The financial sector is the backbone of any country. This is also a very crucial sector. The most minor of mistakes can cause serious impacts. Deposits are collected from the common people and credit is provided by the banks and financial institutions to those individuals in need. The deposit in the banks are owned by the depositors. This is not a budget that the government can spend nor is it the property of bank founders and managers. The money earned through the blood and sweat of the common people are brought to these institutions that are recognized by the state, and is therefore the property of the people. It’s a symbol of the peoples trust in the financial system. Banks cannot run without trust and without banks the financial system cannot function. Without proper functioning of the financial system the country cannot run. The concerned institutions and the state must be aware about maintaining this trust otherwise no individual will make deposits. The misuse of these amounts is more serious than the misuse of of the states income and corruption. It is the state and the concerned institutions responsibility to see to the safe and proper use of the deposit. It is therefore the responsibility of the state to see to it that the deposits scattered across banks and financial institutions be institutionalized and unified, the amounts be invested in productive sectors, trust in the financial institutions be established, and the money earned through the sweat of the common people be properly used. This is a concept accepted by banks the world over. The economic development of the country is dependent on this.

States responsibility

It is the duty of the state and the regulatory agencies to see to the preservation of the state’s financial system, protect the rights and well being of the depositors, and promote peoples and depositors trust in the financial system. Likewise it is also an important duty of the state to encourage healthy competition between financial institutions to strengthen and better the national economy, ensure reliable and quality banking and financial mediation service, reduce risk in the banking and financial sectors, and establish a proper system to operate, manage, regulate, monitor and supervise the sector. This has also been mentioned in the current and proposed in the laws related to banking and financial institutions. Likewise the regulation of this sector, and laws related to the financial officers have also been mentioned as the objectives of the Nepal Rastra Bank (Central Bank) in the Nepal Rastra Bank Act in the following manner:

(a)           Create and manage necessary currency and foreign exchange policy for the sustainable development of the economy through price and Balance of Payment stability

(b)   Promote necessary stability and fluidity for the banking and financial sector

(c)    Develop secure, healthy and capable payment systems

(d)   Regulate, inspect, supervise and monitor the banking and financial system, and

(e)    Promote the overall banking and financial system of Nepal and increase the trust of the common people towards it.

3. Development of Banking in Nepal

The modern development of the banking sector in Nepal began in 1994 with the Nepal Bank Law. Before that the Tejarath Adda est. in 1933, Taksar in 1989, and the Sadar Muluki Khana established in 1989 were some of the historic official agencies related to financial institutions. Not that there weren’t any currency mechanisms during the time of ancient rulers such as Amshu Verma and Maandeb.

In the course of historical development of laws, the Nepal Bank Act 1994, the Nepal Rastra Bank Act 2012, the Nepal Industrial Development Corporation Act 2016, Banijya Bank Act 2020, Rastriya Banijya Bank Act 2012, the Agricultural Development Bank Act 2024, Banijya Bank Act 2031, Financial Company Act 2042, Development Bank Act 2052, Nepal Rastra Bank Act 2058 are some of the important ones.

Likewise five different acts of the same nature (Agricultural Bank Act 2024, Banijya Bank Act 2031, Financial Company Act 2042, Nepal Industrial Development Corporation Act 2046, and Development Bank Act 2052) were dissolved and the Bank and Financial Institutions Act (through ordinance 2060), 2063 was brought about as an umbrella law and was another historic achievement.

The amendment made in the Banijya Bank Act (Commercial Bank Act) in the 40’s decade with the intention to bring in foreign investment and technology and slowly make Nepalis capable of operating the banking sector proved to be a turning point in the financial history of Nepal. Although this allowed a couple of banks to be established through united investments, in the latter part, the astonishing interest and involvement of Nepalis to invest in the banking and financial sectors was largely due to the policies that allowed for such an environment to take place.  This sector became the central business attraction. From just 4 banks and financial institutions, a total of 31 commercial banks, 87 development banks, 79 finanance companies and 21 micro finance companies and even a few cooperatives and non government institutions have been established and are in operation within the last 20/25 years. This is perhaps exemplary in the world it self.

With the increase in the number of banks and financial institutions, there have also been developments in the policy level as well as laws. Legal documents such as the Foreign Investment and One Door Policy, Foreign Investment and Technology Transfer Act show that there have been some policy level preparations to attract foreign investment. To make the Nepal Rastra Bank, the central bank of the country and the main regulatory body self governing and capable, the Nepal Rastra Bank Act 2012 has been abolished and replaced with Nepal Rastra Bank Act 2058. There is already a First Amendment within this act to strengthen the banks regulatory and monitoring role. The Bank and Financial Institutions Credit Recovery Act 2058 and Credit Recovery Jury were established to bring a change in the Nepali mentality that banks are the medium of bad debtors. Campaigns by the state and the central bank to take action against misuse of banks and financial institutions for personal gains on the basis of post, access and money, creation of special benches in the courts to carry out hearings on banking and commerce have led to increased trust among the common people and helped further develop the sector.

Challenges and future direction

Along with these mentioned achievements there are certain serious challenges related to the banking sector of Nepal that must be dealt with immediately. In the yesteryears there were not as many institutionalized banks in operation. This gave more priority and necessity to the opening of new banks rather than analyzing who were involved in the banks in operation. The laws, rules and regulations were developed accordingly. However the quantitative need has been met today. There is no longer the need for the state to invest partially or wholly to establish or encourage a new bank to operate. Nepali citizens are themselves seen to be attracted towards this.

Of the current and future challenges faced by the banking and financial sector are: overall quantitative increment in banks and financial sectors, lack of qualitative and easily accessible service, urban centric service, lack of stability in trust and establishment, transparent and secure operation, questions over management and good governance, personnel related credit facilities and establishment and operation of banks, direct involvement of individuals, institutions, capacity of regulatory bodies, effective monitoring and most importantly the trust of the common citizens on the financial system.

It is well understood that banks and financial sectors run on the basis of deposits by commoners and not on the investments made by a few. Their commercial success depends on their professional operation, their founders, shareholders, operators and managers.

Investors are not the owners of the banks, and neither is there any such tradition around the world to open banks and financial institutions for the well fare of the investors. Except for having a share on profits obtained from operating within the prevalent rules and limitations shareholders have no other claims on the institutions. No one can therefore say that they own the banks just because they have invested in it.

The permission and license issued by the state to banks and financial institutions to operate their organizations is the main basis for them to operate. Without state licenses and permits no one will come to deposit their savings in banks and financial institutions. No one should forget the fact that they were not made founders, shareholders or operators of banks and financial institutions just because they invested in it but because they owe it to the state and country. We must all therefore accept the fact that banks and financial institutions operate because they have received recognition from the state, and have to operate remaining within the limitations of the law of the land.

One of the major challenges we face is to develop a long term vision about who can establish and operate banks and financial institutions. When individuals and institutions facing financial and commercial difficulties become involved or invest considerably in other banks and financial institutions such will definitely have a negative impact on the overall economy as has been proven from examples in Nepal as well as abroad.

Another challenge that we face is the current trend of individuals who have lost public trust or have a negative image among the public or who do not have enough experience in banking and finance being involved in the establishment and operation of new banks and financial institutions, and legally pressurizing to be a part of the management on the basis of their shares in the said banks. Although banks and financial institutions should be selling their trustworthiness and professionalism our big challenge is to topple the mentality that having adequate money and access should be enough credential to establish and operate banks.

Reasons to bring in a new bill

The banking and financial sector is growing rapidly the world over and challenges too are rising rapidly. The global financial crisis and its impact on Nepal is another grave challenge. The global financial crisis which has been increasing step by step is indeed a challenge that the world must deal with. This draft Bill related to Banks and Financial Institutions 2066 was brought about to study the national needs, significance of the financial sector, and make appropriate laws after analyzing such factors like the local consequences of the global financial crisis, national needs, worldwide values, commitments made to the World Trade Organization, establishment, regulation and monitoring of foreign banks and financial institutions in Nepal, organizational character of national banks and financial institutions, financial state, capacity for healthy competition, increment of national financial system through the unification and merger of current banks and financial institutions, qualitative, trustworthy, and easily accessible baking and financial mediation service, easy abolition of incapable and bad institutions, increment of trustworthiness of banks and the financial systems, protection and promotion of the rights and well fare of depositors, effective supervision, accountability of regulatory bodies.

The proposed bill has twice the legal capacity of current laws and has the following structure. The proposed bill is expected to address the current needs, problems, and codes of the state. It is expected to encourage moral and professional individuals to enter the banking and financial sector, and prevent wrong individuals from being involved as well ease operation, promote good governance, transparency, competition and capacity, initiate and strengthen regulations and supervision locally as per international codes, allow only capable and competitive institutions to remain through mergers, abolish weak and unhealthy institutions, ease access to foreign banks opening branches in Nepal by raising local investments, allow Nepali banks to open branches abroad, and ensure that regulatory bodies are accountable to elected peoples representatives legally. This will help develop long term professionalism, healthy, well governing, disciplined, moral and capable banking and financial institutions and system and create a secure environment for them to grow. It will increase public trust in the financial system and promote and protect the rights and well fare of shareholders and depositors, and other concerned people. This will help create a strong legal basis for the economic and financial stability of Nepal.

*This investigative recommendation was prepared by financial law expert Hari Nepal for the Nepal Constitution Foundation with inputs from women, Janajati, Dalit, Madhesi, youth and other related and concerned pressure groups. The Foundation is grateful to Niranjan Acharya, Meena Shrestha, Bharat Gautam, Sujan Lopchan, Bidyakanta Adhikary, Meena Gurung, Bholanath Dhungana, Bishnu Prasad Kandel, Shyam Kumar Biswakarma, Lalit Chaudhary, Jenny Gurung, Abhishek Adhikari, Phurpa Tamang, and Dr. Bipin Adhikari.

The research has been supported by The Asia Foundation and opinion expressed in this report are of the authors and don't necessarily refelects of The Asia Foundation.