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By: Bed Prasad Adhikari Laxman Aryal Prabigya Acharya Seema Maharjan Surya Prakash Aryal (Apex College-Manikkya Section)
A Project Report Submitted to Course Instructor Financial Restructuring Strategies Faculty of Management, Apex College
In partial fulfillment of the requirements for the internal assignment of Master of Business Administration (MBA.)
January, 2014
TABLE OF CONTENTS
Acknowledgement List of Abbreviations Executive Summary CHAPTER I 1.1 1.2 1.3 1.4 INTRODUCTION
Background of the Study .................................................................................................. 1 Objectives of the study ..................................................................................................... 2 Methodology of the Study ................................................................................................ 3 Significance of the Study ................................................................................................. 3
CHAPTER II
2.1 History of Micro Finance in Nepal ....................................................................................... 4 2.2 Modalities of Nepalese Micro-Finance Sector ...................................................................... 6 2.3 Micro credit programs in Nepal ............................................................................................ 9 2.4 Prudential Regulation Related to Micro-finance in Nepal .................................................. 11 2.5 NRB Directives related to Microfinance Institutions .......................................................... 12 2.6 Facts of Micro-Finance in Nepal ......................................................................................... 14 2.7 Problems and Challenges of Micro-Finance in Nepal ........................................................ 16
CHAPTER III
Works Cited
List of Abbreviations
ADBN: Agricultural Development Bank Nepal BAFIA: Banking and Financial Institutions Act CBs: Commercial Banks CGISP: Irrigation Sector Project CSD: Centre for Self-help Development DCGCL: Deposit and Credit Guarantee Corporation Limited FAO: Food and Agriculture Organization FINGOs: Financial Intermediaries NGOs FY: Fiscal Year GBBs: Grameen Bikas Banks IBP: Intensive Banking Program MCPW: Micro-Credit Project for Women MFIs: Micro Finance Institutions NBL: Nepal Bank Limited NCCC: National Cooperative Consultation Committee NCDB: National Cooperative Development Board NRB: Nepal Rastriya Bank PAPWT: Poverty Alleviation Project in Western Terai PCRW: Production Credit for Rural Women PSL: Priority Sector Lending RBB: Rastriya Banijya Bank RMDC: Rural Microfinance Development Center RMP: Rural Microfinance Project RSRF: Rural Self-Reliance Fund SACCOPs: Savings and Credit Co-operatives SFCL: Small Farmers Cooperative Limited
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SFDP: Small Farmers Development Program SKBBL: Sana Kisan Bikas Bank Limited STI: Second Tier Institution TLDP: Third Livestock Development Project UNDP: United Nations Development Projects WDS: Women Development Section
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Acknowledgement
This report entitled AN Overview: MICRO FINANCE IN NEPAL is the result of our deepest effort. While preparing this valuable report, we got various new experiences and secret understandings about the micro finance in Nepal, issues related to it and the future prospects of micro finance in Nepal. We are very thankful to many individuals who have supported us throughout our survey as well as preparation of this report, directly or indirectly.
We would like to express our deepest appreciation and gratitude to Mr. Bharat Singh Thapa (Course Instructor-Financial Restructuring Strategies), who has the attitude and the affluence of the genius, had continually and convincingly conveyed us a spirit of adventure in regard to this assessment, despite of his busy schedule by giving his valuable time in helping and supporting us.
We would also thank to Associate Professor Dr. Pushpa Raj Sharma for his continuous guidelines through telephone calls despite of his busy schedule, without whom this assessment would have been a distant reality. We also extend our heartfelt thanks to our college family, well-wishers and friends of entire Manikkya Section-MBA of Apex College, who directly or indirectly assisted and supported us for conducting survey and preparation of this report. Finally, we would like to appreciate acute help of Mr. Narayan Prasad Poudel who had helped us by delivering valuable presentation on Micro Finance in Nepal: Status and Issues
EXECUTIVE SUMMARY
Microfinance is not simply banking for the poor; it is a development approach with a social mission and a private sector-based financial bottom line that uses tested and continually adjusted sets of principles, practices and technologies. The key to successful microfinance lies in the ability of the provider to cost-effectively reach a critical mass of clients with systems of delivery, market responsiveness, risk management and control that can generate a profit to the institution. Typically, this profit is ploughed back to ensure the long-term survival of the institution, i.e. the continuous provision of services demanded by its clients. The two long-term goals of microfinance are thus substantial outreach and sustainability. The history of microfinance in Nepal is relatively new. The Nepali government's attempt to promote microfinance services dates back to 1975. It was recognized as an official poverty alleviation tool only in the countrys Sixth Plan (1980/81-1984/85). The sector has, however, gained momentum after the restoration of democracy in 1991. Microfinance is often seen as an effective strategy for extending financial services to the poor and disadvantaged groups not reached by the formal financial sector. Despite its tremendous potential to alleviate human poverty, only 33% of households below the poverty line have access to microfinance services. There is an even greater need to expand microfinance services in the high hills and mountainous regions of the country.
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CHAPTER I INTRODUCTION
acquire employment as well as income. Although, many programs have been implemented for poverty alleviation in Nepal, only micro-finance programs are seen as a poor targeted and rural based. The microfinance sector in Nepal has expanded and became more diversified in recent years and apart from serving the poor, particularly women, may also fill the gap left by the progressive withdrawal of commercial banks from rural areas, due to the insurgency and cost savings measures. Diversification has come from the commercialization of leading NGOs and their transformation into rural microfinance banks. Microfinance is often seen as an effective strategy for extending financial services to the poor and disadvantaged groups not reached by the formal financial sector. Despite its tremendous potential to alleviate human poverty, only 33% of households below the poverty line have access to microfinance services. There is an even greater need to expand microfinance services in the high hills and mountainous regions of the country. Nepal has a wide variety of active microfinance institutions that provide financial services to the poor.
personal savings among the members of the groups. They also started group savings to realize self-reliance in financial resources. A total of 142,711 members who were organized into 19,597 groups were benefited from the program by July 1991/92. After the reinstallation of multiparty democracy in 1990, the government appointed a seven member National Cooperative Consultation Committee (NCCC) and dissolved the Sajha Central Committee. It also provide constituted 11 members National Cooperative Development Board (NCDB) to provide policy directives to the cooperatives. The government enacted a new Cooperative Act in 1992 to ease promotion and development of cooperatives as a vehicle of economic development in the rural areas. The government also emphasized the role of cooperatives for extending credit facilities and other services to the rural people in its Eight National Plan.
The Nepal Rastra Bank (NRB) initiated Small Sector Lending in 1974 directing the commercial banks (CBs) to invest 5% of their deposit balance in Small Sector, which was later designated as the Priority Sector Lending in 1976. The NRB subsequently initiated Intensive Banking Program (IBP) in 1981 to boost up PSL lending to the low income group and required CBs to raise PSL to 8% of CBs loans and advances, which was further raised to 12% in 1989. The main partners of PSL were the Nepal Bank Ltd. (NBL) and the Rastriya Banijya Bank (RBB) - the two state controlled CBs. Target groups under PSL are low-income family with Rs. 2,511 or less per capita income per year. The beneficiary must contribute 20% of the project cost if the loan size was more than Rs. 15,000. NBL and RB charged 15% to 16% interest rates on priority sector loans. They provided loans up to 80% of the appraised value of the collateral for low income and 70% for the high-income families. However, these CBs provided loans to the group members of Production Credit for Rural Women (PCRW) formed by Women Development Section (WDS) of the Ministry of Local Development and the groups formed by the bank staff without collateral on just group guarantee. The loan limit for such loans was Rs. 30,000. The Grameen Bank model of Bangladesh was replicated in Nepal with the establishment of Eastern and Far-Western Grameen Bikas Banks (GBBs) in 1992. Credit discipline was given top priority and loans were extended without collateral security on group guarantee. The board of directors of the GBBs comprised the NRB and CB representatives and headed by the Deputy Governor or Executive Director of NRB. The share capital of the first two GBBs was mainly contributed by the
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government and the NRB (75%), and by the CBs (25%). The first two GBBs started functioning from the middle of 1993. They charged 20% interest rate and the main source of fund for lending came from NRB and CBs. In the meantime, two NGOs the Nirdhan and the Centre for Selfhelp Development (CSD) also launched microfinance programs replicating Grameen model in 1993 and 1994 respectively. The financial Intermediaries Act was enacted in 1998 to regulate the financial intermediaries NGOs (FINGOs) on carrying out microfinance activities. This was claimed to be a breakthrough in legalizing the operation and activities of NGOs as microfinance operators. With the enforcement of this Act, two FINGOs, Nirdhan, and the Centre for Self-Help Development (CSD) also got registered under it. Later 47 NGO got license from the NRB to operate as FINGOs. In 2004, the government introduced the Banks and Financial Institutions Ordinance (which was converted into an Act in 2006) which has a provision of licensing microfinance banks also as class 'D' banks. As a result, 13 microfinance banks have been issued license by the NRB till the date. In order to avail small wholesale funds to cooperatives and NGOs providing loans to the low income groups, the government had created a fund called Rural Self- Reliance Fund (RSRF) in 1991 with Rs. 20 million was contributed from the government. The government with the assistance from ADB and NRB also established the Rural Microfinance Development Centre Limited (RMDC) in 1998, to provide larger wholesale loans to MFIs through implementation of the ADB assisted Rural Microfinance Project (RMP). After the operation of RMDC, several MFIs were added in the microfinance market and the coverage by the microfinance institutions also increased with faster speed. The government had also instituted another wholesaler, the Sana Kisan Bikas Bank Limited (SKBBL) in 2001 to provide wholesale funds to the Small Farmers Cooperative Limited (SFCL) in 2001. With all these initiatives and efforts microfinance has gained a new momentum as an industry. Besides all these self-help groups also were promoted by several rural and community development projects of the government and donors to provide small credit to the self-help group members through grants for seed funds. (Rural Microfinance Development Centre Ltd., 2009)
programs such as PCRW, MCPW, GBBs Replicates, etc., fall under gender based programs while the programs as PAPWT, TLDP, RMP, CGISP, etc. come on project based micro credit programs. The wholesale micro credit programs are RSRF, RMDC, SKBBL, etc. The micro credit activities of SACCOPs and FINGOs come under the modality of community based. Besides, a number of self-help groups are also rendering micro finance services to the rural people. Although large numbers of MFIs have emerged in Nepal, micro-finance services from these institutions are yet to cover the target group in full capacity particularly in remote hills and mountains. Based on institutions involved, microfinance sector can be classified into two groups formal (Government and NRB) and semi-formal model as depicted in Fig 2.1. (Nepal Rastriya Bank, Micro Finance Department, 2007)
1. Small Farmer Co-operatives Limited Previously it was the Small Farmer Development Project under Agricultural Development Bank, which has been transferred to the local community under the Cooperative Act, 1991.
2. Priority Sector and Deprived Sector Credit Programs There is the mandatory provision for all commercial banks to disburse 2 percent and 3 percent of the total loan portfolio to priority and deprived sector credit programs respectively. By Mid-July 2007, the priority sector credit programs will be phased out.
3. Rural Micro-finance Development Banks To provide the banking facilities for the socio-economic upliftment of the deprived people in the rural areas 5 regional rural development banks were established with the initiative of the government, NRB and some other financial institutions. Later 4 private sector micro-finance development banks (Nirdhan, Swabalamban, Deprosc & Chhimek) were also established.
4. Financial Intermediary Non-government Organizations (FINGOs) Out of about 10,000, only 47 NGOs are licensed by NRB for financial intermediary. They usually form the groups and collect deposit through MFIs as well as they obtain wholesale credit from MFIs and disburse it to the group members.
5. Savings and Credit Co-operatives (SACCOPs) The co-operatives have been introduced in Nepal since 1956. About 8000 co-operatives are registered in Cooperative Department of the Government of Nepal. Some near about 2600 cooperatives are involved with the savings and credit programs. Of them, only 19 cooperatives are licensed by NRB for limited banking transaction and 199 co-operatives are associated with the RSRF.
6. Donor Sponsored Micro-credit Programs There are six major donor funded micro-credit programs that are running in the country of which some are now in in-active stage. They are PCRW, MCPW, TLDP, PAPWT, RMP and CGISP.
All these programs are focused to reduce poverty and have contributed to the facilitation of micro-credit to the targeted groups and assisted in capacity building of PFIs.
There are six major donor funded micro-credit programs that are running in the country of which some are now in in-active stage. They are PCRW, MCPW, TLDP, PAPWT, RMP and CGISP. All these programs are focused to reduce poverty and have contributed to the facilitation of micro-credit to the targeted groups and assisted in capacity building of PFIs. To improve the socio-economic status of rural women by accessing them to institutional loan for their productivity the project Production Credit for Rural Women (PCRW) was launched in 30 November 1988. To increase the economic status of the rural & urban women by providing micro-credit for their micro businesses the project Micro-Credit Project for Women (MCPW) was launched in 15 December 1993. To increase the income & employment of the rural poor by engaging them in livestock management & productivity the project Third Livestock Development Project (TLDP) was launched in 1997. To increase participation of the deprived poor in Western Terai for their socio-economic upliftment the project Poverty Alleviation Project in Western Terai (PAPWT) was launched in 1998. To increase the agriculture productivity by providing the irrigation facilities to the deprived community's farmers for the poverty alleviation program the project Community Ground Water Irrigation Sector Project (CGISP) was launched in March, 1999.
Micro credit is not always the answer (Asian Development Bank 1998). Micro credit is not appropriate for everyone or every situation. The destitute and hungry who have no income or means of repayment need other forms of support before they can make use of loans. In many cases, small grants, infrastructure improvements, employment and training programs, and other non-financial services may be more appropriate tools for poverty alleviation. (Sharma, Microfinance: A Powerful Tool for Social Transformation, Its Challenges, and Principles, 2004)
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The Bank and Financial Institutions Regulation Department of NRB is solely responsible for the licensing as well as regulating all kinds of BFIs. This department issues 'Unified Directives' for all the BFIs consolidating all of its previous directives, notices, code of conducts, etc. The task of supervision of FIs is done by the respective supervision departments of NRB, i.e., the Bank Supervision Department, Development Bank Supervision Department, Finance Company Supervision Department and Microfinance Promotion and Supervision Department. In this context, Micro Finance Promotion and Supervision Department supervises all kind of micro finance institutions ('D' class FIs, cooperatives permitted for limited banking services and FINGOs). This Department is also involved in the promotional activities of micro financing through the different projects, funds, programs, etc., with the collaboration of government as well as foreign/national agencies. As per NRB Act, Nepal Rastra Bank carries out its supervisory function by applying different approaches of supervision in practice. The major guiding documents for NRB supervision are: NRB Act, BAFIA, Supervision Bylaws, Basel Core Principles, Onsite and Off-site Supervision Manuals, NRB Unified Directives to Banks and FIs. Supervision Mechanism include the following:
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a) On-Site supervision (Routine Onsite, Special Onsite) b) Off-site Supervision c) Follow-up Supervision The onsite supervision is carried out based on onsite supervision manual. The review is basically designed to assess the health and financial soundness of the bank. Accordingly, it covers the analytical review, system appraisal and detail verification. The scope of off-site supervision includes financial analysis, compliance review, consolidated off-site report, annual report and enforcement report. The major functions of off-site supervision are: collecting information from the MFIs, checking the accuracy and appropriateness, analyzing the financial indicators, monitoring the compliance, preparing the periodic reports and submitting to the authorities, analyzing annual financial statements and manuals, providing AGM clearance, CRR monitoring, imposing penalties in case of non-compliance. Similarly, follow-up supervision is also done as a part of the off-site supervision. As per the latest Unified Directives, the major prudential regulation for BFIs include: Capital Adequacy, CRR and SLR Provisions, Loan Classification and Provisioning, Single Obligor Limits, Accounting and Financial Disclosures, Risk Mitigation, Corporate Governance, Compliance of Supervisory Directives, Investment Guidelines, Reporting Requirements, Consortium Financing, Transfer of Promoters Share, Credit Information and Black Listing, Branch Expansion, Interest Rate Determination and Disclosure, Resource Mobilization and its Limit, Deprived Sector Lending, Upgrading/Expansion of Operation Area/Merger & Acquisitions, Anti-Money Laundering and Countering of Terrorist Financing, Subsidiary Company Provision, e-Banking, Miscellaneous Directives, etc.
4% primary capital (paid up capital, share premium, general reserve, retained earning loss) 8% primary and supplementary capital (loan loss provision, asset revaluation reserve and other reserve)
2. Fund mobilization It can mobilize fund up to 30 times of core capital through group savings, borrowing and debentures.
3. Compulsory reserve and liquid assets It is required to maintain compulsory minimum reserve of 0.5% of total borrowed fund with NRB or any other Class A Commercial Bank. It is also required to maintain liquid assets of 2.5% of individual, group and special saving of members. The liquid assets are defined as cash reserve at hand, investment in government bonds, investment in NRB bonds and deposit in commercial banks.
5. Expansion of Branch and Geographical Area MFDBs must take permission from NRB prior to expanding branches and geographical areas.
6. Norms of Corporate Good Governance MFDBs should clearly spell out rules for the appointment of Board of Directors and CEO and specify their functions and job responsibilities.
Extension of loan up to Rs. 60,000 per member without collateral security Extension of loan up to Rs. 150,000 to individual member for starting microenterprise with collateral security.
8. Interest Rate and Service Charge MFDBs are given freedom to fix interest rate on deposit and loans and advances, service charge and penalty interest rate for overdue loans.
9. Deprived Sector Lending: As a directed lending, 'A', 'B' and 'C' class FIs are compulsorily required to lend respectively 4%, 3.5% and 3% of their total lending as the deprived sector lending. This amount might be disbursed either by the FIs themselves or may be provided to 'D' class FIs in the form of wholesale lending. The 'D' class FIs are required to fully utilize that kind of borrowing in deprived sector and keep its account separately. They ('D' class FIs) cannot keep this amount as a deposit in any other FIs for getting interest. If it is not fully utilized or kept as deposit in other FIs, it could not be counted as deprived sector lending. The share capital invested by 'A', 'B' or 'C' class FIs in 'D' class FIs or 'D' class subsidiary is also counted as a indirect deprived sector lending for those three FIs.
10. Reporting Requirement MFDBs, FINGOs and Cooperatives licensed by NRB are required to report to the Financial Institutions Regulation Department and Bank and the Financial Institutions Regulations Department according to the Unified Directives and other directives related to MFIs. If they fail to comply with the prudential norms of reporting or reporting late, they are penalized according to the Bank and Financial Institutions Act, 2006
Bank and Financial Institution Ordinance (2004), The Cooperative Act (1991) and The Financial Intermediary Act (1998). Microfinance institutions working in the present legal and regulatory framework include: 21 Microfinance Development Banks classified under category D by the NRB, 5 Regional Development Banks, Over 20,000 Savings and Credit Cooperatives and 45 Financial Intermediary NGOs licensed by the NRB The following three categories of second tier refinance institutions have been established to provide wholesale loans to different MFIs in Nepal: Rural Self-Reliance Fund, Rural Microfinance Development Center and Sana Kisan Bikas Bank (Small Farmers Development Bank) The number of micro finance development banks operating at present has reached 21, whereas in 2007, there were 12 micro finance development banks licensed by the central bank. The growing number of microfinance institutions has been successful in increasing the outreach of deprived section of the population to the finance. In the fiscal year 2009-10, microfinance institutions have catered the credits to 670,000 households across 56 districts, with the portfolio of Rs 8.10 billion. In the last fiscal year, the amount of loans disbursed has reached to about Rs 14 billion and the outreach of microfinance institutions have grown to 1.7 million households that are entertaining collateral free micro loans. The central bank allows class A, B and C financial institutions to carry out deprived sector lending through microfinance institutions. The provision has aided both other kinds of financial institutions along with microfinance institutions. The growing numbers of microfinance institutions have increased access to finance of remote and deprived people but at the same time geographical concentration of these institutions have contributed in over-indebtedness of the borrower. Lately some microcredit institutions have become profit centric thus to earn more profit overlapping of the borrowers have created distortion in the sector that needs to be dealt with."suggesting the central bank to be more selective in giving license to microfinance institutions.
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Almost all the MFIs are running with more labor intensive model and using less of IT facilities. (Nepal Rastrya Bank, 2013)
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sustainable, and profitable. Endorsement of National Micro-finance Policy and establishment of a Second Tier Institution (STI) as proposed by the Government of Nepal will facilitate the categorization of various MFIs even to formalize informal financing to provide easy access to the microfinance. Besides, the cost effective and self-sustained MFIs are also the pre-conditions for the successful implementation of such programs. For this, sound monitoring and supervision of MFIs is a must. This will certainly pave the way for meeting the national objective to expand the outreach of MFIs so far for the targeted people.
In order to lessen the problems and overcome the challenges, the study makes the following recommendations for the consideration of the policy makers, the practitioners and the other stakeholders. 1. The government should formulate a national policy of microfinance setting the vision objectives, strategies and policies and specifying implementation modalities to direct the micro finance program to accomplish the stipulated objectives 2. Appropriate technologies should be introduced to get advantage of the local potential such that the poor can get sizable profits and return out of their loan proceeds. Technology that provides comparative advantage of the remote areas should be made available for harnessing benefits from high value but low volume crops such as herbs, vegetable seeds. Hence, researches and investigations have to be made for financing high value low volume crops suitable to harness local potentials and credit programs should be linked up technology diffusion. 3. It is also essential to maintain peace and security in the country in order to provide security to the MFIs, which would be stationed at remote locations for providing microfinance services to the poor. 4. The government should also exempt tax on income made by MFIs serving the downtrodden masses of the remote corners of the country. It should also wave taxes on the interest earnings of the poor from their savings deposits in the MFIs to encourage them for keeping more savings. 5. The MFIs should be given legal authority to collect savings deposits from the clients as well as non-clients in the remote districts to cultivate savings habits among the local people and also to raise the internally financial resources generated of MFIs. The larger MFIs should be allowed by NRB to raise deposits from the non-members to a certain limit. However, they should not be allowed to operate banking counters as the commercial banks.
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6. In order to avoid staff corruption and racketing, MFI top management should be vigilant and watchful of staff behavior and relationships with clients and other vested interest groups. To this effect, they need to avoid duplication and overlapping of loans with other MFIs. 7. The Nepal Rastra Bank should allow expansion of area coverage to the licensed FINGOs and the new MFIs to operate in districts which have thin coverage of microfinance and restrict new operation of MFIs in the overcrowded urban centers and Terai districts. 8. The motivation level of the field staff should be maintained at high level, they are the key scorers of the micro-finance game 9. Privatization of MFIs should be emphasized. The central banks main role should not be as implementers or operators, its main role is to supervise operations. 10. In some cases in the name of women, the resources are controlled by men and. To cater to such problems, awareness among women should be promoted individually and collectively.
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WORKS CITED
Published Sources Asian Development Bank. (2002). Poverty Reduction in Nepal: Issues, Findings and Approaches. manila: ADB. Asian Development Bank. (2005). The role of central banks in micro-finance in Asia and the Pacific. Manila: ADB. Nepal Rastriya Bank, Micro Finance Department. (2007). Some Glimpses of Micro Finance Activities in Nepal. Kathmandu. Nepal Rastrya Bank. (2013). Country Report, Nepal. kathmandu: Nepal Rastrya Bank. Rural Microfinance Development Centre Ltd. (2009). State of Microfinance in Nepal. Putali Sadak, Nepal. Sharma, P. R. (2004, December). Microfinance: A Powerful Tool for Social Transformation, Its Challenges, and Principles. The Journal of Nepalese Business Studies, p. 4. Sharma, P. R. (2012). An overview if Microfinance Practices in Nepal. Nepal.
Online Sources http://en.wikipedia.org/wiki/Microcredit http://www.scribd.com/doc/18101015/Impact-Study-of-Microfinance http://www.adb.org/documents/impact-microfinance-rural-households-philippines http://www.microfinancegateway.org/p/site/m/template.rc/1.26.11408/ https://www.google.com.np/ http://www.nepjol.info/index.php/JNBS/article/view/40/122http://www.nepjol.info/ www.hotelnepal.com/nepal_news.php?id=2696 http://www.bwtp.org/arcm/nepal/I_Country_Profile/nepal_country_profile.htmlhttp://www.inafi nepal.org.np/overview-microfinance-sector-nepal