The financial sector in Nepal comprises 20 commercial banks, 17 development banks, 17 finance companies, 54 microfinance institutions and approximately 31,000 cooperatives. Despite a diverse mix of Bank and Financial Institutions (BFIs), the NRB–UNCDF study (2024) found that formal institutions meet only 40 percent of the demand for financial services, while cooperatives cover another 20 percent. Similarly, Nepal Financial Inclusion Report (IFC, 2023) revealed that 77 percent use banking services and 11 percent use other formal financial services, while only 47 percent access credit from formal institutions. These studies indicate that many poor households are still left without access to financial services.

The phrase ‘Water, water, everywhere, nor any drop to drink’ aptly describes the condition of the Nepali financial sector—a situation in which financial institutions exist in abundance, yet their services fail to effectively reach those who need them the most.

The Nepal Rastra Bank (NRB) has formulated various regulatory frameworks and issued guidelines and directives to improve access to finance. It introduced the deprived sector lending programme, under which Class A, B, and C BFIs must disburse 5 percent, 4.5 percent and 4 percent, respectively, of their total loan portfolio to the deprived sector. NRB has also mandated each bank to open at least one branch in every municipality. Additionally, there are priority sector lending requirements and subsidised credit programmes.

However, despite policy abundance, implementation remains weak, creating a wide gap between plans and actual practice. Banks are physically present across the country and maintain excess liquidity, yet these resources are not being effectively mobilised to expand access to finance. There is also a lack of policy mechanisms to obligate Microfinance Institutions (MFIs) to serve the underserved and ultra-poor. Empirical evidence consistently shows that financial inclusion remains limited, particularly for rural populations, women entrepreneurs, Micro, Small and Medium Enterprises (MSMEs) and low-income households.

Most BFIs still rely on traditional service delivery mechanisms and offer standardised, ready-made products that may not address the unique needs of poor households. Serving low-income clients effectively requires a clear understanding of their household-level cash flows, irregular income patterns and seasonality. Similarly, MSME products offered by BFIs may not cater to the diverse needs of different types of MSMEs. For instance, the internationally recognised agricultural bank Rabobank offers tailored financial products for dairy farming based on cash-flow needs. If a farmer requires a loan only to purchase a cow, the repayment period is typically 3–5 years. However, if the loan is intended for purchasing livestock, constructing sheds and acquiring grazing land, the repayment period extends to 20–40 years, aligned with the farmer’s long-term cash flow.

MFIs in Nepal have struggled to reach the ultra-poor due to a lack of strong commitment to serving the bottom segment of the population. In recent years, many MFIs have become increasingly focused on commercialisation and profit maximisation, drifting away from their original mission of poverty alleviation. Reaching the unserved and ultra-poor requires strong partnerships and coordinated efforts among government agencies, donors and civil society.

The lending methodology of MFIs itself creates barriers to promoting financial inclusion. The requirement to form groups and attend mandatory monthly meetings often excludes the ultra-poor, whose opportunity costs are high. Many of the poorest households rely on daily wage labour. They do not have the time to attend group meetings. Additionally, some poor individuals are unable to find sufficient members to form a group, while others lack acceptable physical collateral.

In group-based lending, the group leader typically selects members based on trust, proximity, kinship and past relationships. As a result, ultra-poor individuals are often rejected as potential members because they are perceived as more likely to miss payments. Consequently, the very people who most need financial services are systematically excluded from access to microfinance.

Promoting financial inclusion

The exclusion of many people from mainstream financial services indicates that the existing delivery mechanisms and products are not capable of serving financially excluded communities. Barriers exist on both the demand and supply sides of financial services. People living in different geographic areas and engaged in diverse occupations require different types of products, and these products must be designed based on local needs. Poor households rely primarily on informal mechanisms because they offer flexible repayment terms and provide credit without requiring physical collateral.

People living below the poverty line are among the most challenging clients for financial service providers. Their agricultural incomes are often irregular, and the risks associated with agriculture are difficult to predict and mitigate. As a result, they require frequent, flexible and tailored financial products to help them manage risks and stabilise their livelihoods.

People living in absolute poverty—characterised by poor health, inadequate housing and limited access to basic services—face significant barriers to using available financial services. Such individuals require broader support systems, including improvements in health and sanitation, skills training and start-up grants to initiate microenterprises. They can benefit from credit only when they possess some skills and income-generating activities that can be expanded. Most poor people depend on subsistence farming and daily-wage labour as their primary livelihood sources.

Due to limited financial literacy, many clients are unable to access the financial services available to them. Financial education helps individuals make sound financial decisions, set financial goals, borrow and invest productively, increase their income and save for the future. The lack of financial literacy is widely recognised as one of the major barriers to financial inclusion.

Findings from various studies suggest that individuals with a strong internal locus of control—those who believe that life outcomes are determined by their own actions rather than by chance—are more motivated to work hard and save for the future. Training, orientation and empowerment programmes that promote livelihood skills, improve business practices and encourage wise money management behaviours are essential for enhancing people’s self-efficacy and improving overall well-being.

The availability of accurate data on access to finance is also critical for promoting financial inclusion. Many BFIs and cooperatives cannot provide information on the number of poor clients they serve or fail to serve, nor the reasons for exclusion within their operational areas. Without reliable data on those who remain unserved, the goal of financial inclusion cannot be achieved. Such data is essential for designing appropriate strategies to meet the financial needs of excluded populations. Strengthened guidelines and directives from regulators, along with effective monitoring and enforcement, are required to address these challenges and advance financial inclusion.