From Informal to Formal Finance: The Transformation of an Indigenous Institution in Nepal
This paper is a sequel to the authors' study in 1988, titled "Dhikuti: The small businessman's informal self-help bank in Nepal" in Savings and Development (XII, 2:183-200). Dhikuti is the name for RoSCAs in Nepal. Since 1988, a remarkable institutional innovation has occurred due to a change in the legal framework and an organization of Dhikuti origins has transformed into a financial company named the Himalaya Finance & Savings Company (HFSC).
The reason for this transformation was to overcome the weaknesses of Dhikuti, such as:
- Lack of instant access to credit;
- Speculative nature and moral hazard of bidding;
- Rigidity of fixed monthly contributions;
- Failure of the system to mobilize savings;
- Drop-out risk of early recipients of the fund;
- No legal status and no supervision by the central bank.
The paper also describes the main changes in the organization which include shifting from monthly rotating savings accumulation to daily deposit collection, because the craving for access to credit was largely due to the absence of savings deposit facilities and from group-lending to individual-lending. As savings mobilization in finance companies is limited, HFSC further plans to transform into a bank for which no such restrictions exist.