The constitution states that cooperatives are one of the three pillars of Nepal's economy. But today, the trust of millions of members in this pillar has been shattered. Although the problems of cooperatives seem limited to a few institutions, their impact is spread across the country, 'from a house in a village to a business in a city and from a member's account to the entire financial system.'

Limiting the crisis of cooperatives to ‘the mismanagement of some cooperatives’ is a simple explanation . But the reality is deeper than that . The crisis here is not just about money, but about trust . People who invest money in cooperatives are not just looking for interest, they are laying the foundation for their future, their children’s education, their health, their dream of building a house or their business . Therefore, the crisis of cooperatives is more of a social crisis than a financial one . This is why cooperative reform is no longer just an internal issue of cooperatives, but is linked to the economic and social stability of the nation and the credibility of the governance system .

1. Cooperatives: The Economy of Collectiveism

Cooperatives are not a ‘financial product’ . It is a socio-economic institution created by the community . Its soul is the collective power of its members, where members are both owners and service recipients . The basic belief of cooperatives is that collectiveism makes work that seems impossible individually possible . Nepalese society is a society born in a culture of cooperation . The practice of permaculture in villages, the Guthi system, labor donation, common farming, common management are all informal cooperative practices. Modern cooperatives institutionalized this culture.

The formal journey of cooperatives in Nepal

The institutional journey of cooperatives in Nepal began with the establishment of the Department of Cooperatives in 2010. The Cooperative Institutions Act came into effect in 2016. Modern cooperative practices gained momentum in Nepal after the establishment of the ‘Bakhan Multipurpose Cooperative Society’ in Chitwan in 2013. A cooperative training center was established in 2019. After the restoration of democracy, the Cooperatives Act 2048 gave a big shape to cooperatives.

Unless cooperatives are operated as a 'means of service' and a 'democratic system' rather than a 'earning vessel', it is not possible to restore the lost public trust in this sector. Therefore, the state, directors and members must be equally responsible for protecting the essence of cooperatives. After the implementation of the Cooperatives Act 2048, the numerical growth of cooperatives accelerated. Then, in 2049, the Cooperative Regulations came into effect. The National Cooperative Federation and various central associations were formed. The cooperative sector began to contribute significantly to rural financial access and community-based services. To improve the problem of misappropriation of cooperative savings and regulatory weaknesses, the work is progressing by amending the Cooperative Act in 2081 and establishing the National Cooperative Regulatory Authority.

Cooperative Bank

With the numerical expansion of cooperatives, the need for a structure to facilitate financial cooperation was felt. The Cooperative Act 2048 Amendment (2057) made provisions for the establishment of a cooperative bank. On this basis, the National Cooperative Bank was registered in 2060, business started in 2061 BS, and in 2067 BS, it obtained a limited banking license from Nepal Rastra Bank and expanded its services.

The historic decision to make cooperatives a ‘pillar’

Finally, due to the reach of cooperatives, number of members and resource mobilization, the Constitution 2072 BS recognized cooperatives as one of the three pillars of the economy. The goal of achieving prosperity through the participation of the public, private and cooperative sectors is the core of the Constitution. Although the Cooperative Act 2048 BS was repealed in accordance with the spirit of the Constitution and the Cooperative Act 2074 BS was implemented, a question has been raised since the day cooperatives were made a pillar – ‘The pillar was created by the concept, but who took the responsibility of strengthening the pillar?’

2. Today’s situation

The core essence of cooperatives was a sacred campaign based on ‘cooperation and collective interest’. Its high objective was to integrate the small capital of the community and become self-reliant by investing in productive sectors. However, in practice, a large part of cooperatives moved away from production and services and focused only on savings and loans.

Savings and loans transactions in themselves are not wrong. The problem began when the size of financial transactions became huge, but the regulatory mechanism to support it remained very weak. Modern technology and frills were introduced into the management of cooperatives. But its operating structure, regulatory management and good governance remained the same. These institutions, which looked modern from the outside, continued to operate with archaic and opaque thinking inside.

The democratic concept of ‘members are the owners of the cooperative’ was limited to paper only. In practice, the key to decision-making was concentrated in the hands of a few limited individuals, especially those who received political protection, and institutional transparency was disappearing. Where billions of resources are mobilized, the lack of scientific 'risk management' proved suicidal. Another sad part is that the democratic concept of 'members are the owners of the cooperative' was limited to paper only. In practice, the key to decision-making was concentrated in the hands of a few limited individuals, especially those who received political protection, and institutional transparency was disappearing. Thus, the dominance of the old-fashioned weak good governance and individualistic decision-making process under the cover of modern management is the real root of today's cooperative crisis.

‘Limited’ mistakes, ‘all’ to be punished

The nature of the crisis currently seen in the cooperative sector amid internal weaknesses is very ironic, where ‘all’ are being punished for the mistakes of ‘limited’. In recent times, the mismanagement and irresponsibility of a handful of cooperative organizations have deeply damaged the image of the entire campaign, due to which even capable and honest cooperative organizations have been drawn into a circle of distrust.

When news of problems in the cooperative sector becomes public, intense psychological fear arises among members regarding the security of their savings. Due to this fear, members start demanding their savings back even when they do not need them immediately, which increases the pressure on liquidity in the organization.

As new savings collection decreases and the cash balance is depleted, the cooperative begins to struggle to fulfill its mandatory obligations such as daily payments and deposit returns. Thus, the risk of collapse due to ‘crisis of trust’ and ‘collective panic’ rather than the institution going bankrupt is the most challenging aspect of today’s cooperative movement.

When the system of trust collapses, politics has an impact on the economy.

The real capital of cooperatives is not money, but trust. But once trust is broken, it can only be restored through systemic reforms, not interest rates. Today, politics is also visible in the cooperative crisis—who should be protected, who should be prosecuted, who should be exempted, who should be punished is growing like a fire. The cooperative crisis has exposed a harsh truth in Nepal: when regulation is weak, the financial system ultimately falls into the hands of the powerful.

Systemic causes of the cooperative crisis

Neglect of the cooperative sector in policies and budgets is the main reason. The constitution made cooperatives a pillar, but the policy and budget did not give that pillar the necessary 'strengthening'. State investment in capacity development, regulatory reform, and technology in the cooperative sector remained weak. In the federal structure, cooperative rights were divided into three levels, but coordination and uniform standards were weak.

Cooperative regulation lacks sufficient manpower, financial risk understanding capacity, and modern supervision tools. Inspection is 'paper-based' in many places. There is no risk-based supervision in cooperatives like in the banking sector. However, the banking sector, which carries out similar transactions, is operating with strong regulatory arrangements. Thus, when there is a regulatory difference between the two bodies in the financial sector, the sector with weak regulatory arrangements is almost certain to face problems first. This weakness has made it impossible to control the crisis in a timely manner even when it escalates.

Weak audit and disclosure system

When the actual financial situation is limited to formalities, the audit can hide the real financial situation. The tendency to not make financial statements public or present them in an incomprehensible manner weakened member control. Bad loans, risk concentration, and asset-liability imbalances were not detected in time. The principle that the power of a cooperative lies with its members is true. But if members do not understand their rights, financial statements, risks, and the status of the organization, that power exists only on paper. When cooperative education is weak, the risk of the cooperative becoming a ‘director/employee organization’ rather than a ‘member organization’ increases.

Specific problems of financial cooperatives

According to the Cooperative Act, as per the directives issued by the Nepal Rastra Bank and the National Cooperative Authority, financial cooperatives are required to maintain primary capital of 4 percent and total capital of 8 percent in the ratio of risk-weighted assets. The act itself has made provision for collecting deposits up to 15 times the primary capital fund. But in practice, many cooperatives have not been able to make the capital/deposit ratio healthy, and it seems that it will take a long time to balance it. When capital is weak, even a small shock can lead to the collapse of the organization.

3. The next course of action

Cooperatives are no longer ‘general reforms’, but systemic reforms with overall changes are needed. There are many ways to reform, but the main issue is that the next reform should answer three questions. Who needs what kind of cooperative? There should be clarity in the purpose and use. What kind of regulation should be made for which cooperative? A clear framework should be made for risk-based regulation and risk management.

How are member savings protected? There should be assurance of savings security and return. Now let’s regulate cooperatives not with a single rule, but with a single vision. The biggest regulatory mistake of cooperatives is the idea that ‘all cooperatives are the same’. The size, turnover, risks and objectives of cooperatives differ. Therefore, the first basis for reform is the proper classification of cooperatives. Cooperatives can also be classified into four categories: A, B, C and D.

Group ‘A’: Large financial cooperatives. Classify on the basis of high deposits, multi-branch, high risk, high turnover.

Group ‘B’ : Medium financial cooperatives. Classify on the basis of regional, medium turnover.

Group ‘C’ : Community-based small cooperatives. Limited members, limited turnover.

Group ‘D’ : Production/service/enterprise cooperatives. Working in the agriculture, industry, labor, consumer, service sectors.

Thus, the dominance of the old-fashioned weak good governance and individualistic decision-making process under the guise of modern management is the real root of today's cooperative crisis. After classification, regulation should also be made effective, because regulation without classification is indiscriminate. Only after classification is risk-based regulation possible.

Mixed Monitoring System

The soul of cooperatives is self-regulation. But self-regulation alone is not enough in large financial cooperatives with high risks. Therefore, a mixed monitoring system is necessary in Nepal. In which cooperatives in group 'A' can be supervised by the central regulator, group 'B' can be regulated by provincial regulations and central standards, and group 'C' can be regulated by minimum standards and facilitated by local/federal/cooperative associations. In group 'D', production-market-management facilitation and central standards should be determined on the basis of risk, not regulation numbers.

In a cooperative crisis, the state is not enough to investigate and take action. A structure is needed to restore the trust of savers. For this, a saver protection fund is needed. The fund should have a system to protect savings up to a certain limit per member. This fund can be established by contributions from cooperatives, regulatory fees, and an initial contribution from the state.

An authority with the authority to identify, change management, restructure, merge or close down troubled cooperatives in a timely manner through the problematic organization resolution authority/body, which should be able to work autonomously . It should be able to take prompt corrective action . When the regulator intervenes before a crisis occurs in a cooperative, the savings of citizens do not sink and timely improvements can be made to the organization . For this, work should be done to stop dividends when capital decreases, remove directors/managers, make management improvement plans mandatory, limit credit expansion and limit new deposit collection .

Special criteria should be mandatory for those who mobilize large amounts of money in the name of cooperatives . Reform is not possible without ensuring the qualifications, honesty and responsibility of directors and managers .

Conclusion

The cooperative movement of Nepal is a movement of massive public participation and wide access . It has played an important role in making the rural economy dynamic and promoting entrepreneurship by integrating small capital . तर, पछिल्लो समय केही संस्थाहरूमा देखिएको वित्तीय अपचलन, सुशासनको अभाव र राजनीतिक संरक्षणले यो समग्र क्षेत्रलाई नै गम्भीर विश्वासको संकटमा धकेलेको छ । सहकारीको वर्तमान संकट केवल पैसाको मात्र होइन, यो त राज्यको नियमनकारी निकायप्रतिको प्रश्न र नागरिकको सुरक्षित भविष्यप्रतिको भरोसाको संकट हो ।