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From unbanked to borrowers

Nepal, December 14, 2011

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  <span class="field-credit">
    Vassiliki Lembesis/Mercy Corps  </span>
    We helped 13,000 Nepalese in remote villages gain access to financial services. Photo: Vassiliki Lembesis/Mercy Corps

If you’re a bank, eastern Nepal might not seem like the most desirable place to open new branches.

The region is extremely remote — isolated by mountains and rivers with few crossings — prone to natural disasters such as floods and landslides, and inhabited mostly by self-employed, small-scale farmers.

But in 2008, Mercy Corps persuaded Nirdhan Utthan Bank to open six new branches in the region, thanks to support from the Whole Planet Foundation. Today, seven branches in the region are operating self-sufficiently, and more than 13,000 local residents make deposits or take out loans — services most were unable to access before the bank’s arrival.

Our program targeted the unbanked. Many of Nirdhan Utthan Bank’s new clients are cash-crop farmers cultivating primarily ginger, cardamom and vegetables and who fall below Nepal’s poverty line of 25 cents per person per day.

Before, if there was a bank nearby, it likely required too much collateral, rigid repayment schedules or other terms and conditions they couldn’t meet. As a result, many households relied on high interest loans from informal moneylenders, eventually putting them in a cycle of debt from which it was difficult to escape.

To expand financial services to these remote communities, Mercy Corps negotiated with the bank to cover the cost of the bank’s first three years of expansion — after which the branches would be expected to pay for themselves. Funding for the project came from the Whole Planet Foundation.

Mercy Corps helped the bank select communities based on targeting criteria, and carried out market research to help develop an agricultural loan product ideal for smallholder farmers. We also provided famers with technical capacity building such as with disease management, pre- and post-harvesting techniques, low-cost storage, drying and grading knowledge, and collective marketing training.

So what happened? All of the clients repaid their loans. The bank broke even before it’s expected target date, and all six new branches are now generating a profit. They also surpassed the number of expected clients — the bank acquired 13,272 new clients, a 9 percent increase in number of clients countrywide. And the combined technical and financial assistance we offered increased the production and profitability of the project participants.

The majority of the project clients have invested loan capital provided by the bank towards livelihood activities such as buying quality ginger and vegetable seeds, fertilizers, dairy cows and buffalos, and other livestock such as poultry, goats and pigs. In addition to livelihoods benefits for households, mobilizing groups around these microloans had the benefit of strengthening farmers groups, improving financial literacy, reducing the risk of loan delinquency, and enhancing the participation and financial ownership of women in spice crop production. More than 98 percent of clients are women.

Mercy Corps is building on the success of this project. In remote areas of both far-west and eastern Nepal, we’re financing the growth of Village Savings and Loan Associations into Savings and Credit Cooperatives. Members of these formally registered cooperatives will benefit from technical and financial services as well as legal support. This will provide a safety net and extend financial services to even more Nepalese.