January 23, Kathmandu. By Kushal Basnet
Cooperatives are not new to Nepal. Bakhan Multi-purpose Cooperative Institute was established in 1957 in Chitwan. Established in 1953 after the abolition of the Rana regime and formation of a democratic system of governance, the Cooperative Department of Nepal Government “look[s] back to more than six decades of its work with satisfaction in that there is a full-fledged co-operative movement in the country.”
Fast forward to 2024, people are outrageous at cooperatives and government regulators of losing their deposits. Social media feeds in Nepal are rife with videos on Cooperative scams. The cliche background goes: “A group of people deposited their money in a cooperative. They want their money back, but the operators or managers of the cooperative have absconded.”
In many cases where depositors have managed to find the operators, they interrogate and sometimes use brute force in the hope of retrieving their deposits, as depicted in some videos. The Cooperative Department’s “satisfaction” with the “full-fledged” cooperative movement does not align with the recent outrage extending to instances of violence.
The building of the chaos
Although the origins of cooperatives can be traced back to the 1950s, the popularization of the cooperative financial system follows the democratic movement of the 1990s. The number of registered cooperatives boomed from below 1,000 in 1992 to more than 30,000 in 2023, the department data shows.
The economic boom of the early 2000s contributed to the rise in the number of cooperatives. Media reports from that era show that the rise of the cooperatives was fuelled by the lucrative real estate sector, which started to decline as a result of the 2008 financial crisis.
However, the cooperative sector did not lose its trust. Cooperative promoters continued investing the depositors’ money on land in expectation of high returns. They succeeded in doing so by promising higher interest rates to the depositors. In the lack of access to banking, people saw cooperatives as an easy source of financing.
However, the cooperatives were hit hard by a government decision to tighten the real estate sector. In August 2017, the government restricted the plotting of land without permission from the concerned authorities, which was lifted fully only in August of 2023.
However, the flow of deposit amounts to land is not the only problem. It is also associated with the cooperative promoters’ misappropriation of the fund deposits.
The collapse of cooperatives is also not new to Nepal. Depositors lost four billion Nepali rupees to Sudhir Basnet’s Oriental Cooperative Society. The Court fined him about 60 million rupees and sentenced him to two years in prison.
Likewise, people lost another six billion rupees to Ichharaj Tamang’s Civil Cooperative. The Special Court convicted Tamang and his associates for money laundering on Monday. However, he is yet to face cooperative fraud charges at Kathmandu District Court.
Kedarnath Sharma Neupane stands accused of embezzling over 15.5 billion rupees of depositors’ funds through Shiva Shikhar Multipurpose Cooperative and Tulasi Multipurpose Cooperative Ltd.
Another recent incident is the cooperative scam involving the Galaxy 4k TV and its owners. Kantipur, a Nepali-medium broadsheet daily, has reported that the TV operators funnelled more than 520 million rupees from 35,000 cooperative depositors. The TV has shut down due to a series of losses. Its majority owner GB Rai is out of reach, while Rabi Lamichhane, a journalist-turned-politician, is surrounded by controversies about his investments on the TV. Lamichhane has claimed that he got ‘sweat-share’ on TV. On the contrary, media reports suggest that he illegally funded his investment from one of the cooperatives operated by Rai. Nepal Police’s Central Investigation Bureau has opened a file on the issue and a detailed investigation is yet to be done.
Shaky foundations of the ‘third pillar’
The Constitution of Nepal 2015 identifies the cooperative sector as the ‘third pillar’ of the national economy after the public and the private sectors. The report has identified the “involvement of cooperatives operators with political parties, or close links with political leaders or some political leaders themselves having a stake in the cooperatives”. Tamang, who was recently convicted of money laundering and is facing charges of cooperative scam, is an ex-lawmaker from CPN (UML).
The origins of cooperative scams can be traced back to their boom phase in the early 2000s. The government formed a high-level commission to investigate the scam allegations on cooperatives in October 2013. Former Special Court judge Gauri Bahadur Karki chaired the commission.
The commission’s findings led to a draft of a cooperative bill to replace the Cooperative Act of 1992. Although Nepal has laws on fraud, the Act of 1992 did not specify any punishment for cooperative fraud. The committee came up with provisions in the bill with imprisonment of up to 20 years for cases involving scams, but parliamentarians removed many of the provisions to serve their interests, as reiterated by Judge Karki. Cooperative Act of 2017, which was prepared based on the committee’s recommendations, has a maximum imprisonment duration of 10 years for embezzlement of one billion rupees. Lower amounts of embezzlement have lower fines and imprisonment duration.
Other recommendations of the commission included a provision in which an individual cannot be a board member of more than one cooperative, and central bank regulation on cooperatives with more than 5 million rupees annual deposit.
The 2017 act provides that a cooperative may accept saving deposits from its members and lend loans to its members. The Act is silent on the issue of collateral on loans. As a result, the provision of loans without collateral has been rampant in the Nepali cooperative sector. There is also no ceiling on the rates of return.
The Cooperative Department is responsible for providing affiliations to new cooperatives and also has the authority to monitor them. But, the department has been lean on regulating the cooperatives.
Following demonstrations, the government signed an agreement with the cooperative victims in August 2023. The agreement promised to reform the existing laws related to cooperatives and set up a fund to secure the savings of the cooperative victims. PM Dahal and his ministers continue to promise to solve the issues of cooperative victims. However, actions to address the issues have not been followed, and the outrage is growing.
A new political weapon
Durga Prasai, a medical entrepreneur and former aide to PM Pushpa Kamal Dahal, scheduled a demonstration for November 2023. The demonstration had a broad agenda ranging from the restoration of Monarchy and the Hindu state to the abolition of the Federal system to justice for cooperative victims.
The movement was a success in terms of the popular support it gained in the streets and social media although it could not take off further due to tactical pressure from the government. Prasai received a significant proportion of the support from the cooperative depositors as a result of his demand that the government waive loans below 20 lakh rupees. Prasai has called for a second phase of the movement in mid-February and is travelling across Nepal to highlight the problems with cooperatives.
Rabi Lamichhane organized a press meeting on Monday, reiterating that he has no involvement in the cooperative scam associated with Galaxy TV investment. Lamichhane has directed his outrage towards the government, stating that the government is responsible for retrieving the depositor’s money once the cooperatives receive approvals from the government.
Prasai is heating the cooperative issue, whereas Lamichhane’s rebuttal on the allegations made to him involves pointing out the ‘weak hands’ of the government. In a situation where the victims have started acting on their own, the addition of a political flavour demands immediate actions from the government.