Transforming an Unsustainable Project into Sustainable Rural Financial Institutions: The Case of the Small Farmer Co-operatives Ltd. (SFCLs) in Nepal

Over the last decade, Nepal has turned into a microfinance laboratory, exploring various approaches to provide financial services to the rural poor, both in the hill and plain areas of the country. The list of institutions and programs engaged in rural finance is long and includes informal credit and savings associations, savings and credit co-operatives, multi service cooperatives, Grameen Banks, village banks, government and privately owned development banks as well as microfinance NGOs. Rural Finance Nepal (RUFIN) is a joint Nepali-German project, implemented by the Agricultural Development Bank of Nepal (ADBN), with technical assistance from the German Agency for Technical Co-operation (GTZ). RUFIN aims at bringing sustainable financial services to the rural poor. The largest provider of rural credit is the Agricultural Development Bank of Nepal (ADBN). In 1975 it started the Small Farmer Development Program (SFDP), the ?mother? of all microfinance activities in Nepal, by introducing the joint liability concept to the country. IFAD was the first major donor, followed by Asian Development Bank. For a long time, the SFDP was considered an unsustainable credit program with low recovery rates and high overhead costs. Responding to this challenge, the ADBN started in the early 90?s to transfer this program into autonomous and member-owned financial institutions, as part of its overall reform program. This paper, through a comprehensive financial analysis, reviews the financial sustainability of these co-operative microfinance institutions, which are known in Nepal as Small Farmer Co-operatives Ltd. (SFCLs). The results of this viability check are very encouraging, and demonstrate that profitable microfinance business and outreach to the poor are not merely fantasy, but can be reality.