The cooperatives conundrum a socio-economic failure
Cooperatives serve as a fundamental tool to bring social transformation and economic development by building harmonious societies which helps to create wealth and employment. After the restoration of democracy in 1990, the democratic government enacted the Co-operative Act 1992 and the Co-operative Regulations 1993. Furthermore, the Constitution of Nepal (2015) acknowledged cooperatives as one of the three pillars, along with the public and private sector, for the development of the national economy. These cooperatives usually act under the seven fundamental principles adopted by The International Cooperative Alliance (ICA) in 1995. They include voluntary and open membership, democratic member control, members’ economic participation, autonomy and independence, education, training and information, cooperation among cooperatives and concern for community.
Since the establishment of the Department of Cooperatives (DoC) under the Ministry of Agriculture for Planning and Development in 1953, Nepal has witnessed a mushrooming growth of cooperative institutions. According to the National Economic Survey 2022–2023 as of mid-March 2023, there were 31,373 cooperative institutions in Nepal. The number of share members stood at 7,381,218, and the share capital was Rs 94.15 billion. In the cooperative sector, savings mobilisation amounts to Rs 478.26 billion, and there is a loan flow of Rs 426.35 billion.
With this increasing number, the regulatory body for these cooperatives still remains questionable. The Department of Cooperatives, now under the Ministry of Land Management, Cooperatives and Poverty Alleviation, is the sole regulatory body for cooperatives in Nepal. According to the Cooperatives Act 2017, the Department of Cooperatives regulates provincial cooperatives having annual transactions of Rs 250 million. The local level cooperatives are regulated by the concerned municipality/rural municipality. Similarly, cooperatives in two or more municipalities in the same province are regulated by the provincial government.
Nepal Rastra Bank only regulates cooperatives with transactions of over Rs 500 million. The central bank seems hesitant in supervising and regulating cooperatives as its capacity is already confined within the regulation of the licensed financial institutions and banks. We spoke to an official of NRB on the regulations of cooperatives. They stated that NRB will facilitate the establishment of a separate regulatory body to regulate cooperatives as announced by the government in the budget for the fiscal year 2023/24. Additionally, due to the recent burgeoning cooperative cases, the central bank supported the Department of Cooperatives to monitor and regulate cooperative unions and institutions by sending their staff. “However, it is not possible for NRB to monitor and regulate the cooperatives as there are too many cooperatives,” the official shared.
The Cooperatives Act, 2074 (2017) and Cooperatives Regulations, 2075 (2018) are prevailing legal frameworks governing cooperatives in Nepal. The Cooperatives Act, 2074 (2017) repealed the Cooperatives Act, 2048 (1992) and was enacted basically to address the issues inefficiencies that had become apparent under the previous legislative regime. The Cooperatives Act, 2048 (1992) provides a structured process for the registration of cooperatives at multiple levels, which includes local, provincial and federal level. It also provides a comprehensive mechanism for supervision and inspection of cooperatives. Nepal Rastra Bank has certain powers regarding supervision and consultation.
Despite the promulgation of such acts, the lack of regulation can be vividly seen in the rising fund embezzlement scams. Recently, depositors of Pokhara-based Suryadarshan Savings and Credit Cooperatives have alleged Gorkha Media for fund embezzlements. A similar case has been brought to light through the investigation report of Supreme Savings and Loan Cooperative Society Limited of Butwal. It is reported that crores of rupees were embezzled. Similar problems were found in Sahara Multipurpose Cooperative Society Limited of Chitwan. It appears that crores of rupees have been misappropriated by companies. Just a year ago, the Central Investigation Bureau (CIB) of Nepal Police had arrested the former chairperson of Shiva Shikhar Multipurpose Co-operative, Bhaktapur for his alleged involvement in embezzling Rs 14 billion from deposits of members. And this is not the first time that such scams are taking place.
It was in 2010 when Unity Life International made headlines for a big cooperative fraud. This was for the first time when a cooperative failure made such a big headline where people came to the streets, protesting and crying their woes. Unity Life International (ULI) carried out banking, insurance and cooperative businesses which were illegal. ULI had a total of 366,342 identified members across the country and abroad, and it had collected Rs 3.79 billion from them. But it only distributed Rs 1.63 billion to the clients as commission and invested the depositors’ money in hospitals and real estate. The government probe had concluded that ULI had violated the Bank and Financial Institutions Act, Insurance Act, Securities Act, Cooperatives Act, Foreign Exchange Act, Revenue Leakage (Control) Act and Consumer Rights Protection Act, among others. Similarly, another big scam was identified in this sector after Oriental Cooperative was found to have embezzled some Rs 10.84 billion in 2013.
Since 2013, four committees have been formed to provide justice to the victims of problematic cooperatives like Oriental Cooperative, yet the reports have been limited to paperwork. Under Section 104 of the Cooperatives Act, 2074 the government formed the Office of the Problematic Cooperative Management Committee. It is a management committee which is responsible for managing the assets and paying the liabilities of problematic cooperatives as declared by the government. Yet, the committee hasn’t been able to reimburse the funds of the victims. The problems of cooperatives are not just limited to regulations; victims have also not been able to get justice.
A decade down the line since these scams but the picture hasn’t changed much. As of now, cooperatives are found to have embezzled more than Rs 200 billion of millions of depositors. Among them, 54 big cooperatives have misappropriated around Rs 160 billion. Recently, the CIB investigation uncovered that Sumeru Cooperative had embezzled an amount exceeding Rs 10 billion from approximately 35,000 depositors. Day after day such cases are rising, leaving victims in deep distress.
Recently, to address the allegations made by the victims of Suryadarshan Savings and Credit Cooperatives, a parliamentary probe committee was formed. While the parliament stands divided due to political reasons, the real need of the time is proper law enactments to regulate cooperatives.
Anup Raj Upreti, Lawyer and Partner at Pioneer law Associates shared, “The Cooperatives Act, 2048 (1992) provides overall management and regulatory framework of the cooperative sector. However, the practical implementation and enforcement of such provisions have been observed to be ineffective. The present scenario indicates that cooperatives are being operated by a handful of people rather than through the active participation of all the members.”
Upreti further states that if the norms of participation envisaged in the Cooperatives Act, 2048 (1992) are well implemented, the current problem of misuse of savings, misuse of funds and use of savings in the non-permissible sectors can be controlled. “Additionally, the debt recovery mechanism provided in the Cooperatives Act, 2048 (1992) should be implemented and the regulator also should monitor the status of recovery. One of the reasons for the financial crisis seen in the cooperatives is due to the inability to recover loans. Similarly, formation of cooperative banks as envisaged by the Cooperatives Act, 2048 (1992) can also enable proper functioning of cooperatives and assist cooperatives to combat financial crises,” he stated.
Additionally, Upreti mentioned that cooperatives should not be taken as a business by its members or investors. “The concept of a cooperative should be as a medium for promotion of businesses operating in the same sector. The regulatory entity should supervise the cooperatives regularly. In any situation where a bank or financial institution faces a financial crisis or mismanagement, Nepal Rastra Bank takes immediate action for risk management. The same approach should be applied to cooperatives, as the savings and investments of millions of people are involved in this sector. The authorities responsible for regulating and monitoring cooperatives appear to be less effective compared to the banking sector. The cooperative sector, which involves substantial savings and investments, should be prioritised and regular monitoring should be done,” says Upreti.
He further states that immediate attention should be given to address the financial crisis of the cooperatives. The trust of depositors in cooperatives can be enhanced by ensuring the public that their savings will be returned, and this assurance should be through institutional mechanisms structured under the Act. There have been many cases where board members were penalised for being unable to return savings. The government should prioritise returning public’s savings rather than criminal proceedings, as this will assist in the resilience of cooperatives. Strengthening institutional efficiency and ensuring effective implementation of laws should be prioritised.
