External Regulations Of Cooperatives

Fraudulent practices in Nepali cooperatives warrant attention, but imposing external control measures would undermine their core principles. Since the 2000s, over 300 cooperatives have collapsed due to corruption, affecting billions in deposits. Victims have protested for over a year, demanding justice and reforms to protect their investments and restore the integrity of the cooperative system.

Cooperatives are built on values of self-help, democracy, equity, and solidarity, with a focus on honesty, openness, and social responsibility. However, scandals have undermined these values. While some advocate for a regulator like Nepal Rastra Bank, cooperatives are meant to be self-regulating. Microfinance institutions, with external oversight, already serve rural communities without compromising the cooperative model.

A survey among 53 victims revealed that 69 per cent were depositors in multipurpose cooperatives and 37 per cent in savings and credit cooperatives. Cooperatives in agriculture, dairy, and beekeeping remained stable, while financial cooperatives faced significant failures. According to Tol Raj Upadhyaya, Deputy Registrar at the Department of Cooperatives, cooperatives linked to production flourish, while those focused on banking struggle. Savings and Credit Cooperatives, designed for members who are also shareholders, cannot function like formal banks or microfinance institutions. The failure of self-regulation, worsened by the microfinancialization of cooperatives, lies at the heart of Nepal’s cooperative crisis.

In our survey, 100 per cent of respondents indicated that their cooperatives were based in the Kathmandu Valley or other urban areas. A review of about 300 cooperatives claimed to have failed, according to protesters, revealed that most were located in such regions, with very few from outside the valley. Upadhyaya validated this, stating, “It is very rare for cooperatives run by small groups in villages to fail; they are mostly the city ones.”

Urban areas are often prioritised for regulatory initiatives in developing countries like Nepal, making it easier to enforce regulations in city-based cooperatives. The government and the Department of Cooperatives have been proactive in supporting urban cooperatives due to their proximity. In contrast, it has been much harder for the department to extend such efforts to rural areas, which has led to rural cooperatives performing better than their urban counterparts.

Given this disproportionate focus, earlier attempts at external regulation failed to address the unique challenges of urban cooperatives. This raises the question: “Can external regulatory measures resolve the entire issue?” If the primary concern is settling claims, external intervention may help. However, it will fail to address the deeper need to strengthen the foundational principles of cooperatives and reinforce the cooperative movement as a whole.

The answer to this question lies not in external intervention but in the strength of cooperatives built from within. In rural areas, there is no central authority regulating or maintaining standards for such organizations. 

Instead, the success of these cooperatives stems from members who feel ownership and actively contribute to their success.

To explore the success of rural cooperatives, we interviewed Ambika Hamal, a leading member of Shree Panchakanya Women’s Multipurpose Cooperative Ltd., a successful women’s cooperative in Mandandeupur Municipality, Kavrepalanchowk. She has been a key figure in the cooperative for many years. When asked about their success, she explained, “Having the immense trust of people, we feel accountable to them. Members actively participate in our activities, ensuring everything is going right in their cooperative.”

Her cooperative runs a safe house for victims of domestic abuse and mentally unstable individuals, helping more than five people just last year. 

They also organise regular meetings including festive celebrations, picnics, and tours. These activities help keep members engaged, informed, and updated on the cooperative’s progress, ensuring accountability from both members and operators. This model of member control has proven to be the key to the smooth functioning of cooperatives.

While we strongly condemn external operational interventions in cooperatives, we support effective policy interventions from the government. If executed properly, the Cooperative Act of 2074 offers a solid framework for the cooperative sector. The government should focus on implementing these policies effectively, rather than considering a central authority like Nepal Rastra Bank for regulating cooperatives, as is done with BFIs.

Additionally, the government and cooperative operators should prioritise creating active, informed members rather than treating them as mere customers seeking high interest rates. When members are educated and aware of their roles, they can play a critical role in preventing the micro-financialisation of cooperatives. 

Increasing cooperative literacy will enhance members' accountability to the institution, thereby holding operators accountable and strengthening internal controls. Therefore, robust self-regulation and active member participation are the only viable solutions for ensuring the long-term success and integrity of cooperatives.

(Koirala and Poudel are high school graduates).