stakeholders so that the timely monitoring, follow-up and inspection is carried out and
the status of the LMFIs and the repayment of loan can be ensured.

Only few LMFIs duly registered should be taken as a partner because the central bank recognizes
loans being disbursed in these LMFIs as loans in Deprived Sector. Moreover, it is more hassle
trying to form a group of individuals to disburse the loan.

Implementation at LMFIs is very difficult. The LMFIs don’t have basic infrastructure such as
computer, fax, or any means of communication. Some of them don’t even have regular supply
of electricity.

The education level of the board members has also to be considered at the time of selection.
Without the board members being educated enough to understand the benefit of a SHS, micro-
credit and free flow of funds (with a little bit of additional effort), the MFIs may not be all that
willing to venture into a new area.

The concern of the banks was such that the project would not be renewed, leaving them having
to do all the hard work of recovery, follow-up and monitoring.

Vendor financing, though it was thought to be the more appropriate model in rural areas before
implementation, was less effective. Solar companies did not want to wear the shoes of a
financing institution. Moreover, in providing credit to LMFIs, the companies needed more funds
from their banks. Additional funds were also needed for door-to-door sales. Banks, without firm
plan, commitment and perhaps, additional collateral from the solar companies did not wish to
enhance the limits already enjoyed by the companies.

The team devised tools such as the loan calculator, cash flow calculator, credit manual and
various training tools. The trainings covered aspects such as SHS and its technical components,
subsidy policy and services. Book-keeping, business planning, marketing, micro-financing,
governance, management information system, interest rate practices and regulatory frameworks
were the other topics covered by the whole training packages.

5.2 Recommendations

The following recommendations can be drawn to accelerate RET micro financing in Nepal.

• RETs are bankable loan products for MFIs and there is huge market for financing RETs
which not only improve the quality of life of the rural poor but also be a means for
income generation through their productive uses.

• Capacity building is essential to attract MFIs into this sector. Capacity building efforts
need to be done for MFIs as well as energy service providers so that they can
complement each other to increase both their businesses.
• Related government agencies and program for RET promotion should give special
attention towards increasing access of poor households in the RETs through facilitating
micro finance access.
• Provision of guarantee fund and similar mechanism would be useful to build the
confidence of commercial/development banks to provide wholesale loans to MFIs.

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5.3 Issues for the Further Research

Following may be the potential areas for further research:

• This study cannot cover all the issues and problems of cooperatives located in far remote
areas.
• This study is only limited to the current cooperatives and banks working in SHS sector.
Therefore, the study issues of those cooperatives who even being selected by ESAP
doesn't invest in SHS can be further discussed.
• After the implementation of 2nd phase of AEPC in SHS further study can be carried out
on monitoring and evaluation of such projects.

REFERENCES

Aurora Ferrari with Guillemette Jafrinn & Sabin Raj Shrestha,WB (2007), Access to
Financial Services to Nepal

RURAL FINANCE SECTOR ANALYSIS, (Nepal: Rural Finance Sector Development Cluster
Program [Subprogram 2])

Microfinance Summit, 2008 Resource papers

ADB Reports

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