Home » What We Do » Economic Development and Opportunity

Economic Development and Opportunity

Protecting and Mainstreaming Informal Sector Safety Nets (PROMISE)

June 2011 ­ May 2014
European Union
East & Far-West (Panchthar, Taplejung, Terathum, Sankhuwasabha, Bhojpur, Baitadi, Doti and Bajhang Districts)
2,000 VSLAs, reaching 50,000 members, representing 300,000 individuals
Economic Development and Opportunity
Nepal Federation of Savings and Credit Cooperative Unions (NEFSCUN)


One quarter of Nepal’s population lives below a poverty line that equates to $0.25/ person/ day, and an additional one half of the population lives on less than $2/ day. Nepal’s workforce is overwhelmingly employed informally, with 96% of workers ­ or an estimated 11,332,000 people ­ employed in the informal sector, which contributes an estimated 52% of the country’s GDP. While the importance of the informal sector in terms of job creation in Nepal cannot be denied, informal employment means that over 96% of workers are deprived of access to formal social protection measures, which directly impacts working conditions, wages, safety nets, access to information, and access to legal, technical, and financial services. Informal sector workers are not protected under the Government of Nepal’s labour law, they have no access to state-sponsored social protection services, and that their employers have no legal obligations in terms of worker welfare. As a result, informal sector workers tend to rely on informal safety nets in the form of self-help groups and Village Savings and Loans Associations (VSLAs).

In Nepal, an estimated 300,000 such informal or VSLA groups are in existence, many of them in districts that formal regulatory authorities and support mechanisms have not yet reached. Key underserved districts in this regard include high hill and mountain districts in the Eastern and Far Western Development Regions. However, while the value of such groups cannot be over-stated, their status as informal groups eventually limits the potential of the VSLAs to serve their members. This means that the very groups set up as safeguards for informal sector workers ­ and which will remain important safety nets for the foreseeable future ­ often fail to play the social protection, savings, insurance, or working capital provision role for which they were established. As a result, informal sector workers depend heavily on high-risk informal loans to cover consumption and emergency needs at interest rates exceeding 60% per annum. Because they are unable to repay these loans in cash, these families might repay consumption and emergency loans with crops, or take a second or third loan to repay the first loan, resulting in a cycle of debt from which it is difficult to emerge.


To address the challenge, Mercy Corps Nepal is working to increase the capacity of workers in the informal economy to escape from poverty and better manage risks and shocks. The goal is to strengthen the capacity of underserved communities in 8 districts in Nepal to understand and access formal and informal social protection measures for informal sector workers. This will be done by supporting Nepal Federation of Savings and Credit Cooperative Unions (NEFSCUN) to merge informal safety nets under VSLAs to be formally registered as Savings and Credit Cooperatives (SACCOs) and provided with technical services, financial services, and legal support. Mercy Corps Nepal is supporting NEFSCUN’s efforts to expand into underserved areas through a deficit subsidy outreach model, thereby enabling a range of VSLAs to be trained and formalised during the project period, while laying the foundation for the formalisation of additional VSLAs after the programme has come to an end.

The target groups include the membership of an estimated 2,000 informal VSLAs, or approximately 50,000 people (25/ group) representing 300,000 household members, in districts where these groups currently have no access to, or links with, NEFSCUN. These districts include three Far Western Districts (Baitadi, Doti, and Bajhang), and five Eastern Districts (Taplejung, Panchthar, Sankhuwasabha, Bhojpur, and Terathum).The target districts in both Far Western and Eastern Nepal are both extremely remote and significantly underserved.

Assessing the capacity of a target VSLA groupAssessing the capacity of a target VSLA group

Key expected results of this action are:

1. Enhanced ability of formal sector intermediary organizations to identify and ace VSLAs in eight underserved district of Nepal.

Utilize the expertise and experience of NEFSCUN, a non-profit, national-level apex body that has both the legal mandate and the capacity to support efforts to formalize and provide services to community-level safety nets, but yet traditionally has not employed an outreach-oriented modality. Mercy Corps will support NEFSCUN to expand to underserved districts through a ‘deficit subsidy’ model and by identifying VSLAs to be formalised as small SACCOs. These SACCOs will endeavour to be federated into District Unions that can themselves maintain close ties with NEFSCUN while serving proximate, day-to-day support and capacity building functions for SACCOs within their networks. These unions and their members will be eligible for wholesale lending via NEFSCUN; ongoing legal support and training via NEFSCUN; savings mobilisation; and, insured savings deposits with NEFSCUN, thereby protecting new SACCOs from the risks associated with under and over-capitalisation.

2. Efficient mechanisms developed for intermediary organizations to train and formalize informal safety nets for poor, informal sector workers.

Train these VSLAs that serve poor and/ or marginalized informal sector workers to meet the standards and ethics of operation that are expected of registered SACCOs, thereby ensuring minimum standards of governance, financial management, transparency, and member services. This will be done by modifying NEFSCUN’s existing SACCO capacity building models to be more appropriate for, and cost-effective to reach, community-based VSLAs, thereby benefiting not only VSLAs supported during the project period but also a range of VSLAs that can be reached by this new NEFSCUN/ District Union outreach modality in the future.

3. Improved legal status, accountability, management, social protection measures, and member services of existing safety nets for informal sector workers.

Example of loan micro enterpriseExample of loan micro enterprise

Identifying, reaching, training, and registering VSLAs as SACCOs are not ends in and of themselves. The purpose of these processes is to improve services to members, almost all of whom are vulnerable informal sector workers, which will allow these informal sector workers to access partially the benefits of formal sector social protection and employment generation mechanisms via: expanded microenterprise-based livelihood strategies through improved loan products, amounts, terms, and conditions; improved protection from routine risks and shocks faced by the poor in the hills and mountains of Nepal (such as natural disasters and crop loss) through micro-insurance; enforced minimum governance and accountability standards; expanded access to savings accounts and accrue savings safely; enhanced access to a network of peer SACCOs that can provide advice and support to one another; and, improved access to individual and group training and technical support opportunities.