Is It Time to Regulate Cooperatives Like Commercial Banks?

Co-operatives have long stood as pillars of financial inclusion and local empowerment in Nepal, reaching from bustling urban centers to remote mountain villages. With over 30,000 co-operatives serving more than seven million Nepalis, the sector’s potential for social and economic good is immense. However, recent scandals and high-profile collapses have created a negative impact, necessitating a critical reevaluation of these institutions' operations.

The question now confronting policymakers is clear: Should Nepal start regulating co-operatives more like commercial banks? The answer, given the stakes involved, seems to be an unequivocal yes.

Co-operatives at a Crossroads

Historically, co-operatives have thrived on principles of democratic ownership, grassroots participation, and shared prosperity. Following Nepal’s 1992 Cooperative Act, the sector exploded in scale, mobilizing savings of over NPR 600 billion and extending financial services to millions. They have significantly contributed to financial inclusion, rural livelihoods, women's empowerment, and local economic resilience.

Yet beneath these successes, alarming vulnerabilities persist.

Recent scandals, such as the collapses of Kanchan Savings in Kathmandu and Buddhabhumi Co-operative in Rupandehi, highlight deep governance failures and regulatory weaknesses. Thousands of depositors have lost their savings, and public confidence is shaken.

Why Current Regulations Are Insufficient

Unlike commercial banks regulated by Nepal Rastra Bank (NRB), co-operatives operate under the Department of Co-operatives, which lacks the expertise, resources, and stringent oversight required for large-scale financial institutions. This regulatory dualism exposes significant gaps:

• Weak internal governance, allowing insider abuse and fraud.

• Limited transparency, with many co-operatives avoiding proper audits and disclosures.

• The lack of deposit insurance leaves depositors unprotected.

• The lack of credit information sharing heightens default risks.

These gaps amplify the risks of systemic financial crises.

The Case for Bank-Like Regulation

Nepal’s larger co-operatives increasingly operate like banks, collecting public deposits, issuing loans, and offering financial products. It is logical and fair, therefore, that their regulation mirrors that of commercial banks. Such a step is essential for:

1. Protecting Public Deposits: Ordinary Nepalis, who entrust their savings to co-operatives, deserve the same level of protection provided to bank customers, including deposit insurance.

2. Systemic Stability: Large-scale cooperative failures risk destabilizing the broader financial system, creating social unrest and undermining public confidence.

3. Fair Competition: Leveling the regulatory playing field prevents regulatory arbitrage, ensuring co-operatives and banks compete fairly and transparently.

4. Restoring Public Trust: Enhanced oversight can restore confidence in the sector, helping responsible co-operatives thrive while weeding out fraudulent practices.

Implementing Effective Reforms

To transition toward effective regulation, Nepal could adopt several key measures:

• Tiered Licensing: Larger, deposit-taking co-operatives should require bank-like licenses, subjecting them to rigorous financial standards, while smaller community-based groups can remain under simplified oversight.

• Mandatory Independent Audits and Disclosures: Transparent financial reporting and regular audits by independent entities should be non-negotiable.

• Participation in Credit Information Bureaus: Mandatory reporting of loan data would mitigate risks from multiple loans and fraud.

• Risk-Based Capital Requirements: Minimum capital buffers, tailored to the risk profile of each co-operative, must be enforced.

• Deposit Insurance Scheme: Establishing a protective safety net similar to banks would secure depositor confidence.

• Robust Inspections and Enforcement: Unannounced regulatory inspections, coupled with meaningful penalties for non-compliance, must be institutionalized.

• Fit-and-Proper Criteria: Stringent vetting of co-operative management and boards would enhance governance integrity.

Lessons from International Experience

Globally, countries facing similar crises—Kenya, India, Sri Lanka, and the Philippines—have strengthened their co-operative sectors by introducing bank-like regulations. Nepal should follow these precedents to stabilize its sector.

Conclusion: An Urgent Call to Action

The continued growth of Nepal’s cooperative sector demands a regulatory evolution. The recent scandals are not failures of the co-operative model itself, but symptoms of inadequate oversight. By adopting stringent, bank-like regulations tailored to the risks and scale of modern co-operatives, Nepal can safeguard depositors, restore public confidence, and ensure that co-operatives fulfill their potential as true engines of inclusive development.

This reform is not merely regulatory—it is essential for building a stable, trusted, and sustainable financial future for millions of Nepalis.