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The year 2025 has been a roller coaster ride for the development sector. Some development partners have discontinued; others have downsized and focused on certain geographies/sectors and others still have changed course completely. What is clear is aid is not what it used to be, the pot is shrinking and shrinking fast. Developing countries must find alternative sources of finance to fund development outcomes—and strategically leverage grants and concessional capital to maximise financing of development needs. The British Embassy Kathmandu has been designing and implementing financial instruments that unlock and mobilise public and private sector finance to support economic growth, private sector development and climate change mitigation.

Nepal is a unique country and has been on a unique development trajectory. Nepal received more than $10bn in remittance in the last fiscal year supporting a positive macro-economic outlook. Still, challenges and vulnerability remain. Dependence on remittance has, sometimes, taken attention away from private sector development and local job creation. Nepali businesses are not adequately integrated with global value chains and attract the lowest levels of foreign investment in South Asia. This limits access to foreign partnerships, technology and know-how. Nepal’s tourism sector, for example, remains stagnant, largely due to a lack of innovation and market access. Despite this and other obvious challenges in the Nepali economy, there are attractive business and investment opportunities across several sectors which remain untapped.

Access to finance is critical to ensuring inclusive growth in Nepal. A study conducted by the British Embassy calculated the funding gap from formal financial channels to small and medium enterprises (SMEs) at over $950m. More than 80 percent of the SMEs rely on informal financing sources and almost 60 percent rely on family and personal savings to fund their financing needs. Even on the formal financing side, SMEs in Nepal have very limited options for raising capital outside of collateralised bank loans. This puts many women, for example, at a disadvantage when so few of them own property or have access to savings. Limited access to finance also stifles growth, innovation and job creation. While the recent fiscal and monetary policies are more supportive of the private sector and SMEs in Nepal, SME development requires strong collaboration between all stakeholders—the government, development partners and the private sector.

Many developing economies like Nepal struggle to attract foreign investments or local capital into high risk/high rewards investment opportunities. Bilateral and multilateral development finance institutions (DFIs) are keen to invest in Nepal as is shown by the number of DFIs active in the country and those that are keeping a close watch for the right investment opportunities. Bridging the gap between interest and investment requires all stakeholders to join forces to mitigate challenges and find and develop opportunities. Designing innovative financial structures will be key in terms of crowding in large amounts of private sector capital.

Blended finance platforms invite the government, development partners, and development finance institutions (DFIs) to collaborate and unlock access to finance. Blended finance strategically uses development finance (grants) to mobilise local and international private capital (commercial capital) into strategic sectors. Further, a reform-oriented public sector that builds a supportive business environment through policy stability and effective partnerships is essential to achieving sustainable development outcomes. 

The British Embassy Kathmandu has been using a blended finance approach to support access to finance in Nepal. Funds such as Business Oxygen and Dolma Impact Fund achieved the dual goal of supporting development outcomes and enhancing returns to investors. International Finance Corporation (IFC), the investment arm of the World Bank Group, has used UK official development assistance (ODA) to de-risk investments and mobilise finance for SMEs in Nepal. The right financial structuring can help further reduce the gap between demand for capital and supply of capital in the growing SME ecosystem.

Building on previous experience, the British Embassy is establishing Nepal in Business—Catalytic Finance to unlock new sources of capital for SMEs, from the Private Equity and Venture Capital (PEVC) space and financial institutions. This financing facility will be managed by the Dutch Entrepreneurial Development Bank- FMO. Demonstration effects from blended finance facilities—investment leveraged, strengthened capacity of the financial sector, and shifting understanding of risks—can be catalytic in this ecosystem. The facility is also expected to create well above 10,000 new jobs.

The author is the Development Director at the UK’s Foreign, Commonwealth and Development Office (FCDO) in Nepal

Foreign Direct Investment (FDI) plays a vital role in supporting economic growth for developing countries. For Nepal, which faces challenges such as limited domestic capital, infrastructure deficits and a narrow industrial base, FDI is particularly important. This essay outlines the significance of FDI in Nepal’s economic landscape, discusses the major obstacles Nepal faces in attracting foreign investment, presents relevant data trends and explores future opportunities along with policy suggestions to enhance Nepal’s economic progress through FDI.

Importance of FDI

Nepal’s economy is largely dependent on agriculture, which employs a majority of the population but contributes a smaller share to the GDP. The manufacturing and service sectors are still emerging, and domestic investment is insufficient to meet the country’s development needs. Consequently, foreign investment becomes a key source of capital infusion. FDI not only provides financial resources but also introduces modern technologies, expertise and access to international markets.

Through foreign investment, Nepal can improve productivity, diversify its economy and create jobs. Moreover, FDI helps alleviate foreign currency shortages by increasing exports and generating revenues, which are critical for sustaining economic growth. Hydropower, tourism, telecommunications, manufacturing and financial services are among the sectors receiving the most attention from foreign investors.

FDI trends: An overview 

FDI inflows into Nepal have remained relatively modest but stable in recent years. According to official data from Nepal Rastra Bank, FDI inflows hovered around $170m in 2018-19 and increased slightly to $182m in 2019-20. The pandemic caused a drop in 2020-21, with inflows declining to about $145m. Recovery signs appeared in 2021-22, with $160m, and early estimates for 2022-23 indicate a further rise to nearly $175m.

Cumulatively, the stock of foreign direct investment in Nepal is estimated between $1.2bn and $1.5bn. When compared to regional neighbors like India, Bangladesh and Sri Lanka, Nepal’s ratio of FDI to GDP is relatively low at around 0.44 percent, highlighting ample scope for improvement.

Hydropower projects dominate FDI inflows, making up approximately 40-45 percent due to Nepal’s large but underutilized potential in electricity generation. Telecommunications is the next largest sector, accounting for about 20 percent of FDI. Other sectors like manufacturing, tourism and banking attract smaller but significant shares, contributing to gradual economic diversification.

Challenges hindering FDI growth

Nepal faces several structural and institutional challenges that restrict its ability to attract and effectively utilize FDI:

• Political uncertainty: Frequent changes in government and inconsistent policies discourage long-term investments. Investors generally prefer stable environments where regulations are predictable and enforced.
• Inadequate infra: Poor road conditions, unreliable electricity supply and inadequate logistics infrastructure increase the operational costs for investors, reducing Nepal’s competitiveness compared to neighboring countries.
• Complex bureaucracy and regulatory barriers: Lengthy approval processes, lack of transparency and corruption add to the cost and time needed to establish and operate foreign businesses.
• Land acquisition and social resistance: Unclear land titles and local opposition often lead to project delays or cancellations, increasing uncertainty and risks for investors.
• Small domestic market: Nepal’s limited population size and low purchasing power restrict the market for products and services, compelling foreign firms to focus on exports, which face their own logistical hurdles.
• External shocks: Global events like the Covid-19 pandemic have disrupted global supply chains and dampened investor confidence, impacting FDI inflows.

Opportunities for boosting FDI

Despite the difficulties, Nepal has unique advantages and opportunities that can help attract more foreign investment:

• Hydropower development: Hydropower offers one of the most promising sectors for long-term foreign investment, both to meet domestic needs and to export electricity regionally.
• Tourism sector: Nepal’s diverse landscapes, cultural heritage and adventure tourism attract visitors worldwide. Investment in tourism infrastructure can stimulate FDI and create employment opportunities.
• Strategic location: Nepal’s position between India and China presents a potential hub for regional trade and manufacturing, especially if transport and border infrastructure are improved.
• Government reforms: Legislative measures like the Foreign Investment and Technology Transfer Act and the establishment of Special Economic Zones (SEZs) offer tax incentives and easier investment procedures.
• Public-private partnerships: PPP arrangements can mobilize foreign capital and expertise for infrastructure and social sector projects, sharing risks and benefits.

Maximizing benefits

To harness the full potential of FDI, Nepal should prioritize the following policy actions:

• Political and economic stability: Establishing a stable, transparent policy framework supported by all political parties is essential to build investor confidence.
• Investment in infra: Upgrading transport, power, digital connectivity and logistics infrastructure will reduce costs and improve Nepal’s attractiveness.
• Regulatory simplification: Streamlining administrative procedures through digital platforms, one-stop service centers and anti-corruption measures will ease the investment process.
• Land acquisition and community engagement: Developing clear and fair land policies and actively involving local communities will reduce conflicts and delays.
• Human capital development: Enhancing vocational education and training to match investor needs will improve labor productivity and attract higher-value investments.
• Sustainable investment practices: Aligning FDI with environmental protection and social inclusion will ensure long-term development benefits and community support.

In summary, FDI represents a vital source of capital, technology and innovation for Nepal’s economic development. While political instability, infrastructure gaps, regulatory hurdles and social challenges have limited Nepal’s ability to attract and fully utilize FDI, the country’s abundant natural resources and strategic location offer significant opportunities. By adopting consistent policies, investing in infrastructure, simplifying regulations and addressing social concerns, Nepal can create a conducive environment that encourages foreign investment. Such efforts will be critical to leveraging FDI as a driver of sustainable and inclusive growth, improving livelihoods and transforming Nepal’s economy over the coming decades.

Former President Bidya Devi Bhandari has formally returned to active politics, rejoining her old party, CPN-UML. After 10 years of party politics and seven years as Nepal’s ceremonial head of state, her comeback naturally raises questions: What role will she now play? Will her political approach evolve, or will she repeat her old style? While debates continue, her return deserves a simple acknowledgment: Welcome back to CPN-UML politics, Mrs Bhandari.

Legally and constitutionally, her return poses no barrier. Though some argue that a former ceremonial head of state should avoid re-entering active party politics, this is a moral debate, not a legal one. In today’s realist political environment, morality and principle seldom define political choices. Ultimately, the decision is hers, based on her confidence that she can still serve the nation.

This article, however, centers on the leadership of CPN-UML itself, especially KP Sharma Oli’s continued role. Is this the right moment to challenge Oli’s leadership? The answer is clear: No.

Still relevant and strong

As both Prime Minister and president of CPN-UML, KP Sharma Oli continues to lead effectively, directing internal and external challenges. Leadership must always be judged relatively. In comparison to other leaders, Oli remains Nepal’s most competent prime minister in recent times. His past tenure lists achievements crucial to national development and foreign policy.

Oli’s leadership is defined by rationality and conviction. He does not bend to populist trends or social media pressures. His decisions are grounded in logic, reason and what he perceives as the national interest. While populism tempts many leaders, Oli has largely resisted that path.

Importantly, he has defended Nepal’s national interests consistently, whether dealing with territorial disputes or resisting external influence. His governance style prioritizes sovereignty and independence. Even as foreign powers and domestic rivals target him, Oli stands firm. Weakening his leadership now would not only fragment the party but also undermine Nepal’s assertiveness on the global stage.

At a time when divisive forces seek to destabilize both the government and the party, CPN-UML leaders and cadres must stand united. Criticizing Oli for the sake of internal power struggles will harm the party more than it benefits anyone individually.

Strengthen the party

The Statute Convention of CPN-UML, scheduled for September 5-7 in Godavari, comes at a critical time. According to party rules, the General Congress must convene within a year of this convention. Therefore, this is not the time for leadership contests. Instead, the party’s focus should remain on strengthening internal structures, refining policies and fostering discipline.

Party politics is not about personal ambitions; it is about collective organization. The stronger CPN-UML becomes, the more its members benefit politically. Internal conflicts only weaken the party. This is evident in the example of Madhav Kumar Nepal. His breakaway Unified Socialist Party now faces marginalization and existential challenges. His past defiance against Oli earned short-term attention, but long-term irrelevance.

The priority for CPN-UML members should be clear: focus on making the party a decisive force in national politics. Strengthening the party as an institution will naturally open leadership opportunities for capable individuals over time.

Leadership pipeline

While Oli remains the party’s central figure today, the question of succession is valid. Fortunately, CPN-UML has no shortage of future leaders. Figures like Shankar Pokhrel, Bishnu Poudel, Pradeep Gyawali, PS Gurung and Yogesh Bhattarai represent the next generation of leadership. Each brings unique strengths and perspectives, ready to lead when the time comes.

However, succession planning must be strategic, not opportunistic. Oli might serve one more term, using that time to mentor and prepare younger leaders. If Bidya Devi Bhandari’s return strengthens the party, it should be seen as a unifying development, not the beginning of a rivalry. Oli and Bhandari are unlikely to compete against each other for leadership positions; rather, they could jointly support second- and third-generation leaders when conditions demand.

Leadership transitions should emerge from consensus and institutional processes, not factional contests.

In the current context, targeting Oli weakens both the party and Nepal’s political stability. Undermining him serves only adversarial interests, both domestic and foreign. Constructive criticism within the party is essential, but it should be grounded in facts, strategy and long-term goals.

Ultimately, while Oli will not lead forever, it is neither the right time nor the right approach to force leadership change rashly. His rational, nationally focused leadership remains essential in steering both the party and the government.

In conclusion, the future will depend on how wisely the party cultivates its emerging leadership. The CPN-UML’s immediate task is clear: consolidate around its current leadership, strengthen party structures and prepare a new generation of leaders through unity and discipline—not internal fragmentation.

Criticizing Oli without strategic reason weakens the party and empowers adversaries. As long as Oli prioritizes national interests and rational governance, he deserves the party’s support—not unnecessary challenges.

For now, the question is not who will replace Oli, but how the party can become stronger under his leadership, ensuring a smooth and wise transition when the time is truly right.

Nepal’s financial system has disbursed loans totaling Rs 5.55trn to approximately 1.94m borrowers. Governor Biswo Poudel recently highlighted this trend while presenting new data on small borrowers—defined as those with loans under Rs 10m. On that occasion, the chief of the central bank, Nepal Rastra Bank (NRB), raised concerns about the concentration of large loans among a small group of individuals and whether such lending practices are contributing meaningfully to economic productivity.

Around 1.94m Nepali people have accessed loans from commercial banks, development banks and finance companies. Of these, approximately 1.869m small borrowers have taken loans totaling
Rs 1.99trn.

These small borrowers include lower-middle-class individuals who often borrow to start small businesses, send family members abroad for work or fund vocational training. Many also take loans to purchase land or vehicles, or to build homes. However, this group is financially vulnerable. According to NRB data, 28.8 percent—equivalent to Rs 549.85bn—of their loans have become non-performing, accounting for 4.34 percent of total lending.

Mid-level borrowers, defined as those with loans between Rs 10m and Rs 100m, are also under financial stress. This segment includes approximately 6,793 borrowers, holding Rs 1.254trn in loans. Roughly 11 percent of this amount is non-performing, indicating severe repayment challenges, especially post-covid, as many small and medium enterprises failed to recover.

At the other end of the spectrum are large borrowers—those with loans exceeding Rs 100m. This group consists of just 7,763 borrowers, who collectively hold Rs 2.39trn. Even more concentrated, 1,552 individuals manage over Rs 1.34trn in loans, highlighting a stark imbalance in credit distribution. Despite handling large sums, the rate of non-performing loans in this group is significantly lower.

The data indicate that the larger the loan, the lower the likelihood of it being classified as non-performing. Borrowers in the higher brackets often have the advantage of restructuring loans, accessing new credit to service old debt and leveraging networks within the banking system. This circular lending practice, often facilitated by banks themselves, poses systemic risks and raises ethical questions.

Loans in the Rs 10–500m range account for 95 percent of Rs 1.048trn in outstanding loans, with a non-performing loan (NPL) ratio of 22.14 percent (Rs 232bn). Notably, NPL ratios decrease as loan sizes increase. For loans between Rs 50–100m, the NPL rate drops to 4.83 percent, and for
Rs 100–200m, it falls to 3.01 percent, with the highest loan brackets seeing NPLs as low as 0.04 percent.

There is a stark contrast in Nepal’s loan distribution and associated credit risks across borrower categories. While small and mid-level borrowers (with loans below Rs 100m) collectively hold significant portions of the total loan portfolio—Rs 1.99trn and Rs 1.254trn, respectively—they also exhibit alarmingly high non-performing loan (NPL) ratios of 28.8 percent and 11 percent, indicating financial vulnerability and limited resilience. In contrast, large and very large borrowers (with loans above Rs 100m), though few in number, control disproportionately high volumes of credit—up to
Rs 2.39trn—with remarkably low NPL ratios (3.01 percent and 0.04 percent). This inverse relationship between loan size and credit risk reveals a systemic concentration of financial resources among a limited elite, raising concerns about financial equity and governance. The findings underscore the need for regulatory reforms to rebalance credit flows, safeguard small borrowers, and address emerging issues of financial inequality and systemic risk.

This disparity raises concerns over the governance and equitable distribution of financial resources. NRB data reveal that out of 1.94m borrowers, just 194 individuals—0.01 percent—have accessed loans exceeding Rs 2.25trn, or 3.9 percent of the total loan volume. On an average, each of these individuals has taken loans of over Rs 1.11bn. These statistics underscore a critical issue: a limited number of individuals control a disproportionate share of banking sector credit.

This concentration of financial power has drawn attention in parliamentary discussions. In a recent meeting of the Finance Committee of the House of Representatives, clause-by-clause deliberations on the amendment of the Banks and Financial Institutions Act (BAFIA), 2073, are underway. The proposed amendments aim to address conflicts of interest, ensure fair loan distribution and introduce stricter governance measures to prevent the undue concentration of credit.

The ongoing legislative review seeks to establish clearer guidelines on eligibility for loans and address the structural weaknesses that allow such imbalances. Key concerns include whether bank directors and affiliated individuals are receiving favorable treatment and whether existing legal frameworks are sufficient to prevent misuse of financial resources.

As the debate continues, it has become evident that financial inequality is deepening. There is a pressing need for reforms to ensure that credit distribution contributes to inclusive growth, supports small and medium enterprises, and reflects principles of transparency and social justice.

The author is a senior fellow and program executive at SNG Solution