Financial inclusion is making financial products accessible to every individual. Financial institutions, markets, and regulators play a significant role by bringing forward targeted marketing and products, incentivizing organizations to improve access, and disseminating factual financial information. However, much of the impact of financial inclusion efforts in Nepal is seen mostly in urban areas and has yet to extend to rural communities.

 The benefits of financial inclusion efforts center mostly in urban areas because banks and financial institutions profit more in these areas by maintaining financial literacy in urban communities through education activities generating revenue and the considerably fewer number of defaulted loans. The financial inclusion story of a rural community may not be as simple.


Financial inclusion in rural communities

Around 40% of Nepalese do not have access to financial services from commercial banks, development banks, or financial companies. Here is where locally stationed finance institutions can bridge this gap.

What rural communities of Nepal need are well designed financial products that can fill specific financial gaps of their livelihood – financial empowerment through small credit solutions. The chief concept for such a product was coined by Nobel Peace Prize Winner Muhammad Yunus in his Bangladesh-based Grameen Bank model, an inspiration that spread globally and eventually made its way to Nepal in the early 2000s. When Nepal’s previous initiatives to reduce poverty through financial inclusion fell short, a number of private microfinances and NGOs adopted the Grameen Model, through which micro-credits could be made to poverty-stricken individuals without any collateral against it. Soon after, financial institutions made themselves more and more accessible through microfinance institutions (MFI), financial intermediary NGOs, and saving and credit co-operatives.

MFI products like group savings, micro loans, and insurance have been tailored to meet specific livelihood demands of rural communities. Unlike major commercial banks of Nepal, MFIs specialize in collateral-free microloans, savings, insurance and remittance services. Additionally, they focus on providing ad hoc financial products to families who suffer economic shocks, to avoid any decline in their living standard.

Institutions such as Laxmi MFI provide agricultural loans for farmers to capitalize on seasonal farming opportunities, along with microenterprise loan, income-generating loan, and revival loans. Similarly, Nirdhan MFI specializes in savings opportunities for salaries, education fees, group funds and remittance services. Nepal currently has around 85 registered MFIs that have more than 4,200 branches.


The reason for their success

The reason why MFIs are so successful in reaching out to financially unaware communities in Nepal is because they specialize in maintaining one-on-one relationships with their members. MFIs may have more than a hundred branches at a time across the nation, with each branch focusing on a small number of members. Individuals are motivated to seek financial packages as groups on a monthly or fortnightly basis and interact with the assigned agent, who makes sure that all the members are paying their financial dues while being aware of any new product that the MFI offers. Overall, these MFIs re-establish the purpose of financial institutions: to strengthen and increase economic activities, spread financial literacy and reduce financial inaccessibility.


Addressing the fintech divide

With trailblazing digital transformation already taking place among commercial banks and their consumers, urban communities are already enjoying non-banking financial services such as utility payment services and digital wallet applications. MFIs, at their own pace, are in the middle of digitizing their entire system along with digitally empowering their members. UNCDF’s Unnati and UK Aid’s Sakchyam Access to Finance projects have aided various MFIs in this digital transformation journey. Through these projects, MFIs are adapting to digital documentation, contact-free approval, tablet banking and digital upgrade of the Core Banking System. Digital empowerment, however, is slowly being realized among a few MFIs in three main ways:

  1. Service digitization through self-developed payment portal.
  2. Strategic partnership with local e-wallet systems and their agents who assist in loading funds in their application to perform financial transactions.
  3. Partnership with payment portals specifically designed for MFIs.

These strategies enable MFIs to further digital literacy alongside financial literacy. Financial inclusion through one-on-one relationships with individuals allows them to be ready for any reluctance on digital transformation. They can adopt methods to assure specific behavioral changes that will eventually generate a digital demand among its members. UK Aid’s Sakchyam Access to Finance project has found that while members of Sahara Nepal MFI did not trust the digital capacity of Sahara to maintain financial transactional record and verification, consistant agent consultations and support resulted in more confident and happy members.


Possibilities in healthcare

MFI contributions are both essential and deep-rooted in Nepali communities and are one of the most important gateways for reaching out to low- and low-to-middle-income families. They have the potential to improve healthcare access to these communities through finance-backed healthcare products and incentives to save for health.

The problem with rural-based healthcare in Nepal lies not only in fulfilling the medical demands, but in creating the demand from scratch. Communities deprived of healthcare do not seek care until necessary or substitute it with unreliable solutions such as those provided by local witch doctors. High quality healthcare seekers migrate to urban cities, where costs of travel, lodging, food and loss of wage overpower the actual cost of public healthcare itself. All these factors force people to seek healthcare only when necessary, or worse, when it’s too late.

When MFIs establish person-to-person or person-to-community relationships, they succeed not only in motivating people towards financial inclusion but also in establishing trust that proves to be a solid foundation in which customers’ future financial decisions are rooted. MFI institutions are increasingly aware of the health financing gap present in rural communities and respond by offering a greater number of solutions. In the case of healthcare, however, the idea of integrating healthcare-based financial packages is widely supported, although still under consideration from both a policy and ground level.

With aid-based health models currently under experimentation, their long-term outcomes are yet to be evaluated. In the case of financial institutions, when there is an incentive to provide innovative financial products to eradicate insufficient living standards, chances are that this result will be permanent.



Anushruti Adhikari, Nepal Institute for Policy Research