The history of formal microfinance in Nepal began during 1950s when the Government established 13 credit cooperative societies to provide financial services to the flood-affected people in Chitwan district.

Microfinance has encouraged income generating activities among the rural entrepreneurs by providing small loan and saving facilities. It was acknowledged as an official poverty alleviation mechanism only in the country’s Sixth Plan (1980/81-1984/85). Till date, there are a total of 41 MFIs licensed by the central bank. 1.4 billion Households are the beneficiaries with Rs.60 billion and the recovery rate is over 95%.

With increasing outreach of microfinance, the opportunities and challenges of this type of financing have become more clear. Some of it are elaborated below:

Opportunities of the MFIs in Nepal:

• It can be used as development tool through empowerment of disadvantaged groups in Nepal.

• It can be used as a women oriented financing, who are statistically less likely to default on their loans than men.

• It can be used as a tool for rehabilitation of the small scale businesses that was affected by the earthquake and unofficial blockade.

• It can be used to benefit the communities by providing small loans for the micro entrepreneurs to create income generating opportunities with local employment.

• Along with the financial services, MFIs is an effective tool to provide skill development training, workshops, etc.
• The money lenders that have been active from the past are known to have charged outrageous interest rate but through the increased access of microfinance they are forced to lower their rates due to competition.

Major obstacles faced by the MFIs:

• The commercial banks, development banks and financial companies are required to provide deprived sector loan to the MFIs which is insufficient to increase the outreach given the geographical difficulties.
• Every commercial banks, development banks and financial companies are required to provide deprived sector loan to the MFIs. The banks have revised the interest rate from 3-5% to 6-9% which has increased the cost of the funds. This affects the MFIs sustainability.
• The profit gained by the MFIs is lower than other commercial banks but it still has to pay 30% corporate tax which is equal with the other banks.
• There is also a problem of duplication in lending. There are examples of one client obtaining loans from various MFIs due to lack of credit information. Recently, the Credit Information Company Ltd has started the initiative to generate credit report of MFIs to discourage multiple lending.
• In one of the case studies conducted, it was found that neither the MFI staffs nor the consumers had commercial orientations towards microfinance activities.

         Looking at the challenges faced, the restructuring of the policies and strategies for MFIs is necessary to overcome the obstacles. Also, simply providing loans for the small-scale entrepreneurs is not enough. The borrowers should be provided with training, mentoring and consulting services so that the micro entrepreneurs can invest money at the right time and place.