Introduction to Dhukuti Finance
Dhikur (in Thakali), dhukuti or dhikuti (in Nepali) – literally a storage box, used for valuables or food grains – The Dhikuti is a financial self-help group which originated from a system of communal food grain storage for the needy. With the onset of the market economy, it expanded quickly and became a sophisticated informal people’s bank, providing capital for small businessmen as well as farmers. Its resources are solely derived from internal savings mobilization.
Thus, the Dhikuti can be defined as a rotating credit association in which equal amounts of money are collected from the participants in regular intervals and allocated to one member at a time. Its rotation is mostly determined by secret tender, the fund going to the lowest bidder, except at the first and last rounds of a round. Dhiktui has become a major informal financial institution for small enterprise finance in Nepal, particularly for investments in non-farm and off-farm activities. In many cases, it is the only source of credit.
(Cited from Dhikuti: The Self-help Bank of Nepal)
Is Dhukuti Finance legal in Nepal?
Banking Offence and Punishment Act 2064 of Nepal has put a restriction on Dhukuti transactions in Nepal.
As per Section 14Ka of the Act: No one shall participate in “dhukuti transactions” of rotating savings and credit related transaction among the members.
As per Section 2(Chha) of the Act: “Dhukuti transactions” means rotating savings and credit related transaction among the members.
As per Section 15(3)(Ka) of the Act: If person commits any offense specified under Section 14Ka:
• Amount of “bigo”
• Imprisonment based on the amount of “bigo”
1) 0-5 millions: 1-3 year
2) 5-50 millions: 3-5 year
3) 50-500 millions: 5-7 year
4) 500 millions+: 7-9 year
An Example Please
Let’s assume there are 5 people playing Dhukuti on 1500 interest and 5000 principal annual basis.
Let’s say they decide to collect 5,000 per person per year. So at the end of first year they collect 25,000 and one out of 5 will take that amount. The one taking that amount can be picked by group understanding or lottery or bidding. Next year and the subsequent years that guy will pay 6,500 which includes 1,500 interest. In the end of second year second person will take the pot money and accumulated interest. Next year and the subsequent years, that guy will pay 6,500.
Is the IRR skewed? Are all participants fairly compensated?
It generally seems that the person taking the pot last will make a profit because he will have extra interest as everyone else in the group will have paid in the the interest at that point. In practice, however one important thing to consider is that the person who is leading the Dhukuti and coordinating is exempted from the interest in most cases.
Let’s view the compensation from above example in numerical form. For simplicity the order of result of the dhukuti is A, B, C, D and E respectively to receive the amount.
Table A: Regular Contribution to Dhukuti Pot
| Year | Person A | Person B | Person C | Person D | Person E |
| 1 | 5,000 | 5,000 | 5,000 | 5,000 | 5,000 |
| 2 | 5,000 | 5,000 | 5,000 | 5,000 | 5,000 |
| 3 | 5,000 | 5,000 | 5,000 | 5,000 | 5,000 |
| 4 | 5,000 | 5,000 | 5,000 | 5,000 | 5,000 |
| 5 | 5,000 | 5,000 | 5,000 | 5,000 | 5,000 |
Table B: Interest Contribution to Dhukuti Pot
Since A is receiving the fund from Dhukuti Pot in first round he will contribute interest for the 2nd to 5th year. Similarly, B will contribute from 3rd year to 5th year and so on.
| Year | Person A | Person B | Person C | Person D | Person E |
| 1 | – | – | – | – | – |
| 2 | 1,500 | – | – | – | – |
| 3 | 1,500 | 1,500 | – | – | – |
| 4 | 1,500 | 1,500 | 1,500 | – | – |
| 5 | 1,500 | 1,500 | 1,500 | 1,500 | – |
Table C: Amount received from Dhukuti Pot
A will receive all the amount collected in the Pot. In second round, however, B will receive the regular dhukuti contribution of each participant put interest put in by A for the second year. Thus B will receive 26,500 from the pot. Similarly C will receive 28,000 at his round.
| Year | Person A | Person B | Person C | Person D | Person E |
| 1 | 25,000 | – | – | – | – |
| 2 | – | 26,500 | – | – | – |
| 3 | – | – | 28,000 | – | – |
| 4 | – | – | – | 29,500 | – |
| 5 | – | – | – | – | 31,000 |
Table D: Net Outflow from the Dhukuti Pot to each participant
This is the summation of the result of Table A, Table B and Table C. (Essentially, -A-B+C)
Also see at the bottom:
(A) The Net Cash outflow in nominal values
(B) IRR of the Cash Flows
(C) NPV @ 12% Cut Off Rate
| Year | Person A | Person B | Person C | Person D | Person E |
| 1 | 20,000 | (5,000) | (5,000) | (5,000) | (5,000) |
| 2 | (6,500) | 21,500 | (5,000) | (5,000) | (5,000) |
| 3 | (6,500) | (6,500) | 23,000 | (5,000) | (5,000) |
| 4 | (6,500) | (6,500) | (6,500) | 24,500 | (5,000) |
| 5 | (6,500) | (6,500) | (6,500) | (6,500) | 26,000 |
| Net Nominal Cash Flow | (6,000) | (3,000) | – | 3,000 | 6,000 |
| IRR | 11.39% | 10.71% | 17.04% | 11.32% | 10.78% |
| NPV@12% | (1,416) | (558) | 140 | 699 | 1,135 |
Clearly the compensation varies in Dhukuti Scheme. If the normal market lending rate is higher than the IRR that the person is earning from the scheme, he can have an arbitrage oppurtunity. In that case he could invest the amount from dhukuti pot to other more profitable areas. Surely, one person’s gain is another’s loss. So other participants would bear that cost.
Because there is arbitrage oppurtunity, there is a bidding practice as well in some Dhukuti Plans where the person intending to receive the amount from the Pot will leave some amount in the pot as a cost of his bid, which will be collected by the participants in the other rounds.