Financial inclusion: Must for Inclusive growth

The central bank‚ considering that financial literacy is an important adjunct for promoting financial inclusion‚ consumer protection and ultimately financial stability‚ has to adopt an integrated approach wherein efforts towards financial inclusion and financial literacy would go hand in hand.

DR. SHIV RAM PD. KOIRALA
The post liberalization period of Nepal has witnessed growth and expansion of the financial sector mainly a burgeoning growth of Banks and Financial institutions (BFIs) in the country. As of mid-July 2013, the number of BFIs registered with the Nepal Rastra Bank (NRB) except NGOs and cooperatives stood at 207 with the branch network of 3,138, covering per branch population of 8,443 on an average. Looking at the deepening indicators, the share of total deposits and credits of the banking system to Gross Domestic Product (GDP) reached 73.90 and 57.55 per cent respectively, along with the ratio of total assets and liabilities to GDP 95.27 per cent.

However, the geographical distribution of bank branches is surprisingly asymmetrical. Over concentration of bank branches in the central development region especially in the Kathmandu valley (687 branches) indicates access to financial services in favor of the capital city.

A report published by the central bank has depicted that Kathmandu valley dominates more than 60 per cent of the total business of the financial institutions. The population per branch in Kathmandu valley counts 3,664 while amazingly, it is around 67.5 thousand in Bajura followed by over 65 thousand in Bajhang. Even Terai districts of Mahottari and Rautahat have a per branch population of more than 21 thousand. Besides, 50.6 per cent and 22.3 per cent of the adults living in urban and rural areas respectively have a bank account, the Nepal Living Standard Survey (NLSS III) report mentions. It further mentions that only 20 per cent of households receive loans from formal financial institutions and 13.8 per cent from cooperatives, NGOs etc. Thus, around 66 per cent of all Nepalis still depend on costly and less reliable mechanisms such as borrowing from relatives or local money lenders or by selling hard gained assets. It is, thus, enough to infer that financial services are particularly difficult for people living in the remote hills and mountains and interior parts of the Terai as well.

The minimal or absence of BFIs other than state owned commercial banks in a few remote districts of Nepal is a big concern for financial access and inclusion. Bringing this largely ignored ‘missing market’ into the formal financial system would undoubtedly enrich and strengthen the national economy. Acknowledging that poverty is becoming concentrated continuously in the inner Terai, hills and mountains, and poverty alleviation and access to finance go hand in hand, all out effort should be made towards extension of formal financial services at an affordable cost to unbanked people across the country. If the financial services had been geared towards inclusiveness, the number of poor today could have been even lower.

Pro-poor growth is only possible when economic growth is made more inclusive. In fact, the question about how economic growth has been distributed among the people is far more important than how much growth has been achieved. According to the NLSS III report, the poorest 10 per cent of the total population accounts for less than 2 per cent whereas the richest 10 per cent accounts for 40 per cent of the total income. This obviously indicates that growth is inequitable and, therefore, the gap between the rich and poor has been widening. Policy makers need to intervene to tackle the widening gap between the rich and poor and bring policies to improve the lives of those in the bottom line so that peace, harmony, stability and prosperity for all will prevail in the society.

The BFIs possesses a tremendous potential to act as agents of change and ensure redistribution of wealth in the society. Hence, access to finance for all through formal financial institutions is a must for inclusive and equitable growth. The BFIs in Nepal have to pursue financial inclusion as a commercial activity and not to view it as social service. The self-sustainability and commercial viability of the financial inclusion initiatives are important if BFIs have to scale up their operations to cover more unbanked areas. There is a need for banks to develop new products and design new delivery models that are customized to the unique needs of the financially excluded population, both in the rural as well as the urban areas.

Banks themselves have also to prepare and implement financial inclusion plan in order to penetrate new market segments instead of unfairly competing in a limited urban market with the same conventional banking products.

The central bank, considering that financial literacy is an important adjunct for promoting financial inclusion, consumer protection and ultimately financial stability, has to adopt an integrated approach wherein efforts towards financial inclusion and financial literacy would go hand in hand. Additionally, it has to play a supportive role in financial inclusion by creating a conducive regulatory environment and providing institutional support to banks in their financial inclusion efforts. Besides, the government has to develop a time-bound national strategy to provide access to finance for all which could be instrumental to inclusive growth.

source:  KOIRALA,DR. SHIV RAM PD.(2014),"Financial inclusion: Must for Inclusive growth", The Himalayan Times,7 July 2014
photo/art: The Himalayan Times
Koirala is Division Chief, Agricultural Development Bank Ltd.
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