The government amended the Cooperative Act on April 12, 2024, through the Amendments to Some Nepal Acts. However, it hastily introduced another amendment via an ordinance on December 29, 2024, and revised the Cooperative Act again. The ordinance, which also amended the Nepal Rastra Bank Act, was passed by the Council of Ministers on December 29 and issued by the President's Office the same day. Despite recent revelations of major cooperative fraud, questions have arisen about why the government rushed to issue the ordinance instead of waiting for a regular parliamentary session.

Why Was the Ordinance Introduced?

According to government officials, the ordinance was primarily aimed at demonstrating Nepal's commitment to international standards for preventing money laundering. The Financial Action Task Force (FATF), an international body that sets and monitors anti-money laundering standards, is scheduled to hold its next plenary session in France on February 17, 2025. Officials indicated that the ordinance seeks to address loopholes in the cooperative sector, deemed risky for money laundering, to avoid Nepal being placed on the FATF’s "grey list."

The Asia Pacific Group (APG), a regional organization under FATF, had highlighted deficiencies in Nepal's cooperative sector during its mutual assessment last year. The report pointed out ineffective regulation, weak governance, and high money laundering risks in cooperatives. Ahead of the FATF plenary held in June 2024, the government had amended the Cooperatives Act 2017 and the Nepal Rastra Bank Act 2002 to signal stricter regulation of cooperatives. However, key provisions, such as empowering Nepal Rastra Bank to monitor large cooperatives and impose savings limits, were not passed by Parliament. Under pressure to show progress before the February plenary, the government amended both Acts via the ordinance.

Key Features of the Ordinance

The ordinance addresses shortcomings identified in the APG's evaluation, such as establishing a regulatory authority for cooperatives; limiting individual savings in cooperatives to Rs 50 million at the national level, Rs 25 million at the provincial level, and Rs 1 million at the district level;  and mandating disclosure of the source of funds deposited in cooperatives.

Arjun Prasad Pokharel, secretary at the Ministry of Land Management and Cooperatives, admitted that the ordinance was prompted by large suspicious deposits in cooperatives. "Although not all such deposits indicate money laundering, they raise concerns," he said, adding that the government has tried to address these issues.

How Does the Ordinance Handle Money Laundering Risks?

The cooperative sector currently has six oversight bodies: local, provincial, federal governments, Department of Cooperatives, the Cooperative Regulatory Authority, and Nepal Rastra Bank. This multiplicity creates ambiguity in roles and responsibilities. The ordinance has classified cooperatives into national, provincial, and district categories, introducing deposit limits based on their level of operation.

Additionally, the ordinance grants Nepal Rastra Bank powers to monitor cooperatives and issue standards. It also allows cooperatives access to the Credit Information Center and the Deposit Guarantee Fund, tools previously exclusive to the banking sector.

Concerns Over Savings Limits

Cooperative activists have opposed the savings cap, arguing that it discourages investment in cooperatives. They believe limits should be based on a cooperative’s capital rather than being arbitrarily imposed. Activists have also criticized the provision allowing individuals to join only one savings and credit cooperative, which could reduce the membership base drastically.

Challenges in Regulation and Implementation

Despite these reforms, challenges persist. Nepal has around 14,000 registered savings and credit cooperatives, with many others operating under different names. The newly established Cooperative Regulatory Authority faces significant hurdles, including a lack of operational resources and potential government interference.

The ordinance also does not provide a clear plan for addressing problematic cooperatives. Approximately 500 cooperatives owe Rs 200 billion to the public. While experts have recommended reimbursing small depositors (up to Rs 500,000) immediately through government-backed loans, the ordinance does not include such provisions.

Sudarshan Dhakal, a former registrar at the Department of Cooperatives, suggested that financial expertise is essential for regulating cooperatives. "This responsibility should lie with the central bank or a specialized authority," he said, adding that integrating the Cooperative Regulatory Authority into the scope of Nepal Rastra Bank could strengthen oversight.