Nepal: Changing Laws and Regulations to Improve Access to Credit by the Poor

This paper argues that changing the legal and regulatory environment in Nepal can expand access to credit by the poor in ways that are sustainable.

It states that these changes:

• Permit private lenders to make loans directly to the poor or to other private institutions that lend or sell on credit to the poor;
• Allow State-run agencies that supply credit to write enforceable loan contracts;
• With proper management incentives, can permit State-run agencies to operate their lending programs at a profit and for the benefit of an increasing circle of clients.

The paper also states that:

• In most cases, the Government can undertake these legal and regulatory reforms at little cost and with little public opposition;
• The reforms, typically, are consistent with other financial sector reforms being contemplated.

The paper suggests many areas in which the Government might serve the public interest by deregulating microfinance and other areas where it might serve that interest by expanding and restructuring regulation.

The paper sets out several recommendations that would permit such an expansion of access to credit in Nepal. The recommendations:

• Apply to both institutions that specialize in micro-lending and to other lenders and creditors that provide microcredit;
• Are aimed at improving the framework for both secured (with collateral) and unsecured (without collateral) lending.