How well is Nepal doing in financial inclusion?

Nepal has made notable strides in financial inclusion, although there is still room for further improvement, says the Nepal Financial Inclusion Report 2023, jointly produced by the International Finance Corporation (IFC) and the UN Capital Development Fund (UNCDF) based on Household Survey on Access to Finance (A2F) 2021-22 (see below for the sample size).

The report reveals that Nepal displays an overall strong adoption of financial services, with banking being the most widely-used service, accounting for 75% of the total usage.

• The percentage of adults who use formal financial services (from banks and other formal providers) has increased from 61% in 2014 to 90% in 2022. This includes using services such as bank accounts, savings, credit, payments, and insurance. 
• In rural areas, the usage of formal financial services increased to 88% in 2022 from 58% in 2014 wherein 77% use banking services and 11% use other formal financial services. 
• In urban areas, adults having access to formal financial services have now grown to 92% in 2022 from 71% in 2014.

Notably, the usage of informal channels and the share of excluded groups have significantly decreased in both areas.

Of particular significance, the report highlights a decrease in the gender gap. In 2022, the gap in access to formal financial services between women and men had reduced to 1% (89% for women versus 90% for men) from the 2014 figures of 57% and 64%, respectively.

The report also highlights that among the surveyed adults who did not have a bank account – 19% of all of the respondents, 30% reported that they did not need it, 23% did not have enough money left after their expenses, and 19% felt that they did not have enough money to put in a bank account. 

An additional barrier to opening a bank account was the lack of necessary documents, with 5% of the respondents citing this as the reason. 

Similarly, the barriers to using mobile money service were lack of knowledge on opening an account (43%), difficulty to use mobile money platforms (18%), and lack of access to agents and points of service (5%).

Despite the overall growth of financial service users, when broken down, the usage of specific formal services remains low. For instance, only 47% use formal credit services, 63% - formal savings services, 76% - pay via banks, and 29% - insurance from formal providers. 

In many cases, usage is limited to transactional accounts only. For instance, opening up a bank account is mandatory to collect social benefits from the government. Nonetheless, the usage of such accounts is limited to receiving cash; and as such benefits are mostly withdrawn by the beneficiaries promptly, these accounts remain dormant thereafter. 

Likewise, the remittance received by beneficiaries in a bank account is mostly withdrawn from the bank account immediately, with less than 20% of such transfers being retained in financial institutions. 

Cash is still widely used due to people’s reluctance to use formal financial services, with most products offered by financial institutions not being tailored for small-value savings/investments.

Savings Market
Growth in savings with other formal financial service providers is higher than with the banks: The number of adults who save in formal financial institutions has increased from 40% in 2014 to 63% in 2022, with 36% of adults saving in banks and 27% saving in other formal financial institutions – mainly Savings and Credit Co-Operatives (SACCOs) which are not regulated by the Nepal Rastra Bank (NRB).

As of 2022, the growth in savings at other formal financial service providers is higher than that with the banks, as savings with a bank increased from 27% to 36% while savings with other formal financial service providers increased from 13% to 27% in 2022.

Growth in financial service provider reach
There has also been a rapid expansion of financial services over the past five years, with financial institutions and/or banks reaching 752 of the country’s 753 local bodies. 

In addition, in order to accommodate the new government structure, NRB has converted its former regional branch offices into provincial offices. Similarly, commercial banks have begun establishing provincial headquarters with provincial management structures to improve and facilitate financial services at the local level. Currently, provincial and local branches of commercial banks work directly with the provincial.

Growth in insurance penetration and usage
The uptake of insurance has seen a notable growth from 11% in 2014 to 29% in 2022. 

Post-2014, banks started cross-selling insurance products that were permitted by NRB. In 2022, 7% of adults accessed insurance services via banks, and 22% of adults accessed insurance through other formal sources which are primarily insurance companies.

The usage of informal channels has also gone down over the years, from 9% in 2014 to 0.4% in 2022. Nonetheless, still a significant share of adults, i.e.71% are excluded from any form of formal or informal insurance services, a decrease of 9 percentage points from 2014.

Sample size for the study
Nationwide, 2,528 adults (aged 16 and older) were sampled for the study. In 2014, UNCDF, in partnership with the Central Bureau of Statistics (CBS) conducted a comparable survey, the Nepal Consumer Survey also known as FinScope Study, in which more than 4,014 adults (aged 18 and older) samples were collected. The methodology adopted by both surveys is deemed to be comparable, and the access strand analysis uses data on adults 18 years and older, to be comparable to the 2014 FinScope survey.

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Note: The entire text in this brief is extracted from the Nepal Financial Inclusion Report 2023. Read the full report here.