The government has started preparation to form an authority for the supervision and regulation of financial cooperatives. The Ministry of Land Management and Cooperatives has drafted the Financial Cooperative (Regulation and Supervision) Act, 2024, proposing the creation of an authority responsible for licensing, regulating, and supervising financial cooperatives that mobilize deposits from the public and disburse credit.
The law, currently in the drafting phase, grants the authority the power to determine minimum capital requirements for financial cooperatives, issue licenses, classify cooperatives, and conduct monitoring and supervision, among others.
The government, through the budget for the fiscal year 2024/25, announced its intent to create a separate body for the supervision and regulation of financial cooperatives. The ministry drafted the law in line with this intent, an official of the ministry said. According to the official, the authority will be an autonomous institution governed by a seven-member board, with the chairperson appointed by the government.
As per the draft law, cooperatives with transactions exceeding Rs 50m, capital over Rs 15m and individual savings above Rs 1m must obtain a license from the authority. Cooperatives that are already in operation are also required to obtain a license from the authority once it becomes operational.
The draft law also proposes classifying financial cooperatives into three categories based on share capital, the nature of transactions, and the operational area. It allows the authority to determine the minimum capital floor for financial cooperatives.
Currently, federal, provincial, and local governments have the power to register and regulate cooperatives based on their transactions, operational areas, and nature of business.
The government began preparations to form a powerful institution for the supervision and regulation of cooperatives after cooperative promoters misused people's deposits, taking advantage of the lack of regulatory oversight.
A committee formed by the government last year recommended regulating cooperatives with large transactions through Nepal Rastra Bank (NRB) as an immediate measure and forming a powerful authority in the long run. Although parliament amended the Nepal Rastra Bank Act, 2001, to pave the legal way for the central bank to regulate large cooperatives, the central bank has been slow to act.
The International Monetary Fund (IMF) has also expressed concern about savings and credit cooperatives, stating that a social unrest could be triggered if the ongoing problems are not dealt with soon. “A combination of large data gaps, weak governance, unsound credit and liquidity risk management, and a lack of licensing, effective regulation, monitoring, and supervision has resulted in the failure and closure of multiple cooperatives,” the IMF said in its review of Nepal under the Extended Credit Facility (ECF) arrangement.
Stating that a proper licensing process hasn’t been established under the current regime, the IMF suggested that licensing of savings and credit cooperatives is necessary for both existing and new entities.
