KATHMANDU: For decades, cooperatives were seen as the backbone of Nepal’s rural economy. They promised financial inclusion, empowerment, and an avenue for grassroots prosperity. Today, they symbolize betrayal. Once hailed as the third pillar of Nepal’s economy, the cooperative sector has crumbled into a pit of fraud and mismanagement, exposing deep systemic flaws that have left tens of thousands of citizens in financial ruin.
At the heart of the crisis is an astonishing Rs. 87 billion ($630 million) embezzlement scandal involving 40 cooperatives. Depositors—ranging from retirees and housewives to farmers and professionals—trusted their savings to these institutions, only to discover their money siphoned away through fraudulent schemes, reckless investments, and outright theft. The victims, many of whom live hand-to-mouth, have spent years demanding justice and the return of their funds. Their outcry, however, has been met with government inertia and hollow promises.
This disaster was not unexpected. Warning signs were visible as early as 2014, when a government commission received over 22,000 complaints against 162 cooperatives involving claims of NPR 10 billion. Poor governance, unchecked mismanagement, and the lack of regulatory oversight allowed cooperatives to operate as personal fiefdoms for their owners. Funds meant for depositors were diverted to speculative ventures—real estate, cryptocurrency, and even personal bank accounts—leaving cooperatives dangerously exposed to economic downturns and public distrust.
The scale of the problem is compounded by political interference. Many cooperatives are linked to powerful figures who have used their influence to shield themselves from accountability. Efforts to recover stolen funds have been glacial, hampered by legal challenges and delays in selling cooperative assets. Amendments to the Cooperative Act have focused on partial deposit refunds, but this piecemeal approach does little to resolve the broader crisis.
Nepal’s cooperative crisis has left its most vulnerable victims—low-income families and the poor—silenced and shattered. Stripped of their savings, many families teeter on the brink of despair, with lives lost to untreated illnesses and mounting financial distress. Yet, instead of relief, their plight has been mired in politics, with real solutions lost in the noise of opportunism and inaction.
For victims, the fallout is devastating. Retirees who planned to live off their savings now face destitution. Farmers and laborers who entrusted cooperatives with their hard-earned money have been left empty-handed. On June 20, 2023, their frustration boiled over into protests at Kathmandu’s Maitighar Mandala, demanding the immediate return of their savings and stricter oversight of the sector.
Yet the government’s response has been tepid. The Cooperative Act now prioritizes refunds of up to Rs. 500,000 per depositor, but the sheer magnitude of the scam makes this an inadequate salve. Meanwhile, court proceedings and asset liquidations drag on, offering little hope to the majority of victims.
Nepal’s cooperative sector has a storied history. Over seven decades, it brought financial services to the unbanked, fostered a culture of savings, and contributed 3% of the national economy by 2020. Its rise mirrored the aspirations of millions of rural Nepalese, who saw cooperatives as a trustworthy alternative to traditional banks.
Today, that trust has evaporated. Panic withdrawals and rumors of insolvency have crippled the sector. Many cooperatives, unable to meet liquidity demands, have closed their doors. The fallout has tarnished a legacy of community empowerment, replacing it with the stench of fraud and incompetence.
The cooperative crisis reveals a fundamental failure of governance. Regulatory oversight is weak, allowing mismanagement to flourish unchecked. Political meddling has undermined accountability, turning cooperatives into vehicles for corruption. If Nepal is to salvage this vital sector, it must implement sweeping reforms.
The government must establish an independent regulatory body with real teeth, capable of enforcing strict financial standards and punishing fraud. Cooperatives must be brought under the purview of Nepal Rastra Bank, the central bank, to ensure consistent oversight. Additionally, a compensation fund, financed by cooperative assets and government support, could offer relief to victims while systemic reforms take root.
Nepal’s cooperative sector is at a crossroads. It can either emerge from this crisis as a reformed and revitalized pillar of the economy or descend further into irrelevance. The stakes could not be higher. For the millions of citizens who placed their trust in cooperatives, the future of their savings—and their livelihoods—hangs in the balance. Here’s everything you need to know about Nepal’s cooperative crisis.
What is the current state of the cooperative sector in Nepal?
Nepal is home to approximately 32,000 cooperatives, with the majority primarily focused on financial activities like collecting deposits and issuing loans. While cooperatives globally are often involved in productive sectors such as agriculture, food production, and milk processing, Nepal’s cooperatives are predominantly concentrated in the savings and credit sector. Out of these, around 25,000 cooperatives are engaged in financial services, with over 15,000 specifically registered for deposit collection. Despite the significant number of cooperatives, many are either inactive or exist only on paper, while others face challenges due to limited operations.
The cooperative sector in Nepal has historically been a vital contributor to the national economy, with approximately 7.4 million people connected to cooperatives and 94,000 individuals employed in the sector. However, in recent years, many cooperatives have faced growing difficulties.
Cooperatives in Nepal operate under federal, provincial, or local levels depending on their scope. Those conducting transactions at an inter-provincial level are regulated by the federal government, while those operating within a province fall under the respective provincial authority. Cooperatives operating at the municipal or rural municipality level are governed by local governments. According to this structure, only 145 cooperatives are regulated by the federal government, around 19% by provincial authorities, and over 80% by local units.
The majority of the issues are concentrated among cooperatives operating in rural areas, with most of them engaged in savings and credit activities. Although the government has officially declared only 20 cooperatives as being in crisis, starting with Oriental Cooperative, many others struggle with transparency, especially in disclosing sources of funds and making transactions clear. Organizations such as the National Cooperative Federation of Nepal are actively involved at the federal, provincial, and district levels to address these challenges.
What challenges have been identified in Nepal’s cooperative sector?
Parliamentary investigation special committee on misuse of co-operatives saving have revealed significant issues in Nepal’s cooperative sector, particularly among the 14,000 cooperatives engaged in savings and loans. Of these, only around 10,000 remain active, leaving approximately 4,000 inactive. Bagmati province, with its 2,716 cooperatives, exemplifies the sector’s issues, hosting nearly one-third of the active cooperatives in Nepal. However, irregularities are widespread, with 40 cooperatives labeled problematic and 205 facing various challenges. Kathmandu, leading with 866 cooperatives, has 96 implicated in mismanaging depositors’ funds. These issues arise from weak regulation, lack of accountability, and misuse of public funds by cooperative directors, often tied to political and economic influence.
Why is Bagmati province considered a model of mismanagement in the cooperative sector?
Bagmati province stands out as a center of mismanagement in Nepal’s cooperative sector. It exemplifies the distortions and irregularities seen nationwide. According to the parliamentary investigation committee, the province’s cooperatives, despite their large presence, suffer from regulatory weaknesses and governance failures. Directors with significant capital and political ties dominate the sector, undermining its core values of community benefit. Mismanagement ranges from misusing public funds to operational violations. While 2,716 cooperatives operate in Bagmati, 40 have been deemed problematic. Irregularities persist due to ineffective oversight and poor adherence to established laws and principles, highlighting the need for stronger regulatory mechanisms.
What findings emerged from the investigation into problematic cooperatives?
The investigation into problematic cooperatives revealed troubling financial mismanagement. Of the 40 cooperatives studied, 29 were in Bagmati province, including Swarnalakshmi, Kantipur Savings, Sumeru, and others. Collectively, these cooperatives hold Rs 71.3 billion in savings and liabilities of Rs 87.89 billion, while their total assets stand at Rs 82.32 billion. This discrepancy highlights weak debt recovery and poor financial practices. Misconduct included using cooperative funds for personal ventures, monopolizing leadership positions, and failing to repay loans. Notable cases include Capital Savings and Credit Cooperative and Sumeru Cooperative, where misappropriations have led to liquidity crises, further undermining public trust.
Why is regulation considered weak in Nepal’s cooperative sector?
Nepal’s cooperative sector suffers from weak regulation, as highlighted by the parliamentary investigation. The Cooperative Act 2017 and related regulations have failed to ensure effective oversight, especially at provincial and local levels. Regulatory bodies, such as the Cooperative Department, lack the authority and resources to monitor cooperatives comprehensively. Political connections and economic dominance by cooperative directors have further weakened governance. Structural gaps, including the absence of a Credit Information Center and Debt Recovery Tribunal, exacerbate the problem. These regulatory lapses allow cooperatives to operate unchecked, leading to mismanagement, financial irregularities, and exploitation of depositors’ funds, necessitating urgent reform.
What specific examples of misconduct were uncovered during the investigation?
Several alarming examples of misconduct emerged during the investigation. For instance, Capital Savings and Credit Cooperative misused member funds, with its CEO becoming uncontactable. Sumeru Cooperative in Lalitpur, under the long-term leadership of Bharat Maharjan, saw systematic mismanagement. Maharjan allegedly used cooperative funds to establish businesses like hospitals and colleges under the Sumeru Group. He later absconded to the UK, leaving the cooperative in financial disarray. Leadership was passed to his relatives, perpetuating the misuse of resources. Such cases reflect a broader pattern of cooperative funds being diverted into private ventures, facilitated by poor regulatory enforcement and unchecked power.
What steps have been recommended to address issues in the cooperative sector?
To address the challenges in Nepal’s cooperative sector, Parliamentary investigation special committee on misuse of co-operatives saving has proposed establishing a powerful cooperative authority. This body would ensure effective regulation, implementing measures like a Credit Information Center and a Debt Recovery Tribunal. Strengthening the Cooperative Act 2017 and addressing gaps at provincial and local levels are crucial. The committee also stressed the need for strict action against mismanagement while encouraging well-run cooperatives. Public awareness about cooperative principles and values must be reinforced, alongside improved transparency and accountability. By addressing these issues, Nepal can restore trust in the cooperative sector and support its economic role.
What challenges are Nepalese cooperatives currently facing?
Nepalese cooperatives are mired in a complex web of challenges that have shaken the very foundation of this sector, once heralded as a pillar of socio-economic development. One of the most significant issues is financial mismanagement. Many cooperatives have been accused of funneling depositors’ savings into speculative and high-risk ventures such as real estate and cryptocurrencies. This reckless behavior has left depositors vulnerable, particularly those from low-income backgrounds, who now find themselves unable to access their savings.
The crisis is exacerbated by systemic issues such as political interference. Cooperatives have become entangled with local and national political agendas, often shielding those responsible for fraudulent practices from accountability. Furthermore, the regulatory framework has failed to evolve alongside the sector’s rapid expansion. Oversight mechanisms remain weak, with government institutions unable to enforce strict compliance or take timely action against errant cooperatives.
Another pressing challenge is the sheer scale of the crisis. Official estimates suggest that around 500 cooperatives are in financial trouble, but in reality, the majority are facing operational challenges. Panic withdrawals, sparked by rumors of insolvency, have further destabilized the sector, creating a domino effect that has left even solvent cooperatives struggling to maintain liquidity.
Additionally, the economic downturn following the COVID-19 pandemic has amplified these issues. Many cooperatives that were already financially fragile could not withstand the economic shock, leading to closures and further eroding public trust. This has created a vicious cycle where depositors, wary of losing their savings, are moving away from cooperatives to more regulated financial institutions, further destabilizing the sector.
The cooperative model is rooted in self-development through community-based approaches. Globally, the modern cooperative movement began in England in the mid-19th century and expanded across the world. In Nepal, the cooperative movement officially started in 1953 with the establishment of the Department of Cooperatives under the Ministry of Agriculture for Development and Planning.
The first Cooperative Act was enacted in 1960, followed by the Agricultural Cooperative Act (Sajha Sahakari). A significant milestone came in 1963 when savings and credit cooperative societies’ capital was converted into a Cooperative Bank, later evolving into the Agricultural Development Bank of Nepal (ADBN) in 1968.
The cooperative movement gained momentum after the enactment of the Cooperative Act of 1992. By 2007, the Interim Constitution of Nepal formally recognized cooperatives as the third pillar of socio-economic development. The federal constitution of 2015 reinforced this recognition, emphasizing the sector’s role in the nation’s progress.
Over the decades, cooperatives in Nepal have grown from a limited number of societies into a vast network. By the Economic Survey of 2022, Nepal boasted 30,879 cooperatives, engaging 7,337,252 members and directly employing over 94,000 people. Initially concentrated on agriculture and community savings, cooperatives diversified into financial services, including deposit collection and loan issuance. This expansion was bolstered by a growing belief in the cooperative model as a key driver of financial inclusion and rural development.
Depositors, primarily low-income individuals, have been the most affected. They include retirees, farmers, housewives, and low-wage workers who trusted cooperatives with their life savings. The narrative that “all cooperatives are corrupt” has further shaken public confidence, driving depositors to shift towards banks or other financial institutions, worsening the liquidity crisis in even well-functioning cooperatives.
Globally, cooperatives thrive in productive sectors such as agriculture, dairy, and food production. However, in Nepal, the focus of many cooperatives has shifted primarily to financial activities like deposit collection and loan issuance. This over-reliance on financial services, coupled with speculative and risky investments, has left the sector vulnerable to economic shocks and public distrust.
Stabilizing Nepal’s cooperative sector requires a comprehensive overhaul of its regulatory and operational frameworks. First and foremost, there is an urgent need for stricter regulatory oversight. The Nepal Rastra Bank or another competent authority must take a more proactive role in monitoring cooperative activities, ensuring compliance with financial standards, and penalizing those engaging in fraudulent practices. This includes implementing transparent accounting systems and regular audits to deter mismanagement.
Political interference, which has long plagued the sector, must be curtailed. This requires depoliticizing cooperatives and ensuring that management decisions are made solely on the basis of financial and operational merit. Legal frameworks should be strengthened to hold those involved in fraudulent activities accountable, irrespective of their political affiliations.
Reforms must also focus on diversification. Nepalese cooperatives need to move away from an over-reliance on financial services and invest in productive sectors such as agriculture, food processing, and rural development. This will not only reduce the systemic risks associated with financial activities but also create a more resilient cooperative model aligned with global best practices.
Public trust can only be regained through tangible actions. The government must expedite the process of refunding depositors, particularly those from low-income groups, and establish a safety net to protect them from future crises. Measures such as the amended Cooperative Act, which prioritizes modest deposit refunds, should be implemented more effectively, with clear timelines and accountability mechanisms.
Education and capacity-building initiatives are equally important. Cooperative management and staff must be trained in modern financial practices and governance. Awareness campaigns should be launched to educate the public about the risks and benefits of cooperative membership, fostering a more informed depositor base.
Finally, a crisis response mechanism should be institutionalized to address emergencies swiftly. This includes establishing a dedicated fund for bailouts, supported by contributions from the cooperatives themselves, and creating a task force to oversee the resolution of distressed cooperatives. Only with a combination of these reforms can the cooperative sector regain its stability and reclaim its role as a driver of inclusive economic growth in Nepal.
The cooperative movement gained substantial recognition during the monarchy-led Panchayat regime, which emphasized community savings and empowerment. By the 1980s, savings and credit groups had spread across Nepal, leading to the establishment of the Nepal Federation of Savings and Credit Cooperative Unions (NEFSCUN) in 1988. The movement was further institutionalized with constitutional recognition in 2007 and 2015, cementing its role in socio-economic development.
The cooperative crisis in Nepal has highlighted several critical lessons that can guide the future of this sector. One of the most pressing lessons is the need for institutional accountability. The crisis has underscored that transparent management and strict financial discipline are essential for the sustainable operation of cooperatives. Without clear oversight and effective governance, even the most well-intentioned cooperatives can quickly spiral into disarray. The importance of government intervention also cannot be overstated. The crisis has shown that proactive regulation and oversight are necessary to prevent systemic failures, and that the government must take a more active role in ensuring that cooperatives are held to the highest financial and operational standards.
Another key takeaway is the importance of balanced growth. While many cooperatives in Nepal have focused heavily on financial services, the crisis has demonstrated the risks associated with this narrow focus. Diversifying into productive sectors like agriculture or food processing can help create a more resilient cooperative sector, better able to withstand economic downturns or financial crises. This approach will also ensure that cooperatives contribute to broader economic development, not just financial services.
Lastly, the crisis has emphasized the importance of public participation. The cooperative model thrives on trust and community involvement. When depositors lose confidence, the entire system falters. Rebuilding that trust requires clear communication, transparency, and a commitment to the welfare of the members. Without active engagement from the public and a restored sense of confidence, cooperatives will struggle to regain their standing as a viable model for financial inclusion.
Is the cooperative crisis due to policy failure or poor regulation?
While some cooperative leaders claim that there are no major issues with the policies or laws governing cooperatives, the parliamentary investigation highlights a clear failure of regulatory oversight. The Cooperative Act of 2017 and the Regulations of 2018 were intended to regulate the sector, but they have largely been ineffective due to poor implementation. Key regulatory bodies like the Credit Information Center and Debt Recovery Tribunal have yet to be fully established. Moreover, the Ministry of Cooperatives has not been proactive in overseeing cooperatives, and only a small fraction of its resources have been allocated to regulatory activities. This lack of oversight has allowed mismanagement to flourish unchecked.
What happens next for cooperatives in Nepal?
The parliamentary committee has recommended the creation of a strong regulatory body to manage the cooperative sector and prevent further financial misconduct. There is growing pressure on the government to take decisive action, including arresting those responsible for misappropriating funds and taking legal measures to protect depositors’ savings. Despite this, there is skepticism about whether the government will be able to implement reforms that will bring about lasting change, given the previous failure of similar efforts.
Will depositors get back the Rs 275 billion lost in cooperatives?
The government has introduced an ordinance to address the crisis, prioritizing the return of up to Rs 500,000 for depositors of troubled cooperatives. However, there is no clear plan for repaying larger amounts, leaving many depositors uncertain about the fate of their savings. Past efforts to recover funds from failed cooperatives have been slow and largely ineffective, leading to skepticism about the government’s ability to resolve the crisis and compensate victims.
What changes does the Cooperatives Ordinance, 2081 introduce?
The Cooperatives Ordinance of 2081 brings several regulatory measures aimed at addressing financial mismanagement in the sector. These include the establishment of a National Cooperative Regulatory Authority to oversee cooperatives, the introduction of leadership term limits for cooperative directors, and restrictions on deposits over Rs 1 million. Cooperatives are also required to report defaulters to the Credit Information Bureau every three months and adhere to stricter lending limits. While these changes are positive, their success will depend on how effectively the government enforces the new regulations.
What is the government doing to solve the cooperative crisis?
In response to the cooperative crisis, the government has introduced an ordinance to establish a new regulatory framework but it is not going to implement. The ordinance includes measures such as creating a National Cooperative Regulatory Authority, limiting the terms of cooperative leaders, and setting stricter requirements for loans and deposits. However, the ordinance does not guarantee repayment for depositors who have lost large sums of money, leaving many victims uncertain about their financial future. Previous government efforts to address similar issues have been ineffective, so there is skepticism about whether the new measures will succeed in resolving the crisis.
Who regulates cooperatives in Nepal, and how are they categorized under different levels of government?
Cooperatives in Nepal are regulated by various levels of government depending on their operational scope. Federal agencies oversee cooperatives that operate across multiple provinces, provincial governments regulate those functioning within a single province, and local governments are responsible for cooperatives that operate at the local level. However, regulatory bodies at all levels have struggled to function effectively due to a lack of expertise and resources. As a result, the majority of issues in the cooperative sector arise from those regulated at the local level, where financial mismanagement and fraud have been prevalent. The establishment of the National Cooperative Regulatory Authority is intended to centralize oversight and improve the situation.
Why are the current regulatory agencies ineffective in managing the cooperative sector crisis?
The effectiveness of regulatory agencies has been compromised by several factors. First, many agencies lack the necessary expertise and trained personnel to effectively monitor and regulate the cooperative sector. Staff turnover and frequent transfers further disrupt regulatory continuity, preventing long-term strategies from being implemented. Moreover, the absence of a strong, independent regulatory body, like Nepal Rastra Bank for the banking sector, has left the cooperative sector vulnerable to exploitation. Without such an agency, cooperatives have been able to bypass regulations and engage in reckless financial practices without facing significant consequences.
