Less than a year after the last amendments, the government has proposed changes to the Cooperatives Act, 2017 and the Nepal Rastra Bank Act, 2002. On Tuesday, the Council of Ministers passed an ordinance to amend several laws related to cooperatives and initiated amendments to these two acts.
The Asia Pacific Group (APG), a regional body assessing money laundering risks, had flagged weaknesses in institutional governance within Nepal’s cooperative sector last year, citing high risks of money laundering. In response, the government attempted to address these concerns by amending the laws, including introducing transaction limits. However, the provisions of transaction limits were amended during parliamentary approval. Therefore, the government is now reintroducing the changes through an ordinance.
In February 2024, the government amended the Nepal Rastra Bank Act and the Cooperatives Act to address the concerns raised by the APG, which highlighted significant risks in the cooperative sector. However, in July 2024, the Financial Action Task Force (FATF) expressed dissatisfaction with the amendments, particularly regarding the regulatory framework for cooperatives. FATF warned that if Nepal did not adequately address these issues, it could face placement on the 'grey list,' which would severely impact its ability to access international financial resources.
The FATF had given Nepal one year to avoid the 'grey list' in the matter of money laundering. The APG will review Nepal’s progress in January 2025, and its findings will influence the FATF’s decision on whether to place Nepal on the 'grey list.'
Nepal was previously on the FATF's 'grey list' from 2008 to 2014. It managed to secure removal after implementing institutional and legal reforms.
The government has now hastily introduced the ordinance as the FATF deadline approaches. Minister for Land Management and Cooperatives, Balram Adhikari, stated that the ordinance was introduced to expedite reforms in response to these concerns.
The ordinance strengthens provisions to regulate cooperatives, including the formation of a National Cooperative Regulatory Authority. This authority will replace the existing Cooperative Development Board, inheriting its structure and personnel.
The chairman of the five-member authority must hold at least a master’s degree in economics, commerce, management, accounting, law, or cooperatives, and have significant experience in banking, financial institutions, or cooperatives. Other members include a joint secretary from the Ministry of Cooperatives, a chartered accountant, and experts appointed by the government.
The ordinance also amends the Nepal Rastra Bank Act, empowering Nepal Rastra Bank (NRB) to regulate cooperatives with significant financial activities. NRB will now be able to set directives, conduct inspections, and take action against cooperatives with an annual turnover or share capital exceeding Rs 500 million. Local cooperatives will be allowed to collect savings of up to Rs 1 million per member, provincial cooperatives up to Rs 2.5 million, and national-level cooperatives up to Rs 5 million.
The transfer of cooperative regulation to provincial and local levels has led to rising cases of embezzlement, directors absconding, and members unable to recover their savings. Despite the increasing number of problematic cooperatives, the government has struggled to ensure security of the depositors.
In 2023, a task force led by National Planning Commission member Dr. Jayakant Raut suggested that large cooperatives be temporarily regulated by NRB, with a long-term plan to establish a regulatory authority. Similarly, the Parliamentary Probe Committee on Misuse of Cooperative Savings, chaired by Surya Thapa, recommended setting transaction limits and forming a regulatory body.
