The Nepalese rural sector, during the period of about a decade and a half, has witnessed tremendous growth in microfinance institutions (MFIs). The MFIs comprise Micro Credit Development Banks, Saving and Credit Cooperatives (SCCos), Financial Intermediary Non-Governmental Organization (FI-NGOs), Small Farmer Cooperatives and others, which offer a variety of microfinance products/services according to the need and demand of the microfinance market.

Despite the increasing number of MFIs, the majority of the rural poor who have little access to formal banking services are still deprived of institutional credit. Hence, they have little option other than to take loans at heavy interest from the local elite, traders and money lenders. The concentration of financial institutions in the plains, i.e., the Terai and urban areas in contrast with the high incidence of poverty in the hills and mountains has failed to mitigate poverty in the rural areas and narrow down the growing economic gap between the mountain and Terai/urban dwellers.

The Small Farmers Development Programme (SFDP), one of the pioneer poverty focused programmes initiated in 1975 by the then Agricultural Development Bank, Nepal (ADBN) had succeeded in extending microfinance credit to more than a million poor people in all the 75 districts by fiscal year 1995/096. However, the ADBN was forced to either merge or close some of its outlets, considering the financial viability and sustainability of the programme.

This programme, recognized nationally and internationally as the best model of participatory rural development, has been transformed into a cooperative model since 1993. Under this model, the institution named Small Farmer Cooperatives Ltd. (SFCL) is registered under the Cooperative Act of Nepal. It provides both financial and non-financial services to small and marginal farmer members. These SFCLs are presumed cost effective and vibrant MFIs for they are owned, managed and operated by the local poor with very low operating expenses.

As far as the outreach of all the MFIs operating in the country is concerned, they are estimated to cover hardly 3.7 million people which is less than 50 per cent of the potential microfinance clients (assuming that 31 per cent of the total population of 24.2 million lives below the poverty line and all these people need microfinance services). This obviously indicates that during the period of over three decades, the microfinance industry has not been able to make a big leap in terms of outreach expansion and delivery of microfinance services. The microfinance industry, therefore, needs a conducive environment to operate and grow so that it can expand its outreach services.

Alleviation of widespread poverty across the country has been a great challenge for the government, planners and policymakers. Despite development efforts since long, the increasing gap between the haves and have-nots has given rise to the alarming socio- economic scenario especially in the rural and far-flung areas. The population of over 7.5 million needs to be brought into the mainstream of development in order to ensure equity and justice for all the Nepalese people.

Microfinance services, of course, can be a boon for the rural destitute who are not considered eligible for credit by the formal banking system. Hence, poor, especially women, centered development is a must to properly address the deep-rooted poverty in Nepal. Against this backdrop, the role of microfinance institutions, as a poverty reduction and rural development tool, needs to be given due place while formulating financial sector development policies and strategies, as there is still a long way to go before microfinance is developed as a financially sustainable full-fledged industry.

All the MFIs, irrespective of their size and nature, need to function within a broader microfinance framework, which may contribute to the smooth functioning of the MFIs. If the government is committed to the UN Millennium Development Goals (MDGs), microfinance policy must be given its due recognition in the national development agenda. A roadmap to meet the goals by the year 2015 must be drawn jointly by the policymakers and the microfinance service providers.

In addition, considering the nominal presence of MFIs in the hill and mountain regions, where a large number of poor people reside, the government must start building the basic physical infrastructure on a priority basis. The investors must be encouraged to set up and operate MFIs even in the remote parts through incentives such as tax exemption and tax rebate for a few years after establishing an institution. A certain amount could be set aside annually from the government's treasury to create a fund for credit support and institutional strengthening of the MFIs, in general, and the MFIs of the remote areas, in particular, creating financial infrastructure for the growth and expansion of the microfinance industry.

The central bank of Nepal, as a major actor of financial sector development and as a guide, supervisor and regulator of financial institutions, must bring all the MFIs into a regulatory net through an umbrella act. The Nepal Rastra Bank's initiation to set up a separate regulatory authority (STRI) for the purpose of regulating the entire MFIs is, of course, commendable.

MFIs being a custodian of the public savings and deposits must adhere to the research-led concept of the "critical triangle of microfinance" - the need for any MFI to manage simultaneously the problems of outreach (reaching the poor in terms of number and depth of poverty), financial sustainability (meeting the operating and financial costs over the long term), and impact (having discernible effect upon the client's quality of life). Effective internal control system, good corporate governance, compliance of prevalent laws, adherence to prudential regulations, commercial orientation, motivated team of directors, managers and staff help the MFIs perform better and live for the foreseeable future.

The clients of the MFIs are no less responsible than other stakeholders. They need to show that they abide by the credit discipline by repaying the borrowed amount before it becomes non-performing. They further need to understand that microfinance is business not charity.

Potential
The microfinance industry has great potential to grow and flourish especially in the developing countries. The Grameen Bank and Bangladesh Rural Advancement Committee (BRAC) of Bangladesh, BRI (micro banking) of Indonesia and BancoSoL of Bolivia, to name a few, have been successful MFIs in terms of outreach, financial sustainability and impact on quality of life of the poor clients.

Microfinance industry in Nepal alone cannot be a loss making industry if a conducive legal and regulatory framework for the MFIs is enacted, their management is placed in the hands of professionals and they are operated on business principle. Microfinance and management courses at the university level could help meet the demand of microfinance professionals in the microfinance industry.