


































Economics, Law and Policy 
ISSN 2576-2060 (Print) ISSN 2576-2052 (Online) 

Vol. 6, No. 3, 2023 

www.scholink.org/ojs/index.php/elp 

27 
 

Original Paper 

Financial Risk and Governance Nexus in Nepalese Cooperative 

Societies 

Gyanendra Prasad Paudel
1
 

1
 National College, Tribhuvan University, Nepal  

 

Received: October 5, 2023    Accepted: October 25, 2023    Online Published: November 30, 2023 

doi:10.22158/elp.v6n3p27                 URL: http://dx.doi.org/10.22158/elp.v6n3p27 

 

Abstract 

This study aims to investigate the relationships between credit default risk, leverage risk, liquidity risk, 

and investment risk and their connection to the governance system of Nepalese cooperative societies. 

The research hypothesis tries to explore that these financial risks are not significantly associated with 

the governance system of cooperatives. The findings reveal a significant connection between the 

governance system of cooperatives and credit default risk, leverage risk, and investment risk. However, 

liquidity risk does not demonstrate a substantial link with the governance system, suggesting the 

influence of additional factors. These results underscore the pivotal role of effective governance in 

mitigating financial risks within cooperative societies. Interestingly, the lack of a significant connection 

between liquidity risk and the governance system implies that other factors are at play in influencing 

liquidity risk. These insights provide valuable guidance for policymakers and cooperative management, 

facilitating the enhancement of governance and risk management strategies, and ultimately 

contributing to the sustainability of cooperative societies in Nepal. The evaluation involves a 

comprehensive analysis of financial risks and the governance system in Nepalese cooperative societies, 

utilizing data from a sample of 126 cooperative societies in Kathmandu. 

Keywords 

governance system, credit default risk, leverage risk, liquidity risk, and investment risk 

 

 

 

 

 

 

 



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1. Introduction 

Cooperatives in Nepal have evolved within a distinctive and well-defined framework, characterized by 

the primacy of member participation in decision-making. This comprehensive exploration will delve into 

Nepalese cooperative governance, highlighting the essential roles played by members, the board of 

directors, management, and employees in shaping the cooperative’s success and commitment to 

inclusivity.  

At the conceptual level, the cooperative model in Nepal illustrates a form of collective action where 

individuals join together to achieve common minimum economic, social, and cultural objectives. It 

reflects cooperative norms that center on democratic decision-making, shared ownership, and equitable 

distribution of benefits. This conceptual foundation aligns with international cooperative principles while 

adapting to the specific social and economic contexts of Nepal. 

Within the Nepalese context, cooperatives have emerged as vital institutions that address various 

economic and social challenges. They play a significant role in rural and urban settings, bridging gaps in 

financial services, agriculture, and other sectors. This contextual significance is underscored by the 

country’s unique socio-economic landscape, characterized by diverse ethnicities, geographical variations, 

and developmental needs. 

The historical cornerstone of cooperative movements in Nepal traces back to early grassroots efforts to 

address economic disparities and empower marginalized communities. Over time, these efforts 

culminated in a structured cooperative framework that aimed to promote self-sufficiency, financial 

inclusion, and community development. The cooperative sector has grown significantly from its 

inception, evolving in response to historical imperatives and changing economic paradigms. 

This study is driven to understand the relationships between credit default risk, leverage risk, liquidity 

risk, and investment risk concerning the governance system of Nepalese cooperative societies. The 

primary aim is to explore whether there is a substantial correlation between these financial risks and the 

governance system. 

This inquiry arises from the recognition that effective governance is pivotal to the sustainability and 

prosperity of cooperatives. Through an examination of how financial risks and governance interact, the 

research aims to illuminate both the strengths and possible weaknesses of the Nepalese cooperative 

model. This understanding is crucial for policymakers, cooperative management, and members alike, as 

it can inform strategies to enhance governance and risk management, ensuring the continued success of 

cooperative societies in Nepal. 

Nepalese cooperatives serve as dynamic entities, driven by the active involvement of their members, 

prudent governance practices, and a faithful commitment to collective prosperity and inclusivity. This 

sequential breakdown emphasizes the integral role of each stakeholder in the cooperative’s 

achievements. 

 



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Drawing from the economic survey for the year 2022/23, as of mid-March 2023, the cooperative sector 

has achieved noteworthy milestones. It encompasses a total of 31,373 cooperatives, catering to the needs 

of 7,381,218 members. Remarkably, this sector has played a pivotal role in creating direct employment 

opportunities for 93,771 individuals. In terms of its financial impact, the cooperative sector has made 

substantial contributions, accumulating a share capital of 94.15 billion rupees, collecting deposits 

totaling 478.03 billion rupees, and providing loans amounting to 426.35 billion rupees to their members. 

These statistics underscore the substantial role of cooperatives in Nepal’s socio-economic landscape, 

affirming their significance at both the national and regional levels.  

 

2. Literature Review 

The governance of cooperative societies in Nepal constitutes a multifaceted and dynamic domain, as 

evidenced by a wealth of scholarly studies and insights. This literature review offers an in-depth 

exploration of significant findings and perspectives concerning cooperative governance in the Nepalese 

context. It interplay between independent and dependent variables, emphasizing the relationship 

between these variables for the purpose of generalizing results to a wider context. 

Multifaceted approach: Paudel (2022) proposed approach to foster the development of the cooperative 

movement is characterized by several dimensions, including the promotion of cooperative-friendly 

policies, expansion into rural underserved areas, establishment of cooperatives as a cornerstone of 

national prosperity, reinforcement of cooperatives self-regulation, and the maintenance of good 

governance. This approach lays the groundwork for understanding the intricate relationships between 

these independent variables and their impact on the dependent variable, cooperative development. 

Significance of accountability: Ernst and Young (2012) underscores the vital importance of 

accountability in cooperative governance. It highlights accountability as a pivotal independent variable 

that influences governance outcomes. Weak oversight and control mechanisms are identified as barriers 

to effective governance, emphasizing the direct relationship between accountability practices and 

governance failures. 

Holistic nature of governance systems: Eckart (2009) conceptualization of governance systems as 

encompassing structures, processes, and dynamic interactions places emphasis on alignment with 

cooperative objectives, member interests, and core values in Nepal. This definition underscores the 

interdependence of various elements within governance systems and their direct influence on the 

dependent variable, cooperative performance. 

Adaptability in cooperative governance: Novkovic et al. (2023) stress the adaptability of cooperative 

governance structures, highlighting their dependence on the organization’s purpose and member 

relationships. This adaptability is a crucial independent variable as it influences cooperative evolution 

while upholding democratic processes, signifying the need for flexibility and responsiveness in 

governance approaches. 

 



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Policy implementation and member participation: Ekhorutomwen and Peters (2021) & Prakash (2004) 

underline the importance of policy implementation in Nepal for strengthening cooperative systems. 

Effective governance through regulation, networking, and innovative management is identified as 

influential independent variables in enhancing performance, benefitting members, and ensuring 

satisfaction. Member participation, another independent variable, plays a pivotal role in governance, 

underlining the importance of policy and active member involvement. 

Management, human resource quality, and adaptability: Paudel (2021) & Fairbairn et al. (2015) 

conclude that effective management, governance, and human resource quality are emphasized as 

independent variables that shape the evolution of the cooperative savings culture. Capacity-building 

initiatives and adaptable governance practices further reinforce the interdependence of these variables 

with cooperative success. 

Cooperative networks and governance: Fairbairn et al. (2015) conclude that the value of cooperative 

networks in sharing collective knowledge for effective governance practices underscores the influence 

of these networks as an independent variable in cooperative governance. The nuanced nature of “Good 

governance” highlights the context-specific and knowledge-sharing aspects that affect governance 

outcomes. 

Agency problems, cooperative identity, and democratic control: Brasil (2008), Novkovic and Miner 

(2015), Birchall (2017) & Cornforth (2004) delve into agency problems, distinctive features of 

cooperative identity, and the balance between representation and expertise in cooperative boards. These 

aspects, considered independent variables, influence governance outcomes through their impact on the 

alignment of interests and democratic principles. 

Humanistic perspective on governance: Novkovic and Miner (2015), Bager (1994), Sacchetti & Tortia 

(2016) introduce diversity and context-dependence as essential components of decision-making 

structures. Human dignity and needs satisfaction emerge as pivotal independent variables influencing 

governance practices. 

The four pillars of cooperative governance model: This model provides a holistic framework that 

includes teaming, accountable empowerment, strategic leadership, and democracy, serving as 

independent variables applicable at all cooperative levels in Nepal. 

Member engagement and context-specific variables: Novkovic et al. (2023) highlighted the 

significance of member engagement as an independent variable is emphasized, as is the influence of 

context-specific variables on various forms of “best cooperative governance”. These variables navigate 

the dynamic interplay between member expectations and external pressures, underlining the need for 

adaptive governance strategies. 

Governance in financial cooperatives: Brasil (2008) highlights the unique challenges and importance of 

governance in financial cooperatives as an influential independent variable. 

 

 



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Link between governance and performance: Dayanandan and Dagnachew (2015) conclude the vital 

connection between good governance and cooperative performance underscores the critical impact of 

governance as an independent variable on the dependent variable, cooperative success. 

Empirical evidence: Puri and Bunchapattanasakda (2019) conclude that good governance exhibits a 

statistically significant and positive correlation with the financial performance of savings and credit 

cooperatives. The independent variables of participation, accountability, and transparency were also 

found to have not only statistically significant but also positive relationships with the financial 

performance of these cooperatives. This empirical evidence serves as a significant reference for 

generalizing the impact of governance components on cooperative financial success. 

Policy implications: Puri and Bunchapattanasakda (2019) show the discovery of a significant 

relationship between participation, accountability, and transparency as pivotal components of good 

governance and cooperative performance carry direct policy implications for enhancing cooperative 

governance, particularly within local governments in Nepal. 

In summary, cooperative governance in Nepalese cooperative societies represents a dynamic and 

multifaceted field. This literature review underscores the importance of various independent variables 

such as adaptability, accountability, management, human resource quality, member engagement, and 

context-specific variables in shaping cooperative governance and, subsequently, cooperative success. 

The diverse insights and perspectives from these studies contribute to a comprehensive understanding 

of cooperative governance in the Nepalese context and provide valuable reference points for 

generalizing results to a wider cooperative landscape. 

 

3. Methodology 

We collected secondary data from the annual audited financial statements of saving and credit 

cooperatives and multipurpose cooperatives operating in Kathmandu, which serves as the capital city of 

the country. 

To account for the demographic and economic heterogeneity of the population, we employed stratified 

sampling, considering all of Nepal as the target population. Our sample consisted of 126 cooperatives 

selected from the Kathmandu district, ensuring a diverse representation of the cooperative landscape. 

We conducted a multi-faceted analysis of the secondary data, utilizing descriptive analysis, correlation 

analysis, and regression analysis: 

The statistical analyses were carried out using SPSS 16.0 and Stata SE10 applications, providing a 

robust framework for data manipulation and analysis. Furthermore, the organization of results and the 

tabulation of data were performed in MS Excel 2007. 

 

 

 

 



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4. Data Analysis 

To assess the governance system of Nepalese cooperative sectors independent correlation hypotheses I, 

II, III and IV have been tested as: 

Hypothesis I: Credit default risk is not significantly associated with the governance system of 

cooperatives.  

Step I: Conceptual framework 

Default risk means debt or loan investment default risk. It is measured by exposure limit of personal 

guaranteed loan i.e., loan supplied without collateral (Lpg). Lpg is calculated from structured 

questionnaire survey, by assigning score as: 

What is single party exposure limit of personal guarantee loan in your cooperative? 

a. does not have any PG loan, score is 0       b. less than 0.1 million, score is 0.5 

c. 0.2 to 0.5 million, score is 1.75              d. more than 0.5 million, score is 2.5         

Governance system is measured by % of member’s participation on board meeting (BMP). BMP is 

calculated from structured questionnaire survey, by assigning score as: 

What percentage of total board members usually participates in decision making process? 

a. 100%, score is 100                           b. 66 - 99%, score is 66 

c. 51- 66%, score is 51                         d. less than 50%, score is 0 

Well governance system reduced the default risk. The expected output is therefore rejection of null 

hypothesis. 

Step II: Setting up of hypothesis 

Null Hypothesis H0: ρ=0, i.e., Population correlation coefficient is zero or there is no significant 

relationship between Lpg and BMP. 

Alternative Hypothesis H1: ρ≠0, i.e., Population correlation coefficient is not zero or there is a 

significant relationship between Lpg and BMP. 

Step III: Level of significance α=0.05 or 5%; degree of freedom df=n-2=126-2=124 

Step IV: Test statistics 

 

Table 1. Correlation of Lpg and BMP 

  Lpg 

BMP Pearson Correlation 0.211* 

 Signification (2-tailed) 0.018 

 N 126 

Note. *Correlation is significant at the 0.05 level (2-tailed). 

 

 



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t=  =  = 2.4037, where, r=correlation coefficient, n=no of observation. 

tcalculated = 2.4037 

Step V: Critical value  

At df=124 and level of significant α=0.05 or 5%, t tabulated = 1.98 

Step VII: Result  

Since the absolute value of the calculated t score is greater than the absolute value of critical t score, 

null hypothesis H0 is rejected and alternative hypothesis H1 is accepted, i.e., as the theoretical 

assumption behind hypothesis testing, the population correlation coefficient is not zero that implies 

credit default risk is significantly associated to governance system of cooperatives. 

Hypothesis II: Leverage risk is not significantly associated with the governance system of 

cooperatives.  

Step I: Conceptual framework. 

Leverage risk means risk due to obligation or presence of debt in capital structure. This may cause 

default in firm’s operation due to lack of firm capacity to repay debt. It is measured by Capital 

Adequacy Ratio (CAR). Governance system is measured by % of member’s participation on board 

meeting (BMP). BMP is calculated from structured questionnaire survey, by assigning score as: 

What percentage of total board members usually participates in decision making process? 

a. 100%, score is 100                       b. 66-99%, score is 66 

c. 51-66%, score is 51                      d. less than 50%, score is 0 

Well governance system optimizes the default risk. The expected output is therefore rejection of null. 

Step II: Setting up of hypothesis 

Null Hypothesis H0: ρ=0, i.e., Population correlation coefficient is zero or there is no significant 

relationship between CAR and BMP. 

Alternative Hypothesis H1:ρ≠0, i.e., Population correlation coefficient is not zero or there is a 

significant relationship between CAR and BMP. 

Step III: Level of significance α=0.05 or 5%; degree of freedom df=n-2=126-2=124 

Step IV: Test statistics 

 

Table 2. Correlation of CAR and BMP 

  Lpg 

CAR Pearson Correlation -0.207* 

 Signification (2-tailed) 0.020 

 N 126 

Note. *Correlation is significant at the 0.05 level (2-tailed). 



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t=  =  = -2.356085, where, r=correlation coefficient, n=no of observation. 

tcalculated = -2.356085 

Step V: Critical value  

At df=124 and level of significant α=0.05 or 5%, t tabulated=1.98 

Step VII: Result  

Since the absolute value of the calculated t score is greater than absolute value of critical t score, null 

hypothesis H0 is rejected and alternative hypothesis H1 is accepted, i.e., as theoretical assumption 

behind hypothesis testing, population correlation coefficient is not zero that implies leverage risk is 

significantly associated to governance system of cooperatives. 

Hypothesis III: Liquidity risk is not significantly associated with the governance system of 

cooperatives. 

Step I: Conceptual framework. 

Liquidity risk means risk of shortage of liquid assets or cash for short term periods such as shortage to 

pay the daily demand of depositors, etc. It is measured as liquid assets to total deposit (LR). The 

governance system is measured by the Number of Board Meeting (NBM) per year. NBM is calculated 

from a structured questionnaire survey, by assigning scores as: 

How often did your cooperative society organize board meeting during the last one year period? 

a. monthly, score is 12                  b. by monthly, score is 6 

c. quarterly, score is 4                    d. as per necessary, score is (12+6+4+0)/3=5.5 

Well governance system optimizes the liquidity risk. The expected output is therefore rejection of null 

hypothesis. 

Step II: Setting up of hypothesis. 

Null Hypothesis H0: ρ=0, i.e., Population correlation coefficient is zero or there is no significant 

relationship between LR and NBM. 

Alternative Hypothesis H1:ρ≠0, i.e., Population correlation coefficient is not zero or there is a 

significant relationship between LR and NBM. 

Step III: Level of significance α=0.05 or 5%; degree of freedom df=n-2=126-2=124 

Step IV: Test statistics 

 

Table 3. Correlation of LR and NBM 

  Lpg 

LR Pearson Correlation -0.167 

 Signification (2-tailed) 0.062 

 N 126 

Note. *Correlation is significant at the 0.10 level (2-tailed). 



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t=  =  =-1.89, where, r=correlation coefficient, n=no of observation. 

tcalculated =-1.89 

Step V: Critical value  

At df=124 and level of significant α=0.05 or 5%, t tabulated=1.98 

Step VII: Result  

Since absolute value of calculated t score is less than absolute value of critical t score, null hypothesis 

H0 is accepted and alternative hypothesis H1 is rejected i.e. as against theoretical assumption behind 

hypothesis testing, population correlation coefficient is zero that implies liquidity risk is not 

significantly associated to governance system of cooperatives. 

Hypothesis IV: Investment risk is not significantly associated with the governance system of 

cooperatives.  

Step I: Conceptual framework. 

Investment risk means risk due to the selection of a risky investment or loan. It causes credit default rates 

high. It is measured as net interest spread (Spread). The governance system is measured by the Number 

of Board Meetings (NBM) per year. NBM is calculated from a structured questionnaire survey, by 

assigning scores as: 

How often did your cooperative society organize board meetings during the last one year period? 

a. monthly, score is 12                  b. by monthly, score is 6 

c. quarterly, score is 4                   d. as per necessary, score is (12+6+4+0)/3=5.5 

Well governance system optimizes the investment risk. The expected output is therefore rejection of 

null. 

Step II: Setting up of hypothesis. 

Null Hypothesis H0: ρ=0, i.e., Population correlation coefficient is zero or there is no significant 

relationship between Spread and NBM. 

Alternative Hypothesis H1:ρ≠0, i.e., Population correlation coefficient is not zero or there is a 

significant relationship between Spread and NBM. 

Step III: Level of significance α=0.05 or 5%; degree of freedom df=n-2=126-2=124 

Step IV: Test statistics 

 

Table 4. Correlation of Spread and NBM 

  NBM 

Spread Pearson Correlation -0.220* 

 Signification (2-tailed) 0.021 

 N 110 

Note. *Correlation is significant at the 0.10 level (2-tailed). 



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t=  =  =-2.511, where, r=correlation coefficient, n=no of observation. 

tcalculated = -2.511 

Step V: Critical value  

At df=124 and level of significant α=0.05 or 5%, t tabulated=1.98 

Step VII: Result  

Since the absolute value of the calculated t score is greater than the absolute value of the critical t score, 

the null hypothesis H0 is rejected, and alternative hypothesis H1 is accepted i.e. as the theoretical 

assumption behind hypothesis testing, the population correlation coefficient is not zero that suggests 

investment risk is significantly associated to governance system of cooperatives. 

 

5. Findings 

In the first hypothesis, the absolute value of the calculated t-score exceeds the absolute value of the 

critical t-score. Therefore, the null hypothesis H0 is disapproved, and the alternative hypothesis H1 is 

affirmed. In accordance with the foundational principles of hypothesis testing, this implies that the 

population correlation coefficient is non-zero, indicating a substantial connection between credit 

default risk and the governance system of cooperatives. 

For the second hypothesis, the absolute value of the calculated t-score surpasses that of the critical 

t-score. Consequently, the null hypothesis H0 is negated, and the alternative hypothesis H1 is validated. 

This aligns with the theoretical framework of hypothesis testing, signifying a substantial association 

between leverage risk and the governance system of cooperatives, as the population correlation 

coefficient is found to be non-zero.  

Contrastingly, the third hypothesis exhibits a different outcome, as the absolute value of the calculated 

t-score is less than that of the critical t-score. Consequently, the null hypothesis H0 is accepted, and the 

alternative hypothesis H1 is rejected. This challenges the theoretical premise of hypothesis testing, 

indicating that the population correlation coefficient is zero, implying that there is no significant 

association between liquidity risk and the governance system of cooperatives. 

In the case of the fourth and final hypothesis, the calculated t-score’s absolute value surpasses that of 

the critical t-score. Consequently, the null hypothesis H0 is dismissed, and the alternative hypothesis H1 

is embraced. This aligns with the foundational tenets of hypothesis testing, suggesting that the 

population correlation coefficient is not zero, highlighting a substantial relationship between 

investment risk and the governance system of cooperatives. 

 

 

 

 

 



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6. Conclusion 

This research provides a comprehensive exploration of the governance landscape within Nepalese 

cooperative societies by examining the intricate relationships among critical financial risks: credit 

default risk, leverage risk, liquidity risk, and investment risk, in conjunction with the governance 

system. The findings, summarized herein, offer a nuanced understanding of these associations. 

The study consistently found that the calculated t-score values surpassed the critical t-score values, 

unequivocally rejecting the null hypotheses. This unequivocal outcome signifies a substantial and 

undeniable linkage between credit default risk, leverage risk, and investment risk with the governance 

system of cooperative societies. These results highlight the pivotal role of effective governance in 

navigating and mitigating these financial risks, ultimately contributing to the resilience and prosperity 

of cooperative societies. 

Conversely, the analysis revealed that the calculated t-score for liquidity risk failed to reach the critical 

t-score threshold, leading to the acceptance of the null hypothesis. This observation suggests that, 

within the context of Nepalese cooperative societies, liquidity risk is not significantly associated with 

the governance system. It implies the presence of other influential factors that play a more prominent 

role in shaping liquidity risk within these cooperative societies. 

In summary, this research underscores the substantial and noteworthy connections between credit 

default risk, leverage risk, and investment risk with the governance system, as assessed through 

member participation in board meetings. These findings underscore the pivotal role of effective 

governance in managing financial risks within cooperative societies, emphasizing the significance of 

robust governance practices. 

Nevertheless, the absence of a significant association between liquidity risk and the governance system 

highlights the intricate nature of the cooperative landscape, suggesting that additional factors, beyond 

governance, may underlie liquidity challenges. These research outcomes offer valuable insights for 

policymakers and cooperative management, serving as a foundation for the enhancement of governance 

and risk management strategies within the cooperative sector. Ultimately, this research contributes to a 

comprehensive understanding and the advancement of governance systems in Nepalese cooperative 

societies, nurturing their long-term sustainability and prosperity. 

 

 

 

 

 

 

 

 

 



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7. Recommendations 

The study offers a set of recommendations aimed at strengthening cooperative societies in managing 

financial risks and ensuring their long-term success. It suggests enhancing governance practices to 

effectively handle financial risks, such as credit default, leverage, and investment risks. 

The study emphasizes the importance of training and education. It advises providing specialized training 

and education for board of directors, members, and staff, enabling them to identify and manage financial 

risks while ensuring that their decisions align with the cooperative’s financial stability. It highlights the 

significance of involving members in governance decisions, thus ensuring their meaningful engagement 

in the cooperative’s decision-making processes. 

Furthermore, the study urges cooperative societies to diversify their liquidity risk management strategies 

beyond governance. This includes a focus on exploring liquidity challenges and developing a range of 

approaches to address them. In a dynamic cooperative sector, continuous research is vital. The study 

recommends ongoing research to identify evolving risks and their relationship with governance, allowing 

for timely adaptations of governance and risk management practices. 

The study also advises policymakers to base policies on research findings, encouraging the adoption of 

best practices and providing resources for training and development within cooperative societies. 

Promoting knowledge sharing and collaboration among cooperative societies is another crucial aspect. 

The study suggests that sharing governance and risk management best practices, experiences, and lessons 

can benefit the entire cooperative sector. 

Finally, the study underscores the need to prioritize the long-term sustainability and prosperity of 

cooperative societies. This can be achieved through effective governance and risk management practices, 

with close collaboration between policymakers and cooperative practitioners. 

 

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