Recent reforms by the Nepal Rastra Bank (NRB) have raised the paid-up capital requirements for payment companies and opened up to 15 percent FDI in such companies. However, these measures appear insufficient to build depth in the financial ecosystem and expand financial inclusion. The first reform is a risk-based approach suitable for traditional financial companies, but inappropriate for technology-oriented companies. Why not create a fintech regulatory sandbox to enable the payments ecosystem to expand the scope of opportunities? Nepal’s digital payment ecosystem is saturated with companies all of which do the same thing. We have 10 Payment Service Operators and 27 Payment Service Providers, with little differentiation among them. This is expected: The country’s consumer base is of low value and there is little space for innovation. Our digital ecosystem has yet to see unique services such as escrow-based debiting or push payments, which can significantly accelerate e-commerce. A prominent player in the ecosystem has introduced payday loans, EMI loans, and buy-now-pay-later loans through a banking partner, and this is a good starting point. However, the NRB needs to open more opportunities to improve the capabilities of our banking ecosystem and deepen financial inclusion.
The second reform—the FDI threshold of 15 percent in payment companies—falls into no-man’s land. For foreign strategic investors, a 15 percent stake is too low of an allocation in the capitalization table to impact company governance. While for financial investors, a 15 percent stake does not present much of a financially appealing investment in Nepal’s competitive payments industry. Remittance capture cannot be the only domain for players to compete in. The focus must shift toward improving access to existing financial and insurance services, introducing newer more appropriate products, and improving the services to consumers to cover the breadth of their transactions and over their lifecycle. High quality FDI, not sources for AML risks The new announcement for a lower FDI threshold for technology companies is welcome, and we will wait for whether NRB and other government agencies can execute this. Government bodies haven’t been able to execute past FDI commitments and have failed to attract FDI into the country even after recently lowering the minimum FDI threshold from Rs 50m to Rs 20m. FDI flows sharply declined over the current fiscal year. Even committed capital is weary to enter the country, while new FDI pledges have dropped drastically. Global macroeconomics alone is not responsible for this scenario. Nepal needs high-quality FDI to help bring in strong standards and connectivity to the rest of the world. I believe that near-term goals for the local digital ecosystem should be to attract small to mid-sized technology companies, which are willing to invest $5 million to $10 million in Nepal to set up research labs, build local teams, and set up offshore implementation offices. Ideally, most of this allocation will go toward high-value activities such as research and development, training, and technology transfer, and less toward buying property. Such high-quality FDI also helps set strong precedents for Nepali officials to understand technology companies and investments in the digital domains. The lower FDI limit, and potentially lower limit for technology companies, may help international entrepreneurs experiment in Nepal, but I worry that it will introduce significant money laundering risks. Nepal’s international reputation for managing such risks have seriously deteriorated over the past year, and the public has not had any reassurances from the NRB that they have boosted their global anti-money laundering capabilities. If our government is serious about encouraging global investors and operators to come and invest in Nepal’s digital economy, it also needs to improve the immigration system. Work visas for foreigners are notoriously difficult to get. Bringing international talent to come work in Nepal is one of the best ways of technology transfer, but we need to make it easier for international talent to come and discover Nepal’s technology scene, the companies, and possibilities, before expecting them to make sizable investments and consider Nepal as their base. Market access and global exposure Startups have long been promised loans of up to Rs 2.5m at 3 percent interest, yet the Ministry of Industry, Commerce and Supplies (MoICS) has been unable to execute this program. It needs to be re-imagined. Undoubtedly, Nepali digital companies need concessionary support. Many young companies in the world need this concessionary support to build their products, acquire customers, expand, and thrive. There can be a better way to mobilize concessionary support. We have private equity fund managers in the country, who have pioneered impact investing. Such investors prioritize the impact created by their investments alongside financial returns. Start-up funding can be more effectively channeled through impact fund managers, and Nepal can focus on bringing in international experts in impact investing from Asia, Europe, and the US to scale this ecosystem. Improving this investment ecosystem will not only spur new ventures, but also help digital companies become more competitive. More sophisticated fund managers can help local companies compete globally. They can inform and lobby the government to identify reforms that can move the needle, such as helping technology companies sell their products and services globally. This means allowing companies to set up branches overseas, letting them make payments to consultants and employees internationally, and enabling partnerships with other technology companies in South Asia or across the world. Helping digital companies become more globally competitive will eventually create a virtuous cycle to improve the venture financing ecosystem in the country, as founding team members of successful companies recycle capital domestically. Nepal needs higher-quality reforms to improve the state of our digital ecosystem. Some reforms that are floating around such as negligible FDI thresholds for technology companies, higher capital requirements for payment companies, and government concessional financing programs sound progressive. However, if the government wants to be taken seriously, more substantive efforts are needed. Some of these efforts include building regulatory sandboxes for payment companies, sourcing-in higher-value FDI into the country, and enabling market access for digital companies with the help of local fund managers. The author, a Senior Fellow with the Nepal Economic Forum, leads the Digital Chautari, a platform to facilitate conversations on creating a Digital Nepal
