Nepal’s financial landscape: Challenges and solutions

Nepal has a wealth of skilled individuals in its banking sector, but it’s not without challenges. One prominent issue is the centralization of Nepali banks in urban areas, overlooking the essential development of banking services in rural settings. This disparity in focus has contributed to a substantial imbalance in financial accessibility across the country. Moreover, rather than investing in production-driven enterprises, Nepali banks tend to divert their resources into endeavors that promise quick profits, such as trade, real estate, automobiles, tourism, and various service sectors. Unfortunately, there’s been a lack of effective regulation by the government in controlling these investment tendencies. Complicating matters further, certain investors are involved in both banking and trading activities, leading to conflicts of interest within the financial landscape. These problems have arisen due to the absence of clear directives from political leadership, ultimately impacting both the banking sector and the country’s overall economy negatively.

Despite these challenges, Nepal’s banking regulatory body, Nepal Rastra Bank (NRB), has played a crucial role in enhancing the Nepali banking system. The guidance and oversight provided by global financial institutions like the World Bank and the International Monetary Fund (IMF) have contributed to NRB’s improvements, ensuring better practices within the sector.

The insurance industry in Nepal, though relatively young, was initially established to offer support to banks. Even today, it maintains a closely intertwined relationship with banking institutions. The performance of insurance companies heavily relies on the health of the banking sector; any decline in banking activities typically leads to a downturn in the insurance business. Despite the expansion of the insurance industry, with over 40 life and general insurance companies operating in Nepal, their performance is not meeting optimistic expectations. Economic indicators paint a grim picture, suggesting that Nepal is already in the throes of a crisis. 

Consequently, there’s a growing sentiment advocating for the downsizing of banks and insurance companies. It’s believed that the government needs to formulate comprehensive strategies to combat this economic downturn, ensuring the sustenance of all citizens. Criticism has been directed at Nepal’s bureaucratic system, claiming that laws and policies are often crafted to serve the interests of bureaucrats rather than the public. Many laws in Nepal are borrowed from foreign jurisdictions and lack a local context, such as the extensive and ambiguous nature of the Income Tax Act, which inhibits revenue generation.

For a more robust and inclusive revenue collection framework that involves every Nepali citizen, there’s a need for tax laws and provisions that encourage compliance. It’s essential for legislation to reflect public demands and for substantial restructuring within sectors like banking, insurance, security markets and corporations. Moreover, the leadership within these organizations needs to comprise experts in the respective fields to navigate the complexities effectively.

The labor landscape in Nepal is a cause for concern, characterized by numerous daily wage workers grappling with inadequate compensation. The prevailing situation often leaves workers struggling to make the ends meet. To address this, the government should conduct studies to determine the minimum income required for a decent standard of living and ensure strict adherence to a minimum wage cap. Regular updates to this cap are necessary to counter the effects of inflation. Additionally, maintaining an updated database of employed and unemployed individuals is imperative, allowing the government to create employment opportunities and provide financial support to non-working age groups.

Legal disputes in banking, such as conflicts between banks and borrowers, revenue-related issues, and trade disputes, have seen a notable surge, primarily due to the prevailing economic downturn. Entrepreneurs are facing challenges in repaying loans due to the stagnancy in their businesses. Financial literacy, however, has witnessed growth in Nepal, partially owing to the 2015 Constitution mandating banks and financial institutions to establish branches in local governments. This initiative aimed to spread financial awareness and education about savings, deposits, and withdrawals among the populace. Nevertheless, banks still need to play a more significant role in fostering entrepreneurship and supporting various business ventures to generate employment opportunities across the country.

Addressing these issues is feasible if political leadership takes proactive measures and shows accountability. Despite the ongoing crisis, there’s a noticeable lack of urgency from the government and concerned entities to resolve these pressing matters. The solution lies in the government rectifying its approaches, fostering a conducive environment for entrepreneurship, seeking guidance from experts and learning from the successes of neighboring robust economies. Moreover, bureaucracy in Nepal needs reform; the prevalent sense of superiority among bureaucrats needs correction to enhance their work ethic and conduct.

The author is a member of the Supreme Court Bar and has been practicing corporate law for around three decades