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The Nepali financial system consists of banking and non banking sector. Banking
sector consists of Nepal Rastra Bank (NRB) as the Central Bank and the
Commercial Banks. The non banking sector includes, financial institutions licensed
by NRB like Development Banks, Finance Companies, Microfinance Development
Banks, Coop Financial Institutions, NGOs undertaking banking activities and those
under different Acts like Insurance Companies, Citizens Investment Trust, Postal
Savings Offices, Employees Provident Fund, Nepal Stock Exchange and
Commodity Markets.
History
The origin of the modern Nepali Financial System can be traced to the establishing
of Nepal Bank Ltd as the first commercial bank of the country. It was established
under Nepal Bank Act, 1994 B.S. The Government of Nepal owned 52% and
general public 48%. It started the banking system in the country and also public
private partnership in financial sector. In addition to commercial banking
operations, it was also permitted to function as banker to the Government.
Establishment of Nepal Rastra Bank under the NRB Act 2012 was another
important milestone for the development of banking system in Nepal.
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Thereafter Cooperative Bank was established, which commenced the compulsory
savings scheme for farmers. Later, this was merged with Agricultural Development
Bank Ltd. The latter was primarily for Development of Agricultural Sector. It has
wide reach in both urban and rural areas and in addition to development banking is
actively involved in Commercial Banking also.
Rastriya Banijya Bank was established as a fully government owned entity in 2022
B.S. for Development of Commercial Banking Activities. It has a wide branch
network all over the country. A savings institution established as a fully
government owned entity in 2022 B.S. for Development of Commercial Banking
activities and has a wide branch network all over the country.
In the last decade there was phenomenal growth of Financial Service Industry and
the present position of various participants including their share of business is
indicated below:
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Commercial Banks 28 80.8%
Development 87 8.0%
Banks
Finance 79 9.6%
Companies
Micro Finance 21 1.6%
Development
Banks
Savings and 16
Credits
Cooperatives
NGOs 38
Rural
Development
Banks
Total 254
Nepal Rastra Bank
Under the provisions of Nepal Rastra Bank Act 2012, Nepal Rastra Bank (NRB)
was established in 2012 B.S. as Central Bank of the Country. It played a crucial
role for Development Banking Industry and has effectively circulated Nepali
Currency. NRB Act 2058 replaced the earlier act. This has made NRB a more
autonomous and responsible regulator as well as supervisor of Financial Sector.
Section 4 of NRB Act 2058 spells out the following as its objectives:
To achieve these objectives the functions, duties and rights of the bank have been
details as under:
The semi formal sector consists of savings, credit or other cooperatives registered
with registrar of cooperatives. The informal sector consists of informal groups like
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Dhukuti groups who pool their savings and extend credit to members,
moneylenders and individual.
RMDC
The Centre for Microfinance Ltd. was registered under Companies Act in July
2000, and is promoted by Canadian Centre for International Co-operation. It
provides training, technical assistance and consultancy service for microfinance
sector. Its mission is to promote and strengthen Microfinance Services through
capacity building, training, knowledge management, research, policy lobbying,
consultancy and networking with mutual trust and co operation among service
receivers, practitioners and stakeholders.
Nepal's inflation rate has been hovering around 10% for the last three years; the
food inflation has been higher than non food inflation. Historically, its inflation had
correlation with inflation in India due to a fixed peg of Nepali Rupee to the Indian
Rupee, the trend has changed to the lag in pass through of international oil prices
and increase in real interest rate.
Financial Sector Reforms (FSR) initiated from 2002 onwards has tackled the
following main issues:
Monetary Policy
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The framework of the monetary policy of the country and the instruments of the
policy are given in the following table:
The monetary policy is administered by Nepal Rastra Bank through the above
instruments. The position is reviewed periodically at least once in a year and the
necessary actions to achieve the goals, including course corrections are taken.
Capital Market
The history of Securities market began in Nepal with the issue of shares by
Biratnagar Jute Mills and Nepal Bank Ltd. in 1937. Introduction of Companies
Act, issue of Government Bond in 1964 and established of Securities Exchange
Centre in 1976 were other important milestones. The latter was established with
the objective of growth and development of capital markets. SEC was later
converted into Nepal Stock Exchange (NEPSE) in 1993. The basic objective of
NEPSE is to impart free marketability and liquidity to government and corporate
securities by facilitating transactions through its trading floor through members
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and market intermediaries like brokers, market makers etc. Government of Nepal,
NRB, NIDC and members are the shareholders of NEPSE. It has introduced fully
automated trading system from 2007. It has adopted a T+3 settlement system. A
provision for Blank transfer is also available with T+5 as the maximum
permissible time. The shares, preference shares, Government bonds and corporate
securities are traded in the above Exchange.