The expansion of BFIs, SACCOS, and insurance companies have helped to increase Nepalis’ access to formal financial services

the HRM
N epal has made significant strides in advancing financial inclusion, with 90 percent of the country’s adults using formal channels for financial transactions. According to a joint report by the International Finance Corporation (IFC) and the UN Capital Development Fund (UNCDF) titled ‘Nepal Financial Inclusion Report 2023’, the use of formal financial services is strong across the country with the growing number of citizens now has bank accounts, avail of banking services as well as purchase insurance policies.

The report states that as of 2022, 90 percent of adults use formal financial services (bank accounts, savings, credit, payments, and insurance), up from 61 percent in 2014. Of the people with access to the formal financial system, 81 percent use banking services, while 9 percent use other types of formal financial services such as those provided by savings and credit cooperatives (SACCOS), compared to 40 percent using banks and 21 percent using other formal channels in 2014.

The uptake of insurance has seen a notable growth from 11 percent in 2014 to 29 percent in 2022. The number of adults who have their savings in formal financial institutions has increased to 63 percent in 2022 from 40 percent in 2014.

This remarkable progress has been driven by the expansion of banking and microfinance institutions as well as insurance companies along with government policy interventions. The mandatory branch expansion of bank branches at all local levels, and the distribution of social benefits via bank accounts are some of the defining factors that led to the increased access to formal banking services. The growth in insurance penetration and usage was driven by the expansion of the National Health Insurance Program, compulsory life insurance for migrant workers, and third-party liability vehicle insurance.

The report has rightly underscored these facts. “The uptake of overall formal financial services has been largely driven by both banking and insurance sector service expansion across the country under the new federal structure, and the uptake of digital financial services amidst the growing mobile and internet penetration,” reads the report.

The most promising development during this period is a significant surge in the usage of formal financial services in the rural areas of the country. The report highlights that the usage of formal financial services has risen to 88 percent in rural areas in 2022 from 58 percent in 2014. Among those who have access to formal financial services in rural Nepal, 77 percent utilize banking services while 11 percent utilize other formal financial services.

Experts attribute the significant increase in access to formal financial services in rural areas to various factors. These include the mandatory and focused expansion of bank branches at all local levels post the country adopted the federal structure. Additionally, the distribution of social benefits via bank accounts and collaborative efforts between local governments and the private sector to promote financial services have also contributed to this positive trend.

According to former banker Bhuwan Kumar Dahal, the policy of the Nepal Rastra Bank (NRB) that mandatorily required banks to establish branches in 753 local units has played the role of a catalyst in this regard. “People living in nooks and corners across the country now have access to formal banking services which was not the case before,” said Dahal.

As BFIs reach almost all local levels, people in remote areas now have access to a wide range of financial services. And, few policy interventions by the government in recent years have also been instrumental to increase formal financial services access. The federal government has made it mandatory for people to receive old-age allowances through formal banking channels. “This move is aimed at promoting financial inclusion and encouraging people to use formal banking channels. This has led to an increase in the number of people using formal banking channels to receive their old-age allowances. This has resulted in the surge in the number of people using formal banking channels” said Dahal.

Bankers say the increased financial access can bring about a range of benefits to both individuals and the country’s economy. When people have access to formal banking services, they will able to save their money more securely and earn interest on their savings. This encourages people to save more, which in turn can lead to greater financial stability and security for themselves and their families, they say.

Gender parity is another encouraging development of the past decade. The gender gap has also significantly narrowed with 89 percent of women having access to formal financial services in 2022 compared to 57 percent in 2014.

However, there is still a gap in the use of banking services with 83 percent of men using banking services compared to 79 percent of women. In terms of account ownership, 50 percent of women and 56 percent of men have an account at a financial institution.

The growth and the narrowing of the gender gap, according to bankers, has happened due to gender-balanced regulations, and government-supported access programs such as concessional loans targeted towards women.

Access to formal financial services is highest in Gandaki Province (96 percent), followed by Bagmati Province (91 percent). Likewise, Gandaki Province has the highest percentage of adults with access to formal savings at 73 percent, followed by Sudurpaschim (69 percent) and Bagmati Province (66 percent). In Gandaki Province, 42 percent have bank savings while 31 percent save at other formal institutions.

Gandaki Province has the highest usage of banking channels for payment services at 85 percent, followed by Sudurpaschim Province at 83 percent, and Bagmati Province at 77 percent.

More Nepalis are saving
The number of Nepali adults who save their money in formal financial institutions has substantially increased, rising from 40 percent in 2014 to 63 percent in 2022. Of those with savings in formal institutions, 36 percent have opted for banks, while 27 percent prefer other financial institutions such as SACCOS.

Interestingly, while the growth in bank savings has been significant, with an increase from 27 percent in 2014 to 36 percent in 2022, the growth in savings with other formal financial service providers, mainly SACCOS, has been even higher, increasing from 13 percent in 2014 to 27 percent in 2022.

According to the report, the usage of formal savings mechanisms is higher among women, with 66 percent of them saving using formal channels (banks – 33 percent and other formal financial service providers – 32 percent ) while men are trailing lower at 59 percent (banks – 38 percent and other formal financial service providers – 21 percent). Urban adults have higher usage of formal savings channels at 64 percent, while rural adults have usage at 58 percent.

The number of savings account has increased significantly in the last decade with the government encouraging citizens to open bank accounts with initiatives such as the “One Person, One Bank Account” campaign, and the need for a bank account to receive social security payments.

The growth in formal savings has also been driven by other policy initiatives such as the mandatory requirement of bank accounts for migrant workers to get foreign employment permits, and the additional one percent interest on remittance deposit accounts.

The more access to financial institutions, the more people are taking credits from banks and financial institutions. The use of formal credit in the past decade has increased to 47 percent in 2022 from 14 percent in 2014. Of this 47 percent, 34 percent used banks while 13 percent used other formal financial channels.

Bank credit usage has grown across urban and rural areas and reached 45 percent of the rural and 49 percent of the urban population. It was only 17 percent and 21 percent respectively in 2014.

Bankers have a word of caution here. They say despite the significant progress achieved in increasing access to formal financial services, there remains a need to enhance financial literacy and knowledge about the banking system in Nepal. “Many people in rural areas require assistance from others to access banking services, indicating a lack of knowledge about how the banking system operates. Therefore, efforts should be made to increase financial literacy to ensure that people are aware of the benefits of using formal financial services and can access them independently. For the same, banks have been doing that,” said Nishchal Raj Pandey, CEO of Sanima Bank.

According to him, there is still a significant gap in financial literacy among the uneducated population, who often prefer to keep their money at home rather than deposit it in a bank. “To bridge this gap, awareness campaigns and other interventions are necessary to educate people on the basics of the banking system and the benefits of using formal financial services,” he said, adding, “Banks have recognized this need and have been working on increasing financial literacy in rural areas to encourage more people to use formal financial services. Through these efforts, banks hope to reduce the reliance on cash and promote financial inclusion in Nepal.

Access to insurance growth reaches 29 percent

The cross-selling of insurance products by banks, mandatory life insurance for people going to foreign employment, and the implementation of agri-insurance have led to the growth in insurance penetration. The uptake of insurance has seen a notable growth from 11 percent in 2014 to 29 percent in 2022.

7 percent of the country’s adults have accessed insurance services via banks in 2022, and 22 percent of adults accessed insurance through other formal sources which are primarily insurance companies.

The usage of formal insurance has increased in both rural and urban areas, while rural areas have seen a significant increment from 8 percent in 2014 to 26 percent in 2022.

There has been a significant rise in access to insurance among female adults, from 7 percent in 2014 to 28 percent in 2022.

The implementation of the Agricultural and Cattle Insurance Directive 2020 has been a catalyst in the growth of agri-insurance. “The access to insurance by farmers increased to 23 percent in 2022 from 8 percent in 2014, which can be attributed to the increase in uptake of agriculture insurance driven by the implementation of the Agricultural and Cattle Insurance Directive 2020, which requires non-life insurance companies to allocate 5 percent of their insurance portfolio to agriculture and cattle insurance products,” reads the report.

According to the report, the overall increased access to insurance is primarily driven by the expansion of life insurance services. In the last four years, the number of life insurance policies sold has increased by a whopping 413.4 percent, from 2.73 million in FY 2016/17 to 13.09 million in FY 2021/22.