Geography may not be destiny, as the saying goes, but when it comes to financial inclusion, it is definitely a key determinant. Nepal, with its rugged landscape and poor infrastructure, is a case in point.

As discussed in a previous post, the lack of brick-and-mortar banks and other financial institutions in rural areas is a major obstacle to achieving universal financial access. Today, 61 percent of the population is formally financially included, but this South Asian country presents infrastructural challenges that compound the socioeconomic marginalization of large swathes of the population. While the State relies heavily on foreign aid, private households find a vital lifeline in the flow of international remittances, which account for 32 percent of GDP. As 25 percent of the population lives on US$1.25 per day, the national social protection programme plays a critical role in sustaining livelihoods and smoothing consumption among the poorest.

In December 1994, the Government of Nepal began making SSA payments to senior citizens, those above the age of 75. Over time, the pool of beneficiaries has been gradually expanded to include other categories of beneficiaries, namely single women, children, widows, disabled persons and Janajatis (members of endangered ethnic groups). The total SSA budget currently amounts to Nr17 billion (~$156 million) per year, and it is expected to be doubled soon. Payments range between Nr200 and Nr1000 (~$2 and $9), delivered three times per year to 2.36 million beneficiaries, distributed across the country’s mountain, hill and terai (plain) regions (see table I).

Social security benefit grants are currently delivered manually to beneficiaries in cash through a complex institutional framework. The process begins with the 3,276 Village Development Committees (VDCs) and 191 municipalities in 75 District Development Committees (DDCs). VDCs are in charge of enrolling beneficiaries, or renewing the applications of beneficiaries, and submitting them to DDCs, which in turn forward summary reports to the Ministry of Federal Affairs and Local Development (MoFALD). On the basis of the budget prepared by MoFALD, the Ministry of Finance (MoF) allocates the funds and reconciles the reports.

The process is divided into six steps: communication with existing/prospective beneficiaries to renew/enrol; application process; deregistration of the deceased and others; issuance of beneficiary passbook/identity card; fund disbursement; and reporting and reconciliation (see figure I).

This manual process to deliver SSA payments, which comes at an annual cost of Nr1.327 billion (~$12 million), presents both advantages and disadvantages.

The two major benefits of manual disbursement of SSA payments derive from the familiarity of beneficiaries with VDC and DDC officials, who are primarily responsible for disbursing the payments and carrying out development work in the areas under their jurisdiction. First, since VDCs and DDCs can rely on the administrative infrastructure already in place, there is no need to set up a separate chain of operations. Second, VDC officials can use the pre-existing channels of communication not only to reach out to beneficiaries but also to receive feedback and complaints to be forwarded to the upper echelons. The personal relationship built over time between officials and beneficiaries is particularly relevant for specific segments, such as senior citizens. Indeed, not only do VDC officials verify the age of applicants, which is the determining factor for eligibility, from the citizenship card, but they also assist eligible beneficiaries in completing the application form.

On the other hand, the manual payment system presents many challenges. To begin with, a manual process for data collection, data entry, record keeping, report preparation and benefit disbursement is cumbersome and prone to errors. It creates a heavy workload for VDC and DDC officials, who are therefore diverted from other tasks, and increases the risk that resources might ‘slip through the cracks’ because of the lack of proper control mechanisms. It also exposes the system’s vulnerability to inefficiencies and fund misuse, by hindering the identification of ghost beneficiaries and leakages. On top of that, because of the remoteness of the areas in which most beneficiaries reside, cash distribution to VDCs and fund disbursement can be delayed, sowing discontent among beneficiaries. As a result, in the medium/long-term, trust in the system can erode, thus undercutting the legitimacy of the institutional actors involved.

A question then arises: how can the efficiency of the system be improved while costs are contained?

The next blog post will describe how MoFALD, supported by the World Bank and United Nations Capital Development Fund and in partnership with local banks, are addressing this issue.

Stay tuned!

ABOUT UNCDF MM4P

MM4P is a programme launched by UNCDF in partnership with the Swedish International Development Agency (Sida), the Australian Department of Foreign Affairs and Trade (DFAT), the Bill & Melinda Gates Foundation and The MasterCard Foundation. MM4P provides support to digital financial services (DFS) in a selected group of least developed countries (LDCs) to demonstrate how the correct mix of financial, technical and policy support can build a robust DFS ecosystem that reaches low income people in LDCs.

For more information, visit mm4p.uncdf.org or follow @UNCDFMM4P and UNCDF MM4P on LInkedIn.