This document has been made available in electronic format by the International Co-operative Alliance (ICA) 

Development of "modern" co-operatives in Nepal (1998)

Oct., 1998
(Source: Co-op Dialogue, Vol. 8, No. 2, July-Sept, 1998, pp.13-23)

Development of "Modern" Co-operatives in Nepal Prof. Hans-H. Münkner and Dr. Mahendra Prasad Shrestha

1. Introduction
Nepalese people have a long tradition in co-operation taking many forms of labour sharing in villages, informal mutual aid groups and rotating savings and credit associations.

Agriculture is the mainstay of the Nepalese economy. It is the source of livelihood of 80 to 90 % of the population, accounts for 53% of the GDP and is the main contributor to export earnings.

It is therefore logical that most of the co-operatives in Nepal are related to agriculture, to farming and to farm products. Subsistence farming is still widely spread. Land distribution is uneven. The overall average size of operational land holding is slightly above one hectare.

The small and marginal farmers who constitute the majority, operate between 0.28 and 1.03 hectares. The Agricultural Census 1991/92 reveals that nearly 70 percent of the total number of holdings are of less than 1 hectare size and account for about 31 percent of the total crop area.

Similarly, the top 5 percent of owners control about 40 percent of cultivated land while the bottom 60 percent control about 20 percent. It is estimated that 10.4 percent of the households are landless; Terai constitutes the highest with 18.3 percent followed by Mountain and Hills with 3.7 percent and 2.2 percent respectively. However, another estimate based on holdings of cultivated lands by rural households reveals that 19.01 percent are landless; 35.0 percent in Terai, 11.3 percent in Mountains and 7.3 percent in the Hills. Limited availability of arable land makes off-farm activities increasingly important.

Although the country is rich in water resources, its agriculture depends primarily on monsoon rains. Only 25 % of the total potential area is covered by irrigation.

Accordingly the main common problems that farmers are facing in Nepal and which could possibly be solved by working together the co-operative way, are:

Furthermore co-operatives would be the most appropriate organisation of farmers to pool their resources, their demand and their produce and to represent their interests vis-à-vis the government and commercial firms.

2. Introduction of “modern” co-operatives
Modern co-operatives began in Nepal in 1954 when a Department of Co-operatives (DOC) was established within the Ministry of Agriculture to promote and assist development of co-operatives.

The first co-operatives formed in Nepal were co-operative credit societies with unlimited liability created in the Chitwan District as part of a flood relief and resettlement programme. They had to be provisionally registered under an Executive Order of HMG and were legally recognised after the first Co-operative Societies Act of 1959 was enacted.
The history of co-operatives in Nepal is closely related to Government’s initiatives to use co-operatives as part of its development programmes. Therefore, the development of co-operatives will be described in eight phases corresponding to eight plan periods.

3. Development of co-operatives by plan periods
During the First Five-Year-Plan (1956/7-1960/1) Government embarked on an ambitious programme to organise 4,500 agricultural multipurpose co-operatives. In fact only 378 co-operatives were organised. The important achievement during this period was that the co-operative development programme was integrated into the overall rural development programme.

During 1961/62 the country was without a Plan. As far as co-operatives are concerned, 203 new societies were organised. In the course of the following years a government machinery for co-operative development was established: Co-operative Societies Rules were framed in 1961, a Co-operative Training Centre was created in 1962 and in the same year a Co-operative Development Fund was set up within the DOC. The total number at the end of this period stood at 581.

During the Second Three-Year-Plan (1962/63-1964/1965) a Land Reform Act came into force in 1964 including a compulsory savings scheme, according to which farmers had to save a portion of their crop. The co-operative programme was integrated into the land reform programme. A total of 542 societies were organised during the Plan period. A Land Reform Savings Corporation was established in 1967 to accept compulsory savings and advance loans to farmers. This led to a rapid numerical growth of co-operative societies of which, however, two thirds were soon defunct. A Co-operative Bank was established under the Co-operative Bank Act of 1963 to finance the reorganisation of agriculture and to provide credit facilities to various small scale production, marketing and other societies organised in co-operative form. This bank was converted into the Agricultural Development Bank/Nepal (ADB/N) in 1968, in order to meet the overall credit requirements of agriculture and to provide credit to co-operatives and to individual farmers.

During the Third Five-Year Plan (1965/66-1969/1970) the total number of co-operatives reached 1,489 operating in 56 out of 75 districts.

Many of these co-operatives were formed in a hurry without taking economic feasibility and social viability into consideration. By the end of the Third Plan most of these co-operatives were defunct. A Co-operative Review Committee assessed the viability of the existing co-operatives and presented a report, grading the co-operatives as follows:

The Committee reported among other things that the co-operative system had failed to perform in accordance with the expectations outlined.

Most of these co-operatives failed to mobilise the desired member participation and to open up new business opportunities.

During the Fourth Five-Year Plan (1970/71-1974/75) a massive reorganisation programme launched already in 1969 was pursued, placing emphasis on the quality rather than on the quantity of co-operatives. The Plan gave priority to 28 districts where the Intensive Agricultural Development Plan was to be implemented. This “Guided Co-operative Programme”, which was later turned into the “Programme for Strengthening Co-operatives” stressed the need for business efficiency (but still ignored social viability).

The 1,489 co-operatives merged or were liquidated so that at the end of the process only about 250 societies survived. The management of the co-operatives was handed over to ADB/N.

The Bank provided loans amounting to more than Rs 110 Million. However, small farmers secured only 32% of these loans whereas 68% were given to medium and big farmers. As a result of these measures the business of the co-operatives increased but the loan recovery ratio reached a low of only 49.3 % (down from 90.3 % under the First Plan and 73.4 % under the Third Plan).

Under the Fifth Five-Year Plan (1975/76-1979/80) a massive Co-operative Expansion Programme was launched, the “Sajha Programme”, which initially aimed at running 1,163 co-operatives in 1,827 village panchayats (now VDCs) of 30 districts, with some 808,000 members reaching 4.4 million people.

Under this programme guided co-operatives and village committees were converted into Sajha societies, co-operatives were organised to cover almost all villagers.

The compulsory savings raised under the Land Reform Programme were converted into shares of co-operatives societies. In this way persons became members of co-operatives against their will.

Under the Sajha programme local politicians were made ex-officio members of the boards of co-operatives, a measure that alienated ordinary members from “their” society.

Within a year the number of co-operatives increased from 293 to 1,053 and the number of members from 93,000 to 802,000. Many of these co-operatives became inactive after some time and their number decreased by 40 %.

The main objectives of the Sajha societies were to increase production and farmers’ income through improved farming systems, institutional loans (subdividing co-operatives into small groups at village level), supply of inputs, savings and marketing.

In 1978 the management of co-operative societies was withdrawn from ADB/N and handed over to their respective management committees. But the concerned people were not properly informed of the decisions. Besides they were not prepared for the take over. This led the Sajha societies to wilderness.

During the Sixth Five-Year Plan (1980/81-1984/85) an “Intensive Sajha Programme” was launched in 1981 focusing more on and made more responsive to the needs and problems of small farmers. This programme started in 20 districts of the Terai.

The ex-officio representation on the boards of co-operative societies was replaced by election of office-bearers from among the members.

The basic guidelines of the programme were as follows:

(a) more emphasis on effectiveness of co-operatives rather than numerical growth;

(b) concentration on areas where integrated rural development programmes are  applied, formation of co-operatives only after a thorough feasibility study;

(c) major orientation on the interests of small farmers.

During the Seventh Five-Year Plan (1985/86-1989/90) efforts were made to reshape the co-operative movement. It was planned to extend co-operative services to the people through newly established service centres. Existing co-operatives were placed at service centres and where no co-operatives existed. A total of 144 new societies were formed mainly in the remote parts of the country.

By the end of this plan period there were:

During this plan period structural adjustment programmes were introduced and co-operatives lost their monopoly in fertiliser trading.

4. Revitalising co-operatives after 1990
With the restoration of democracy in 1990 and under the Eighth Plan (1992-1997) efforts are made to revitalise existing co-operatives.

A National Co-operative Federation Advisory Committee was appointed and submitted its first report in 1991.

In the same year a National Co-operative Development Board was constituted and in 1992 a new Co-operatives Societies Act promulgated which recognises the democratic character of co-operatives and ensures their operational autonomy.

4.1. The National Co-op. Development Board (NCDB)
The NCDB is a high powered body established under the NCDB Act of 1992 and composed of Government representatives from different ministries appointed and people having experience and knowledge about the co-operative movement nominated by HMG. The Board is chaired by the Minister of Agriculture.

The responsibilities of the NCDB included:

(a) to work out suitable policy guidelines and new legislation relating to the co- operative movement,

(b) to create organisational structures of the co-operative movement from village to  national level, and

(c) to co-ordinate activities of co-operatives.

4.2. Salient features of the Co-operative Societies Act of 1992
The salient features of the 1992 Act are as follows:

In the preamble to the Act, it is stated that co-operative societies and unions shall be formed “for the social and economic development of the country’s farmers, artisans, people possessing inadequate capital and low-income groups, workers, landless and unemployed people or social workers or general consumers on the basis of mutual co-operation and co-operative principles.”

Furthermore it is said in section 3 (1) of the Act that:

“A society or union may be formed ... in accordance with co-operative principles with the objective of providing services and facilities for the economic and social development of its members.”

While granting operational autonomy to co-operatives once they are registered, there are some restrictions as to registration.

In the case of primary societies at least 25 persons have to apply for registration.
This number exceeds international standard requirements of 7 to 10 applicants and makes it difficult for artisans and other profession based co-operatives to use the co-operative form of organisation for their joint activities {section 3 (1) (a)}.

In the case of secondary societies, single purpose unions can be formed by at least five primary societies, and (multi-purpose) district unions need at least five primary societies or single purpose unions as founder members {section 3 (1) (b) and (c)}. In the case of a central (national) single purpose union, a minimum of 5 single purpose unions or 25 single purpose primary societies are required {section 3 (1) (d)} and in the case of the National Co-operative Federation, at least 15 unions have to apply.

By the exclusivity clause of section 3 (2) it is prescribed that not more than one district co-operative union or single purpose union of the same nature and not more than one central union of the same nature shall be formed.

This complicated regimentation, which restricts the rights of co-operatives to determine their own federal structures and which may be in conflict with the constitutional rights of citizens and their freedom of association is regulated in other countries by one single sentence:

"Co-operatives have the right to federate".

The National Co-operative Federation was established in 1993. Other Central (single-purpose) Unions were formed in the fields of savings and credit, consumers and dairy products.

The 1992 Act empowers co-operative societies to collect share capital by selling these shares not only to members and persons eligible to become members, but also to other prescribed agencies {section 23 (1)}.

This section follows a trend to open the door of co-operatives to “well-meaning” investors and sets limits (20 % of the share capital) to avoid undue influence of such investors on the management of the society. However in strict terms, this section is a deviation from the “pure” co-operative principles.

The powers of the Registrar of Co-operative Societies have been drastically reduced. Under the new Act co-operatives are autonomous to elect their office-bearers, to take management decisions and to appoint their auditors subject to the approval of the Registrar.

The Registrar still decides on the registration of new societies after conducting the necessary investigations to ascertain, whether or not the by-laws of the applicants conform to the co-operative principles {section 5 (1)} and registers amalgamated or divided societies {section 31 (2)}. The applicants have to submit a work plan and a statement of shares together with their application for registration, however, the Act is silent on the importance of these documents for the Registrar’s decision to register or to refuse registration.

The Registrar cannot interfere with elections to the board of directors, except upon request of a member of the society {section 16 (5)}. But intervention of the Registrar is not totally excluded {section 16 (6)}, if members inform the Registrars of irregularities. Other powers of the Registrar are:

The Act is silent on who prescribes what accounts and records have to be kept by registered co-operative societies and unions (section 33).

4.3. Numerical strength of co-ops
The current (1995/96) figures regarding the numerical strength of the co-operative movement in Nepal are as follows:

 Type of Society No.
(A) Primary societies
 Agri.multipurpose 1,622
 Consumer     258
 Dairy      661
 Savings and Credit 343
 Others      248
 Total   3,132

(B) Secondary Societies
 District unions 49
 Single purpose
 district unions:
 - consumer       4
 - dairy        7
 - savings and credit 9
 - others       3
 Total      72

(C) National Societies
 National Co-op Fedn. 1
 Consumer  1
 Dairy   1
 Savings and Credit 1
 Total   4

Total membership in 1995/96: 1.05 Million members.
Total share capital: Rs. 304.46 Million.

(Source: Department of Co-operatives)

5. The role of Co-operatives
Agricultural multipurpose co-operatives are the most numerous type of societies. Their main activity is to supply inputs, give access to production loans and special purpose loans and sell items of daily consumption, an activity which is important in the Hills and Mountains Districts, where such items are in short supply.

Agricultural co-operatives maintain 353 go-downs with a total storage capacity of 54,694 mt. However, the utilisation of this capacity is low. Marketing is a relatively new but increasing activity, depending on surplus production, mainly in the Terai.

The principal commodities sold by agricultural co-operatives either to the Nepal Food Corporation or in the open market are paddy, wheat, maize and oil seeds. However, co-operatives also purchase food grains to sell to their members during periods of shortages.
A more recent activity with important prospects for the future is processing of agricultural produce (paddy, oil seeds). In 20 districts co-operatives have installed small, efficient agro-processing plants. Their success will depend on whether or not they manage to keep the cost of processing low and to maintain a good quality. Other types of co-operatives work in the fields of:

6. Government policies concerning co-operatives
6.1. Government policies before 1990
In Nepal, modern co-operatives were introduced by Government and worked under Government control and direction. Co-operatives were utilised as instruments for the implementation of Government’s development schemes, applying incentives but also administrative pressure. When analysing the different programmes, a number of weaknesses and mistakes can be identified:

* Government mistrusted people’s organisations if they were not controlled by Government and had little confidence in people’s capacity to manage their own organisations.

* The spirit and principles of co-operative self-help were largely ignored.

* Co-operatives were organised from outside to implement national policy objectives without careful preparation (feasibility studies, member education) and without regard to the felt needs of the people called upon to become members.

Co-operatives, over the years, have been subjected to the experiment of a variety of organisational arrangements: people oriented, land reform oriented, guided co-operatives, Sajha societies etc. Too many and too frequent organisational experiments have not been healthy for the movement to prosper and grow.

The number of co-operatives and of members increased but many societies did not operate according to their own by-laws, e.g. they did not hold annual general meetings for over three years, and members did not know their rights and obligations. Little or no attention was paid, however, to reforming the basic organisational structure to ensure the viability and sustainability of the co-operatives, once they were organised.

The guided co-operative programme worked on the assumption that co-operatives could not function properly if the members were in control. Therefore, it was decided that the management should be taken over by staff of the DOC and later of the ADB/N. The role of members diminished and public support decreased.

Co-operatives were perceived by many as Government offices. Providing managers and paying their salaries was intended as important assistance to co-operatives but had the effect of alienating members from “their” co-operatives.

Provision of funds at a nominal rate of interest and relaxed standards in loan repayment did not help co-operatives to become self-reliant. On the contrary, such privileges increased their dependence on external funds and diminished the importance of internal resource mobilisation.

Where co-operatives were used as channels for ADB/N loans to individual farmers or groups, the cost incurred by the co-operatives was not fully covered by the commission paid by the Bank so that co-operatives lost own funds in the process.

The Sajha Programme was a politically guided programme, with the Pradhan Panchas of the village panchayats as ex-officio chairmen of the board of the co-operative society.
Under the Sajha Programme many people were made members against their will, when their compulsory savings during the Land Reform Programme were converted into co-operative shares. They were also not allowed to manage the co-operatives of which they were made members, because the members of the management committees or boards were ex-officio political workers of persons nominated to serve on the committees, while the responsibility for the management was with the ADB/N.

This resulted in the dominance of rich and powerful people. Mandatory membership
and political predominance hurt the image of co-operatives in the eyes of ordinary
co-operators and the public.

The share of loan disbursement to co-operatives, which stood at 70% of the total disbursement in 1976/77, came down to 12.6 % in 1991/92.

The decrease in the share of loans to co-operatives in total disbursements has been caused by the increase in the number of defunct co-operative societies despite the policy declaration of the Government to promote and develop co-operatives as the basis of socio-economic development relying on the mobilisation of local resources and skills and the participation and initiative of local people.

The dominating role of co-operatives in the delivery of small production loans to farmers living far and wide in the country has become a matter of the past.

Sajha co-operatives, although they are more in terms of quantity, are not performing too well. 48% are making profit mainly on paper.

Only 30% of the total Sajha co-operatives can be considered to operate satisfactorily in terms of positive economic results.

6.2. Government policies after 1990
With the restoration of democracy the attitude of Government towards co-operatives changed. Measures were taken to revitalise existing co-operatives on the basis of a detailed study of the situation, to solve the problems of past loans, bad debts, compulsory savings, embezzlements and accounts reconciliation and to reorient co-operatives in the changed context.

Under the Eighth Plan Government expressed its willingness to promote an autonomous and democratically controlled co-operative movement in accordance with its fundamental ideals, values and principles, and to “extricate it from the bewildered state of the past.”1
Co-operatives are now expected to grow on their own and to expand their activities according to their own plans.

Between 1991 and 1994 the number of co-operative societies increased spontaneously and without any governmental programme by 1,155 from 916 to 2,071. In 1995/96 it stood at 3,308.

Under the new political, economic and administrative climate, many existing informal groups opted for conversion into co-operatives. Other growth factors are:

A major success story are the dairy co-ops. Their number increased from 4 in 1991 to 377 in 1994 and 661 in 199596 with seven single purpose district unions in 1994 and 9 in 1995/96 and one Central Union.

The majority of these dairy co-operatives are self-sustaining and have grown to a stage where the country’s dairy industry depends on these co-operatives.

Around 65 % of farm requisites, including chemical fertilisers improved seeds and implements are distributed through the co-operative network.

The situation is different in the case of urban co-operatives, where many new societies have been registered to qualify for tax privileges but otherwise remain inactive.

The new co-operative development policies are laid down in the Eighth Five-Years-Plan and include the following objectives:

- to mobilise the co-operative movement as a self-inspired, voluntary and autonomous movement of the people on people’s own initiatives, with their participation and according to their needs and aspirations,

- to infuse co-operative spirit among people through publicity and membership education,

- to provide assistance for the establishment of an integrated, strong and effective co-operative system through maximum participation of the local people and in particular of women in economic activities,

- to mobilise small capital and skills scattered in the rural areas,

- to encourage the formation of co-operative organisations at local, district as well as national levels adopting democratic systems of management and maintaining transparency in their business transactions,

- to give first priority to co-operatives in any programme implementation or business operation to be undertaken by any governmental or non-governmental agencies, and

- to engage co-operatives in the supply of means of production, sale and purchase of commodities and various other activities oriented towards agricultural production and industrial enterprises and to involve co-operatives increasingly in planning, publicity & programme implementation processes from the central to the district and village levels.

When supporting co-operatives in line with the above mentioned policies, the new autonomy principle of the ICA should be kept in mind.

“Co-operatives are autonomous self-help organisations controlled by their members. If they enter into agreements with other organisations, including governments, or raise capital from external sources, they do so on terms that ensure democratic control by their members and maintain their co-operative autonomy.”

7. Conclusion
The co-operative movement in Nepal has a history of being supported by government through various programmes and projects. Much of this support focused on the development of physical infrastructures like warehouses, cold storage, collection centres and processing industries. Another preferred area of support was to channel credit and agricultural inputs through co-operatives to individual farmers or groups of farmers.

Considering the enormous task to educate and train over one million co-operators as well as tenth of thousands of committee members and managers of co-operatives, relatively little has been done in the field of member education, leadership training and the development of managerial and entrepreneurial skills among co-operative personnel, based on the genuine co-operative principles, despite the laudable efforts of the Co-operative Training Center and many NGOs and INGOs.

During the period of Government supervision and control co-operatives have acquired the image of semi-official structures implementing Government’s development policies and being supported by and accountable to Government. Where Government staff was seconded to act as managers, this negative image was strengthened further.

The policy of encouraging the numerical growth of co-operatives by offering incentives like tax exemptions and concessions, e.g. regarding registration fees, import duties etc., made the public (and many co-operators) see co-operatives as a form of organisation favoured by policy makers and politicians and used by them for their own ends. The conversion of compulsory savings into co-op shares has created large numbers of involuntary members which turned out to be a burden for a voluntary movement.

After the restoration of democracy in 1990, the official policy and the law governing co-operatives were changed and new institutions like the National Co-op Development Board and National Co-operative Organisations were created, however, the image of co-operatives dating back to the time of state control and state subsidies is still present in the minds of Government officials, co-operators and the general public.

A new image of co-operative societies as autonomous self-help organisations financed, managed, controlled and patronised by their members for their own benefit has still to be created.

Seven years after the official liberalisation of co-ops, dynamic, self-managed co-operative enterprises with active participation of their members, being aware of their responsibilities for their joint undertaking, are still the exception rather than the rule.
Except for the problems related to stringent Government control and lack of autonomy, the problems of the past continue to exist:

All these problems continue to exist and will only be overcome, if a deliberate new start is made, based on a new concept of co-operatives as autonomous private self-help organisations and on a policy of making members fully responsible for their own co-operative organisations.

The present manual on the formation of co-operative self-help organisations is meant as a contribution to the implementation of a new, constructive co-operative development policy focusing on human resources development and encouraging self-help and self-responsibility.

Sources and References
Agricultural Projects Services Centre (APROSC): Restructuring Co-operative Training Centre, prepared for Department of Co-operatives, Jawalakhel, Lalitpur, Kathmandu 1995.

Development Project Service Centre (DEPROSC-Nepal) and Ledgerwood, Joanna: Critical Issues in Nepal’s Micro-Finance Circumstances, Kathmandu 1997.

Jain, S.C.: Nepal: The Land Question, Development Publishers, Indore 1985.

National Co-operative Federation Advisory Committee, Sajha Programme in Nepal, Kathmandu February 1991 (2047).

Nepal Rastra Bank: Nepal Rural Credit Review, Kathmandu, December 1994.

Pandey, Chhaya Datta et al.: Rural Co-operatives in Nepal, in: Taimni, K.K. (Ed.): Asia’s Rural Co-operatives, New Delhi 1994, pp. 211-219.

Shrestha, Basu Dev: Country Paper Nepal, in: Asian Productivity Organization (Ed.): Agricultural Co-ops in Asia and the Pacific, Tokyo 1996, pp. 186-196.

South-South  Solidarity and Community Development Organization, Status of Land Reform in Nepal, Seminar Report, Kathmandu, April 1995.

The World Bank, Nepal: Poverty and Incomes, Washington D.C., 1991.

Uprety, Sita Ram and Regmi, Keshab Prasad: Why Do Co-operatives Fail? A Study
of the Factors That Are Basic to Co-operative Pursuits, Kathmandu 1996.

1  Shrestha, Basu Dev, op. cit., p. 193.
2  Pandey, Chhaya Datta et al., op. cit., p. 218.
3  Pandey, Chhaya Datta et al., op. cit., p. 219.