Revitalizing Nepal’s cooperative sector

The cooperative sector, a vital pillar of Nepal’s economy, significantly contributes to poverty alleviation, financial inclusion and community empowerment. However, despite its importance, the sector faces deep-rooted issues related to governance, financial mismanagement, and regulatory oversight. Drawing lessons from Maharashtra’s cooperative experience in India and international models like Mondragon in Spain and Amul in India can provide valuable insights for revitalizing Nepal’s cooperatives. Additionally, cooperative theories and international standards set by organizations such as the United Nations (UN), International Labour Organization (ILO) and International Cooperative Alliance (ICA) can guide necessary reforms to restore integrity and sustainability in the sector.

Cooperatives in Nepal are intended to function as empowerment centers, focusing on mutual support and self-help, rather than mere service centers. Unlike traditional organizations, the formation of a cooperative institution involves specific requirements. As per Section 5 of the cooperative registration guidelines, three categories qualify for forming cooperatives: primary producers (those directly involved in production), actual workers (engaged in labor) and bona fide consumers (genuine consumers). However, these principles were often disregarded during registration, leading to deviations from cooperative standards, resulting in governance issues and misappropriation of funds. Officials failed to consistently enforce these guidelines, allowing intermediaries to capture control of cooperatives instead of genuine members, which compromised the essence of cooperativism.

The deep-rooted challenges in Nepal’s cooperative sector came into the spotlight with a series of scandals involving high-profile individuals. The arrest of Rabi Lamichhane, a former Deputy Prime Minister, Home Minister and Chair of the Rastriya Swatantra Party (RSP), along with 13 others, highlighted the issues plaguing the sector. A parliamentary special probe committee was formed in 2024 to investigate crisis-ridden cooperatives. The committee accused Lamichhane of misusing approximately Rs 650m that had been funneled into Gorkha Media Network, where he served as the Managing Director of Galaxy Television. The funds were allegedly sourced from multiple cooperatives, including Suryadarshan in Pokhara, Supreme in Butwal, Swanalaxmi in Kathmandu, Sahara Chitwan and Sano Paila in Birgunj. The incident showcased how influential individuals misused cooperative resources for personal or political gain, leading to significant financial crises and eroding trust in the sector. This case was not an isolated one, but rather indicative of a systemic issue where politically connected figures exploited cooperatives, leaving ordinary citizens, who invested their savings in the cooperatives, to bear the consequences. These individuals, many of whom work under harsh conditions in Nepal and abroad, saving diligently for their future, were among the primary victims.

Another case that drew public attention involved Congress Vice-president Dhanraj Gurung and his wife, who were accused of embezzling Rs 148.1m from the Miteri Cooperative. The unresolved nature of this case has fueled suspicions, emphasizing the urgent need for stringent reforms to address corruption and financial mismanagement in the sector. These incidents collectively underscored the systemic governance failures and the necessity for comprehensive regulatory reforms.

The cooperative movement in Maharashtra during the 1960s to 1980s stands out as a model of successful rural economic development, offering crucial lessons for Nepal. Maharashtra’s cooperatives emerged as a central force in the state’s economic and political landscape, with their influence paralleling that of Panchayati Raj institutions and the Congress Party. For many aspiring politicians, cooperatives were a critical platform for advancing their careers, making the cooperative network integral to rural development and political life. By 1988, Maharashtra had overtaken Uttar Pradesh as India’s largest sugar-producing state, with over 100 cooperative sugar factories driving economic growth. The sector expanded beyond sugar production to include related industries, such as dairies, spinning mills, agricultural processing units, poultry farms and cooperative banks, thus establishing a robust network that supported local economies. 

An illustrative example is the Hutatma Ahir Sugar Cooperative in Sangli district, which became a model of how cooperatives can drive regional development by fostering economic self-reliance and empowering communities.

However, despite its early success, Maharashtra’s cooperative movement eventually encountered significant challenges. Corruption, financial mismanagement and political interference became rampant, with cooperative leadership often falling into the hands of influential families connected to the Congress Party. The resulting dynastic control led to resource misallocation and weakened governance structures. Political entanglement with cooperative management eroded democratic principles and undermined financial oversight, allowing personal interests to take precedence over cooperative ideals of member empowerment and mutual benefit. The decline of the movement highlighted the vulnerabilities that arise when political power and cooperative management become intertwined.

To address these setbacks, Maharashtra implemented a series of reforms aimed at restoring the integrity of its cooperatives. Mandatory audits were introduced to ensure transparency, while term limits for leadership positions were established to prevent power concentration. Stricter financial regulations aimed at curbing corruption and state-supported cooperative banks played a crucial role in providing financial resources to distressed cooperatives, enabling them to continue supporting rural development. These reforms demonstrated the importance of robust governance practices, financial transparency and effective regulatory oversight—lessons that are relevant for revitalizing Nepal’s cooperatives.

The principles that guide cooperative reforms in Nepal should be informed by theoretical frameworks that emphasize ethical governance and accountability. Fiduciary duty requires cooperative leaders to prioritize the interests of members, maintaining loyalty and transparency. The business judgment rule protects leaders who make decisions in good faith, using informed judgment, provided their actions do not serve personal interests. Agency theory highlights the need for mechanisms like regular audits and transparent reporting to monitor leadership behavior and mitigate conflicts of interest. Stakeholder theory broadens the scope to consider the interests of all stakeholders, particularly marginalized groups, while social capital theory underscores the importance of building trust and reciprocal relationships to promote cooperative development.

International standards and legal frameworks also play a crucial role in guiding cooperative reforms. The United Nations, through Resolution A/RES/56/114 and the declaration of the International Year of Cooperatives in 2012, emphasizes cooperatives' role in promoting sustainable development, social inclusion and poverty alleviation. The ILO’s Recommendation No 193 advocates for cooperative development aligned with international labor standards, promoting democratic member control and legal compliance. The ICA’s principles, such as voluntary membership, democratic governance, economic participation and continuous education, provide essential guidelines for enhancing cooperative governance. Aligning Nepal’s policies with these international standards can modernize the legal framework and improve the sector’s sustainability.

Successful models such as Mondragon in Spain and Amul in India offer valuable lessons on how cooperatives can thrive through effective management and member engagement. Founded in 1956, Mondragon operates on principles of shared ownership, democratic governance and profit-sharing. It has demonstrated resilience and adaptability across various industries, including manufacturing and finance, by emphasizing member participation and collective decision-making. Mondragon’s cooperative model shows the benefits of a structure where economic growth is shared equitably among members, ensuring long-term stability even in challenging economic times. 

Amul is a case in point. Founded in 1946, it transformed India’s dairy sector by creating a cooperative network that connected small-scale producers directly to consumers, thereby maximizing returns for farmers. Its ‘milk to market’ model, supported by government partnerships, facilitated rural development by eliminating intermediaries and promoting sustainable agricultural practices.

To address the existing challenges in Nepal’s cooperative sector, several key measures must be considered. Strengthening governance and regulatory frameworks is essential, with the modernization of the Cooperative Act of 1992 to close legal gaps. The revised act should incorporate stringent financial regulations, anti-corruption measures and enforceable penalties for violations. Establishing a central regulatory authority akin to a central bank would enhance oversight and ensure consistent enforcement across federal, provincial and local levels. Governance reforms should also include independent supervisory boards, transparent election processes for leadership positions and term limits to prevent the concentration of power.

Improving financial management practices is equally crucial. Regular independent audits and financial ‘health checks’ would help detect risks early and prevent financial mismanagement. Establishing a cooperative development fund could provide financial support to cooperatives that adhere to governance standards, promoting stability and ethical practices. Financial literacy programs for cooperative members would enhance understanding of budgeting, risk management and proper financial conduct, ensuring informed decision-making.

Investing in training programs for cooperative staff and regulatory bodies would build technical capacity, addressing the skill gap that has affected management quality. The adoption of modern management practices, such as result-based planning, would optimize decision-making and operational efficiency, while the use of technology would streamline cooperative operations and reduce costs.

Promoting inclusiveness and gender equality is vital to bringing diverse perspectives into cooperative governance. Ensuring women and marginalized groups are represented in leadership roles through leadership development programs would prepare future leaders from underrepresented backgrounds, ensuring inclusiveness in decision-making.

Finally, minimizing political interference is essential for maintaining the integrity of the cooperative movement. Policies should be implemented to prevent political manipulation in cooperative elections, and whistleblower protections must be established to encourage the reporting of unethical practices without fear of retaliation. Training cooperative leaders in ethical governance and cooperative values would further combat corruption and uphold the principles of member empowerment.

Nepal’s cooperative sector holds immense potential to drive economic development and support inclusive growth. Learning from Maharashtra's experiences and international models like Mondragon and Amul offers valuable guidance for addressing current challenges. By strengthening governance, modernizing regulations, enhancing financial management and investing in capacity-building, Nepal’s cooperatives can be revitalized to empower communities, support small businesses and promote sustainable development. Through these comprehensive reforms, the state can transition from a controlling role to that of a facilitator, allowing cooperatives to thrive and fulfill their role as a crucial component of the national economy.