SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY (Nepal: Rural Finance Sector Development Cluster Program [Subprogram 2])

Country/Project Title: Nepal: Rural Finance Sector Development Cluster Program (Subprogram 2)

Lending/Financing Modality:

Sector Development Cluster Program/Asian Development Fund Loan and Grant

Department/ Division:

South Asia Department Governance, Finance and Trade Division

I. POVERTY ANALYSIS AND STRATEGY

A. Linkages to the National Poverty Reduction Strategy and Country Partnership Strategy Reducing the high incidence of poverty and the widening socioeconomic disparities—the underlying causes of the conflict—remains a key development challenge for Nepal, according to the country strategy and program (2010–2012) of the Asian Development Bank (ADB). The strategic priorities therefore include financial sector assistances especially to make reliable and efficient financial services more accessible to marginalized groups and women, by promoting and strengthening microfinance, building a regulatory framework conducive to rural finance, restructuring key rural financial institutions, and building the capacity of sector institutions. The government’s Three-Year Interim Plan (2008–2010) also reaffirms the dependence of the country’s development on growth in agriculture and the rural sector, and the importance of increased access to rural finance for rural economic growth and poverty reduction.

B. Poverty Analysis Targeting Classification: General Intervention 1. Key Issues

In Nepal, an estimated two-thirds of the population lacks access to formal financial services. The scarcity of access to finance is even more acute in the hills and mountain areas and in the Western region, and among the poorest. In Nepal, women have legal rights to access to credit. However, due to the limited asset ownership of women to meet the collateral requirements, women's access to credit from formal financial institutions is considerably less than for men. The percentage of women borrowers in semi-formal microfinance institutions, such as microfinance NGOs and cooperatives is much higher than in formal financial institutions. However, due to the limited scale and outreach of semi-formal microfinance institutions, overall, women's access to credit is still limited. Difficult terrain in the hills and mountains makes more costly for microfinance operations. As a result, microfinance institutions operating in those areas are far fewer than in Terai. Marginalized groups and women in particular need financial intermediation to initiate or expand productive activities and have remunerative returns through self-employment (microenterprise) or agricultural activities. Insufficient access to funds to invest in agriculture and nonagricultural activities is a significant constraint rooted in rural finance laws, policies, and institutions. In Nepal, the government owns many financial institutions and its excessive control has weakened internal governance, management, financial health, and outreach of these institutions. Private rural financial institutions, including microfinance institutions, are expected to fill the gap in outreach, but most microfinance institutions are capacity constrained and have very little outreach. Insufficient supportive sector infrastructure and ineffective supervision and regulation of microfinance institutions also inhibit sector growth.

2. Design Features

The objective of subprogram 2 is to strengthen financial intermediation for the rural population, with focus on marginalized groups and women, through policy, legal, and institutional reforms. A key program emphasis is the reform and restructuring of major rural finance institutions including the Agricultural Development Bank Limited, the largest rural finance provider; the Small Farmers Development Bank (SFDB), a cooperative bank of small farmers; and Grameen Bikash banks, Bangladesh Grameen Bank replicators, which provide microfinance especially to women. The sound and expanded operation of these institutions will deepen financial intermediation among rural small farmers and reduce their dependence on informal money lenders. Specific pro-poor design aspects include institutional reform and restructuring of key rural finance institutions with emphasis on expanded outreach to marginalized groups and women; capacity development and training for microfinance institutions in financial inclusion; and institutional support to informal and semiformal community-based credit groups to ensure financial service outreach to marginalized groups, women, and those in remote areas. To extend the access to finance in the hills and mountains, credit line support will be provided to develop an appropriate microfinance delivery model for those areas. The sector capacity building component of subprogram 2 will include extensive financial literacy and skills training for marginalized groups and women to improve their access to finance.

2

C. Poverty Impact Analysis for Policy-Based Lending

The policy reform actions of subprogram 2 have a strong pro-poor focus. They will facilitate the creation of environments where marginalized groups and women can have more access to the necessary financial inputs for their income-generating activities. Policy and institutional reforms under subprogram 2 will mainly involve (i) the development of microfinance policy addressing gender and social inclusion aspects, and (ii) institutional reform of key rural finance institutions including the development of financial inclusion strategies. Subprogram 2 includes strategy development to improve microfinance delivery to inaccessible hill and mountain areas.

II. SOCIAL ANALYSIS AND STRATEGY A. Findings of Social Analysis

Despite the presence of diversified financial institutions, just 30% of Nepalese households, on average, have an account with or a loan from a formal or semiformal financial institution, and 70% have no access to institutional finance or are financially excluded. The percentage of financially excluded households is higher in the hills and mountain areas (80%) and among the poorer households (75%).

B. Consultation and Participation 1. Provide a summary of the consultation and participation process during the project preparation.

(i) Consultation and participatory discussion with microfinance institutions, nongovernment organizations, and community-based organizations with regard to access to finance, their members’ need and demand for financial intermediaries, and constraints on access to financial services among marginal groups and women; (ii) dissemination and discussion of policy and regulatory matters with government agencies, regulatory authorities, and rural and microfinance institutions to promote access to finance among marginal groups and women; and (iii) consultation and discussion with donors and development partners, to get feedback on the inclusiveness of the project design.

2. What level of consultation and participation (C&P) is envisaged during the project implementation and

monitoring? Information sharing Consultation Collaborative decision making Empowerment

3. Was a C&P plan prepared? Yes No

If a C&P plan was prepared, describe key features and resources provided to implement the plan (including budget, consultant input, etc.). If no, explain why.

Participating rural and microfinance institutions, especially SFDB, and Grameen Bikash banks, have an established rural community group network. They will develop the C&P plan interactively in consultation with community-based groups. It will reflect the specific needs of marginal groups and women with respect to financial services.

C. Gender and Development 1. Key Issues

In recent years, women's uptake of loans has increased especially due to the establishment of semi-formal microfinance institutions with stronger focus on targeting women. However, women's use of institutional credit is still limited due to complex social norms and traditions. In Nepal, land is often used as collateral to obtain loans from formal commercial banks. While the laws and bylaws stipulate equal rights for both male and female children to the family property, due to the deeply embedded cultural beliefs, daughters are very rarely given a deed to family land. As commercial banks are, by law, prohibited to sanction non-collateral based loans, women are often denied access to credits from commercial banks.

2. Key Actions

Measures included in the design to promote gender equality and women’s empowerment—access to and use of relevant services, resources, assets, or opportunities and participation in decision-making process:

Gender plan Other actions/measures No action/measure

Subprogram 2 will improve women’s access to credit and other support services for their income-generating activities, and will thereby empower women. Specifically, subprogram 2 will support: (i) promotion of gender and social inclusion-oriented microfinance policies, (ii) development of gender-oriented financial products, (iii) mobilization of women self-help groups, and (iv) onlending support to women cooperatives.

3

III. SOCIAL SAFEGUARD ISSUES AND OTHER SOCIAL RISKS

Issue Significant/Limited/ No Impact

Strategy to Address Issue

Plan or Other Measures Included in

Design Involuntary resettlement

No impact No involuntary resettlement issues are expected

Full plan Short plan Resettlement

framework No action

Indigenous peoples

No impact No issues related to indigenous peoples are expected

Plan Other action Indigenous

peoples framework

No action Labor

Employment opportunities

Labor retrenchment

Core labor Standards

No impact No labor issues are expected

Plan Other action No action

Affordability

No impact Subprogram 2 will promote affordable financial services for poor households

Action No action

Other Risks and/or Vulnerabilities

HIV/AIDS Human trafficking Others(conflict,

political instability, etc), please specify

No impact Plan Other action No action

IV. MONITORING AND EVALUATION

Are social indicators included in the design and monitoring framework to facilitate monitoring of social development activities and/or social impacts during project implementation? Yes □ No