Wednesday, January 2, 2019

Local Governance Opportunities and Challenges in Nepal

Local Governance opportunities and challenges in Nepal
Nahakul K.C. [1]

Political devolution of state power, how is political devolution different from technical decentralisation? 
Nepal has begun its political devolution since 1950 in the name of block development after the Rana regimes. The country has been gone in to the various stages of local development in Panchyatand multi-party democratic system in to republic. Nepal new constitution in September 2015, which sets out a federal, multi-party democratic system of governance and a commitment to end all forms of discrimination, recognising unity in diversity. It commits to achieve this by devolving power to local and provincial levels. 

For the implementation of the vision of the constitution, a legal framework has to be drawn up clarifying the space within which the new structures can operate. A few of these laws and regulations have been drafted and passed the “Local Government Operation Act-2074”. The changing structure and systems provide an important opportunity to support the implementation of development activities, opening of policy debate about options and trade-offs to operationalise the vision of the constitution. Given the sensitivity of this transition, newly elected provincial and local governments required critical technical support for the operationalize their functional roles and responsibilities in the sector of; executive, legislative and judicial.

The major principles are of the local government are; legitimizations, periodic election, geographical boundaries and their demarcation, clarity of roles and responsibilities, inter-governmental linkages and coordination. 
Federalism is a political system through which two or more governments have shared authority over the same geographical area. Nepalese federal/local government have major characteristics; system of government that divides sovereign power across at least two political units. Sovereign Power – the amount of authority and autonomy given to each unit of government. Federal government not responsible for issues such as preparing drinking water taps at local level. State/local governments not responsible for national defense, monitory and foreign policy.

Rural/urban municipalities have the political agendas as per the constitution of Nepal. Local Government Operation Act 2017 and bylaws which is most important part of the legitimization. The issues are how to ensure the development activities which require high participation of the communities for the implementation of the programme activities. Before going to implementation of the programmes, it is important to have ‘strategic vision’ to decide deliberative decision-making and annual planning process. In this process it is important to have political agreement among the elected representatives and opposition parties at the Palikas’ level. The party manifestos are important factor to drive their community participation though the user’s committees and Community Organizations at the ward level. The ward committees are main instruments for the community participation.
In my opinion, there are major actors in the development planning process which required clearly defined roles and responsibilities for each local government Mayors/Deputy Mayors, Ward Committee Chairs, members and female members more inclusive participation in the decision making. 
There is critical area to collect the revenues and tax, which required adequate and appropriate local sources of revenue over which sub-national governments are given control to establish link between benefit and cost of the local services. In my opinion there is urgency address adequate development settlement and ward level proposals throught unified budget. LLGs can constituents in place appropriate demands on local government and hold local official more accountable for their performance based better service delivery. The elected local government officials need to be more accountable to their citizens for coordination, cohesiveness and coherence among the various development and judicial stakeholders. For the effective implementation, there are key stakeholders are the “Civil Servants” which is urgently required. MOFGA is the key stakeholder for the issuing of model laws, rules, regulations and procedures.
Sufficient technical and managerial capacity allow to local government to meet the legitimate demands them constitute and any mandates essentials to achieve objectives as per local government operation act. It required appropriate design system inter-governmental relationship including technical and fiscal support mechanism to bridge the capacity gaps. It is important both upwards and downwards accountability. Private sector and individual experts can be value addition for better function of LLGs. The general assembly, executive committees, local revenue advisory committee, revenue estimate and budget ceiling determination committee, budget and programme formulation, judicial committees chaired by deputy mayors and other thematic committees are the major actors. 
General impression of the functioning of local governments so far in the current ongoing federalisation process in Nepal.
My impression is about the functional of local government is quite optimistic in the Nepal where 753 Local Level Governments are in-place as per the democratic electoral process. Existing clear laws and bi-laws are such as “Local Government Operation Act, Intergovernmental Fiscal Act, National Natural Resources and Fiscal Commission Act -2017, procedures, laws, local governance resource books developed by ministry of federal affairs and general administration.   Beside these regulations, many local government themselves prepared other customary laws which will enhance exclusive power in 22 matters, concurrent power in matters which will be around 320 functions which are both functional and unbundling for the local development. This is the historic moment for the Nepal serve the citizens more closely by their own elected representatives with the help of technocrats. 
More inclusive decision-making process for the marginalized, economically deprived and socially excluded communities in their basic need such as education, health, income, social safety-net and living standard. Local government is needs to focus on capacity development, first they need to develop clear do able polices, guidelines and operational manuals and longer- term periodic plan. Technology innovation is critical in ‘Information Communication & Technologies’ system, data base. 
There is not yet clear who will handle common agendas /issues such as poverty, land management. There is critical gap between the provincial government and local governments for their roles and responsibilities, taxation, revenue collection issues. It needs to develop clear policies. The issues of monitoring and oversight issue is crucial for the quality assurance of the development activities at the LLG level. 
Where local governance governments in upcoming five years from now?  
I am quite optimistic for upcoming five years there will be bright future of LLGs because after almost two decades later elected representatives are in place. Permanent two third majority government is in the federal level and out of seven, six provincial government are governing by Nepal Communist Party which is one of the important factors for the permanent government structures at all three tires of the government. 
It needs to change ‘business as usual not an option anymore’ deliberative decision-making process is essential for the success of the programme. For the success of the programme for upcoming five years there is required to implement the role of local political accountability by technical and social accountability required by the LLG and provincial governments. It needs to be clear targeting to reach to the poor and deprived communities which not restricting autonomy, discretion and choices with over focused programmes. The conditional grants are essential from the government. There might be important to develop policies for the ‘matching fund’ and ‘cost sharing investment modality’ for the longer-term development. As per current scenario there is bit less optimism in the provincial government due to not having sufficient deputatization to the civil servants at the provincial level. 



[1]Mr. K. C. is Ph. D. Scholar for Rural Development Department of Tribhuvan University Nepal. nahakulkc@gmail.com

Wednesday, March 15, 2017

REACHING THE POOREST AND ENHANCING DEPTH OF OUTREACH RIGHT POVERTY TRAGETING THROUGH FINANCIAL INCLUSION

REACHING THE POOREST AND ENHANCING DEPTH OF OUTREACH RIGHT POVERTY TRAGETING THROUGH FINANCIAL INCLUSION

March 15th ; 2017
Nahakul K.C.[1]
1.         ABSTRACT:
Poverty Alleviation Fund (PAF) was created by Government of Nepal in 2003 to reduce extreme
poverty in Nepal and build an equitable and sustainable society and is financed by the Government through a succession of IDA grants from the World Bank. Initially established by an ordinance in 2003, PAF is governed by an act since 2006. Thus PAF is now an autonomous and professional organization governed by a separate law.

To realize the development objective, PAF has four major programmes – social mobilization, capacity building, income generating activities and infrastructure building at community level. Revolving Fund (RF) is part of the income generating activities. For income generating activities, PAF provides 90% grant to Community Organisations (COs) to launch activities, exclusively for the target groups. The groups or CO members borrow money from CO's Revolving Fund in the form of loan to launch IGAs. Poverty Alleviation Fund (PAF) has started its implementation since 2004/2005. While implementing the sub projects through community organizations is on-going to finance on Income Generation Activities and small infrastructure, COs and its members have also started to build federations, networks of COs, and co-operatives.

PAF Revolving fund is the central feature of PAF Income Generating component in continuously carrying out the income generating activities by COs’ members. As a part of IG program, COs have established Revolving Fund (RF) provided by PAF. RF has been important source for the poor to easily access the loan to initiate their livelihood activities, who have no access to the formal financial institution. PAF has envisioned RF as the important milestone for financial linkages.

This article is mainly focused on for the event is “Balancing Financial, Social and Human Values.”  In March 2017. The summit plans to come up with workable declaration through deliberation on pertinent issues confronting microfinance services in Nepal.

Key Words: Revolving Fund, Poverty, Saving &Credit, Financial Inclusion and Social Cohesiveness

2.           INTRODUCTION:
This article is intended to share experiences and practices of access to credit through revolving fund for promoting economic empowerment. This article is intended to present in National Microfinance Summit Nepal 15th to 17th March 2017; "Balancing financial, social and human values." This will reflect main learnings of Poverty Alleviation Fund Nepal and its best practices. This paper has objective to share learnings and success of the revolving fund of the Community Organizations at the national and international forum. The paper will provide opportunities to obtain experiences from other countries and national entitles who are directly working in to the micro finance institutions.

Objectives of Revolving Fund:
In order to access to and mobilize RF, CO and its members will have to follow the systematic practices and process. The practices and processes involve identification, analysis and prioritization of their needs, aggregating their demands, and accessing to RF and ensuring proper management of RF. Experience, skill and learning gained in this process itself is empowering and instrumental that help advances CO and CO members to undertake the further improved and informed steps and activities (broadening the scope of livelihood portfolio for e.g.) based on the experiences and learning. Specifically, the main objectives of RF are:

· To allow tap economic opportunities and promote entrepreneurial activities amongst co members;
·   To provide financial source, enabling CO members to access to credit to finance their income generating activities;
·  To meet their specific credit demands with the appropriate terms and conditions set by themselves, making loan accessible and affordable and ensuring effective RF management;
·       To facilitate in financial linkage of cos/ members with appropriate FIs;

3.           REVIEW OF LITERATURE:

A literature review was undertaken at the start of the evaluation process to equip the evaluation team with a comprehensive understanding of the project components, objectives and contextual factors. The evaluation team reviewed the Performance Management Framework for RF Management”,

  • Review of Performance of CO Revolving Funds and Recommendations for Revolving Fund
  • Management” prepared for the IFAD Nepal Office and
  • Revolving Fund Management Manual for Income Generating Groups 2065

In order to the proposed study 50 COs, M-CRIL/PAF Nepal adopted the mix methods approaches;

(a) CO workshops at the regional level, and
(b) Field visits to COs.

Each CO workshop was a day-long activity with participation from at the most 4 COs. The workshops were organised by PAF/PO officials at locations where representatives of the participating COs could reach conveniently. Therefore, multiple workshops were organised in regions where the number of COs to be covered were more than four.

The representatives of COs participating in the workshop were requested to bring along all their
record books for review by PAF-N/M-CRIL analysts. The information from the COs were collected based on the template developed by PAF-N/M-CRIL to obtain impressions on the aspects of the review. This included the development of verifiable indicators for each aspect to ensure an appropriate impression of the performance of the COs.  In addition to workshops, at least one CO in each region was covered by field visits.

4.           ANALYSIS AND DISCUSSIONS:

Framework to reach to the poor Targeting Mechanism

Poverty level:
PAF’s mandate is to work with poor households to address issues of rural poverty and social exclusion. Participatory social assessment and community well-being rankings were used to identify the poor as primary beneficiaries at the settlement level. Among the members in the sample COs, 68% are classified as hardcore poor (food sufficiency less than 3 months), 24% under medium poor category (food sufficiency more than 3 months but less than 6 months), 8% under the poor category (food sufficiency more than 6 months but less than a year) and none of them are in the marginal non-poor category. The Central region has a high proportion of hardcore poor (79%) while the Western region has the lowest (43%). However, there is not much difference in the poverty profile of CO members across age of association and gender.

Caste Composition:
To understand the caste homogeneity of COs, all the sample COs were categorized into four
categories. The term homogeneity applies to ‘same/ similar’ caste, economic status and business activities.

(i) Dalit (low caste Hindus)
(ii) Janajati (indigenous people not part of the Hindu caste system)
(iii) Minorities/Muslim and
(iv) Others (includes Chatri, Brahmin, Newar, Takali, Bahun, etc).

Overall a typical sample CO is made up of member households that are 32% Dalit, 45% Janajati, 16% Muslim and 8% other ethnicity. It is clear that PAF is focusing on socially excluded groups such as Dalit and Janajati (together constituting around 77% of the membership). There are 5 COs with 100% Dalit and 11 COs with 100% Janajati in the sample. The majority of Cos are homogenous in nature with a mix of caste groups as members.

Distance from CO to Bank:
As per the PF guidelines all COs were required to open bank accounts to which the revolving fund and other grants could be transferred. The far distances of the COs from their bank branches indicate their remoteness and also the chances of being excluded from formal financial services.

The distance of the sample COs from their bank branches ranged from 3 to 80 Km, with an average of 25 Km. Two-thirds of the COs have branches more than 10 Km away from their location. A majority of sample COs in the Mid-Western and Far Western regions are located in the hills and mountains.

Hence, the average distance is higher in the Mid-Western (34 km) and Far Western (43Km) regions. Some of the COs do not have road access due to which the SMs have to walk to conduct CO meetings. The COs located in the mountains in Doti district from the Far-West conduct bi-monthly meetings due to access issues.

5.         FINDINGS:
During this study and major findings of the PAF financial inclusions are as follows;

Contribution to Poverty Alleviation - Poverty falls to 33.1 percent in six districts:
There are indications that PAF is contributing to poverty reduction in Nepal. For example, the incidence of poverty has come down by 17.40 percentage points in the last seven years in six districts where the Poverty Alleviation Fund (PAF) is operating its programmes. Poverty rate, on average, stood at 50.7 % of the population in Doti, Dailekh, Jumla, Rolpa, Rautahat and Humla districts in 2007. That rate fell to 33.1 per cent in 2014, according to the report, entitled ‘Socio-economic Changes in PAF Intervention Households in Nepal’ which was prepared by the Centre for Economic Development and Administration (CEDA) of Tribhuvan University (TU) based on survey conducted in 2,800 households.

This means that the poverty rate in the six districts declined at an average of 2.49 per cent per year between 2007 and 2014, as against national average poverty reduction rate of 0.8 per cent per annum. The national poverty rate stood at 25.2 per cent of the population in 2010-11, as per the National Living Standard Survey conducted by the Central Bureau of Statistics.

When the survey was conducted, it was found that per capita consumption had largely gone up in the six districts where the programmes of PAF were operating, indicating a rise in income level. According to the report, per capita consumption in the six districts stood at NRs 14,826 per year in the year 2007-08. The amount went up to NRs 36,440 in 2013-14, marking a rise of 145.78 per cent in the seven-year period, or 20.83 per cent, on average, per year. Between 2003-04 and 2010-11, average per capita consumption in the country had gone up from Rs. 15,848 per year to Rs. 34,829 — up 119.76 per cent or 17.10 per cent per year.

Case 1: Member gets out of debt.
CO Name: Tri Shakti
Client: Santoshi Kumari Chowdhary
Location: Saptari (East)
The client initially had no source of income and was completely dependent on her husband who is a daily wage labourer. Their family used to have sufficient food only for 3-4 months. After associating with the CO which was formed in 10/12/2066, Santoshi had obtained a loan of Rs 13,200 for leasing a plot of land (~0.15 bigha) for agricultural. However, due to draught conditions, she was barely able to produce enough from the land to feed her family and pay off the loan. Due to pressure from other members repay off the loan, she took financial assistance from other CO members and also took some smaller loans (10%-15%) from local money lenders.
Despite being in debt, she took another loan of Rs 20,000 from the CO and commenced a rice trading business. The business consisted of buying rice at a wholesale rate from farmers and selling the same at local markets at a higher price. This business got her good profit which she used to pay off all her existing loans.
Thereafter she took another loan of NPR 10,000 for rice business and a solar loan of Rs 13,000. The solar lamp enables her children to study during night time. It is to be noted that currently their family is self –sufficient in terms of food throughout the year. Savings from her business over the years has allowed her to invest NPR 2 lakhs for house construction.

Loan products and terms:
The evaluation team analysed the terms and condition of the COs that offered multiple loan
products and came to the conclusion that in most cases the loan product was the same in terms of design with the main difference being the nomenclature (like buffalo loan, vegetable loan, grocery shop loan) and some variation in terms of loan amount and tenure. The following are the key features of the loan products.

Interest rates are the same across products offered by a CO and are in the range 5-15% per
annum. Interest is calculated on a reducing balance basis in all COs. Most of the COs (more than
65%) charge interest at 12% per annum but since interest rate setting is the prerogative of the
members, some COs decided to charge just 5-6%.

Case 2: Member increases her garments business
CO Name: Fulmat Mai Pran
Client: Deopati Yadav .Location: Rautahat district
Before joining the CO, she used to engage herself in agriculture and sewing activities. She has 5 children apart from 4 other members in her family. Three of her children go to school. Thereafter she joined the CO and took a loan of NPR 36,000 to start a poultry farm in 2070. Afterwards, she took NPR 45,000 to start a garment business along with 3 more members from a different CO. She also obtained loans from other sources (NPR 2.5 lakhs). Her approximate investment in the business is NPR 3 lakhs.
Currently, the business has expanded to NPR 15 lakhs and her profit share is NPR5 lakhs. She along with other partners are engaged in buying large machines and generators. They have also hired 2 people and pay them around NPR 10,000 – NPR 15,000 as wages. Due to the exposure received through CO and capacity building training, she has gained the confidence to talk freely with other people and improve the standard of living of her household.

Widespread outreach: Since its inception in 2003, PAF has been promoting COs and has been able to expand its outreach to all the regions of Nepal, through its income generation and
infrastructure related schemes. Out of the total 75 districts in Nepal, PAF’s RF programme is
functional in 55 districts across five regions with 30,000 COs were established.

Most COs (around 60%) also charge a penalty of NPR 10-100 per month for delayed repayments. Some of the more progressive COs introduced more stringent norms to discourage late repayments (like charging 50% of the instalment interest within the loan tenure and 100% of instalment interest after maturity for delayed payments.  Some COs (21%) also charge a processing fee of 1-3% of the loan amount (most such COs being in the Central region). One old CO in the Eastern region was found to charge an insurance fee of 4%.

High poverty focus: The RF programme was designed to focus on addressing issues related to poverty and social exclusion. The study indicates that 68% of the members of sample Cos are hardcore poor (food sufficiency less than 3 months), 24% are medium poor (food sufficiency more than 3 months but less than 6 months) and 8% are poor (food sufficiency more than 6 months but less than a year); none of the members are in the marginal non-poor category.


 Bank linkage of COs: All COs have opened accounts at nearby bank branches where PAF can transfer the revolving fund. While there are issues with physical access to the bank branches therefore, actual use of the account due to their distances from CO locations, this process has
provided an opportunity to the excluded population in remote regions of Nepal to gain some
access to formal financial services.

The repayment frequency across products is similar mostly monthly for both principal and
interest but, in a few cases, the principal repayment is more relaxed at quarterly or six monthly
intervals; very few have the option of bullet repayments.

The loan tenure fixed at one year by most of the COs (61%), but some have adopted a more
liberal tenure of 18 (16%), 24 (16%) and 36 (7%) months. Older COs, particularly those offering
higher loan sizes, allow a longer tenure for repayment in comparison with the younger COs.
Younger COs offer a maximum tenure of 2 years while around 11% of the old COs have loans

Case 3: Member increases her dairy business . CO Name: Jay Hanuman
Client: Dulari Devi . Location: Parsa district
5 years back, the client had no source of income and had to completely rely on her husband who works as a labourer. After getting associated with PAF, she received loans (NPR 10,000 = 1st, NPR 20,000 =
2nd, NPR 35,000 = 3rd, NPR 50,000 = 4th) which she used to buy 2 buffaloes. She started selling milk and makes a profit of NPR 20,000 on a monthly basis. She is using the extra income to send her 4 children to school. This was not the case 5 years back.
Additional income has increased her confidence as she does not need to depend on family members for income purpose. She is the only member in the entire CO who has taken 4 loans (others have taken
3 or less than 3 loans).

Revitalizing the livelihoods of CO members in earthquake-hit areas: PAF has been actively
supporting the government of Nepal for rehabilitating certain areas (about 1,500 COs in 14 most affected districts) of the Central and Western regions which were greatly affected by the
earthquakes in April and May 2015. Steps taken by PAF involved the recapitalisation of the RFs of the affected COs, reconstruction and rehabilitation of damaged infrastructure.

6.         RECOMMNDATIONS AND CONCLUSIONS:

Regularity of savings and terms an issue in the older COs Savings mobilized by COs around 10% of the average PAF RF provided over the years, should have been higher considering the initial contribution requirements Inter-lending using members’ savings – a minor activity with limited implications;

Member savings form a critical & regular source of funds for a community organisation for meeting credit needs of the members particularly for household and personal needs. The field survey indicates that around 61% of the COs use savings for inter-lending to members for emergencies (accident, hospitalization) and other non-income generation purposes such as wedding, educational expenses for children.

Influencing policy makers; the establishment of the federation structure and the linkage of the federations with banks would require policy support from the central bank (to enable the use of the deprived sector facility) and with other government departments to facilitate the registration and smooth functioning of the structure. PAF will need to develop a blue print for this programme and share it with the relevant institutions. With policy support, deprived sector lending from the banks can be provided either to the COs or their federations.

PAF’s experience and comparative advantage in financial inclusion
PAF has a strong comparative advantage of its nation-wide outreach and network of Cos with financial record. PAF has so far provided almost 30,000 community organizations through the revolving fund, and many of them have acquired basic financial literacy. Some of them formed higher level institution such as SACCOs and engaged in higher amount of transactions with proven credibility and financial record.
Moreover, PAF has complete data of performance monitoring of revolving fund and could provide data to the financial sector who are interested in lending to the poor segment of population under the GON’s policy. PAF conducted a series of consultation meetings with Nepal Bankers Association and intends to work closely with banks and MFIs for financial inclusion. 
The new policy of two percent direct lending, and crating demand is always challenging across the world. PAF Community Organizations are greatest mechanism to enhances demands and capacity. Microfinance institutions should collaborate with PAF, not only lending for together resource mobilizations. PAF Nepal is approaching with Nepal Rastra Bank to have access on deprived sector lending so that PAF Nepal eventually become licensed institution for finance inclusions. PAF would like to establish clear specialized financial institutions within the existing organization and link up with existing financial institutions. So that poor can benefit from the deprived sector lending process and moving out of the poverty and reaching towards prosperity.  

7.         REFERENCES:
·             Mabuhang, A. D. B. S. Y. G. T. (2015). Socio-Economic Changes in PAF Intervention Households in Nepal (2007-2014). Centre for Economic Development and Administration (CEDA).
·             MCRIL. (2016). Review of Performance of Revolving Fund under Poverty Alleviation Fund Project. Micro-Credit Ratings International Limited. Draft Report. Submitted to The World Bank.
·             NPC. (2013). Poverty Alleviation Fund Program Evaluation. National Planning Commission - Government of Nepal.

·             ODI. (2014). CDD/Livelihoods projects in fragile and conflict afgfected areas of South Asia. Overseas Development Institute (ODI).

·             Operational Manual. (2012). Kathmandu: Poverty Alleviation Fund.

·             PAF. (2015). Annual Report. Poverty Alleviation Fund.

·             PAF. (2017a). Review of performance of Revolving Fund under Poverty Alleviation Fund. Poverty Alleviation Fund. 

·             PAF. (2017b). What is PAF. Retrieved from http://www.pafnepal.org.np/what-is-paf-2.html

·             PAF. (2017c). What We Do. Retrieved from http://www.pafnepal.org.np/what-is-paf-2.html

·             Perfromance Audit Report. (2012). Office of the Auditor General.

·             Perfromance Audit Report. (2014). Office of the Auditor General.

·             Poverty Alleviation Act. (2007). Government of Nepal.

·             Tamang, B. (2016). Revolving Fund Status Report. Poverty Alleviation Fund. 




[1] Mr. Nahakul K C is the Executive Director of the Poverty Alleviation Fund OF Government of Nepal. He has more than 23 years of professional experience in senior managerial positions with the government, multilateral and bilateral donor agencies, civil society and private sector on resource mobilization programme management and strategy and policy formulation.  He is leading one of the largest portfolio of poverty sector reaching to the poor through financial inclusion and revolving fund. He has worked with various Ministries, UNDP, DFID and I/NGOs in Afghanistan, Philippines, Nepal and Vietnam.  He has done his BA in Economics and Political Science from the Tribhuwan University, Nepal. He holds a Master’s Degree in Community Development (MCD) from the College of Social Work and Community Development, University of the Philippines and Master of Public Administration (MPA) from IGNOU-Delhi, India.