Development of Financial Institution in Nepal

Revised Draft Report
Development of Financial
Institutions in Nepal
Submitted to:
South Asia Network of Economic Research Institutes (SANEI)
Pakistan Institute of Development Economics
Islamabad, Pakistan
Submitted by:
Mr. Bharat Prasad Devkota, Team Leader (Development Economist)
Mr. Santosh Kumar Upadhyaya, Member (Financial Management)
Mr. Mahendra Raj Joshi, Member (Economist)
Centre for Economic Development and Administration (CEDA)
Tribhuvan University
Kirtipur, Kathmandu, Nepal
E-mail: ceda@wlink.com.np
Telephone: 00977-1-4331721
Fax: 00977-1-4331722
December 13, 2007
PREFACE
This study, "Development of Financial Institutions in Nepal", is a product of a team work. The
collection as well as collation of information, both quantitative and qualitative, proved quite
challenging tasks. The transition phase, through which Nepal is going on, was really an
experience while undertaking the task. The present form of the study could takes place due to
the painstaking endeavors of Mr. Santosh Kumar Upadhyaya and Mr. Mahendra Raj Joshi. Mr.
Upadhyaya had a special contribution in developing chapters on nonbanking financial
institutions and Nepal Stock Exchange, in particular. Finally, this endeavor would contribute to
understand the dimensions of financial institutions' development in Nepal in the present context.
Bharat Prasad Devkota

Team Leader
December 13, 2007
ACKNOWLEDGEMENTS
First and foremost, the study team would sincerely like to express gratitude to the South Asia
Network of Economic Research Institutes (SANEI), Pakistan Institute of Development
Economics, Islamabad, for entrusting the team to undertake this study. This study proved a
challenging task to the team in terms of information collection because of the introduction of a
new national income series covering 2001 onwards only, and divergence in information from the
same institute. During the information collection process the following persons were kind
enough to avail of necessary information to the team. Thus, we would sincerely like to
acknowledge Mr. Bhola Ram Shrestha, Executive Director, Financial Institutions Supervision
Department, Mr. Gunakar Bhatta Deputy Director, Research Department, and Mr. Rewati Nepal
of Regulation Department of the Nepal Rastra Bank; Mr. Deepak Raj Kafle Chairman,
Securities Broad of Nepal; Mr. Raj Man Shrestha, Deputy Chief Officer of Rastraya Banijya
Bank; Mr. Srikrishna Shrestha, Chief Manager Inspection Department of Nepal Bank Limited;
and Mr Prasiddha Suwal Section Chief, Loan Division of the Agricultural Development Bank
Limited. The team would, last but not least, like to express appreciation to the Executive
Director, Dr. Ramesh Chandra Chitrakar, for his kind support to make the study successful.
Study Team December 13, 2007

Contents
Preface
Acknowledgements
Abbreviations ............................................................................................................................................ i
Overview .................................................................................................................................................. ii
Chapter 1: Introduction ................................................................................................................................ 1

1 Background..................................................................................................................................... 1
2. Objectives of the Study................................................................................................................... 1
3. Methodology ................................................................................................................................... 1
3.1 Conceptualization ....................................................................................................................... 1
3.2 Methods ...................................................................................................................................... 2
4. Information Processing and Analyses............................................................................................. 3
5. Limitations of the Study.................................................................................................................. 3
6. The Study Setting............................................................................................................................ 3
Chapter 2: The Economy ............................................................................................................................. 4

2.1 The Setting...................................................................................................................................... 4
2.2 The Post 1990 Economy ................................................................................................................. 6
2.2.1 The Size of the Economy............................................................................................................. 6
2.2.2 Per Capita Income........................................................................................................................ 6
2.2.3 The Structure of the Economy ..................................................................................................... 7
2.2.4 Annual Growth Rates of Population, National Income and Production ...................................... 7
2.3 Production Efficiency and Poverty ................................................................................................. 8
2.4 Nepal in the Global Economy......................................................................................................... 8
2.5 Nepal in Global Competitiveness Ranking..................................................................................... 8
2.6 Governance ..................................................................................................................................... 8
2.7 The Wealth of Nepal....................................................................................................................... 9
2.7.1 Natural Resources ........................................................................................................................ 9
2.7.2 Human Resources ........................................................................................................................ 9
2.7.3 Infrastructure Development ....................................................................................................... 10
2.7.4 Institutions ................................................................................................................................. 10
Chapter 3: Central Banking ....................................................................................................................... 11

3.1 Introduction................................................................................................................................... 11
3.2 Monetary Policy............................................................................................................................ 11
3.2.1 Cash Reserve Ratio (CRR) ....................................................................................................... 11
3.2.2 Bank Rate ................................................................................................................................. 12
3.2.3 Refinancing Rates..................................................................................................................... 12
3.2.4 Interbank Transactions Rate ..................................................................................................... 12
3.2.5 Open Market Operations .......................................................................................................... 13
3.3 Money Supply............................................................................................................................... 13
3.3.1 High-powered Money or Monetary Base (Mo) ........................................................................ 13
3.3.2 Narrow Money Supply (M1)..................................................................................................... 14
3.3.3 Broad Money Supply (M2) ....................................................................................................... 14
3.3.4 Government Financing: Size and Trend ................................................................................... 14
3.3.5 Financial deepening.................................................................................................................. 15
3.3.6 Monetary Authority Assets....................................................................................................... 15
3.3.7 NRB Monitoring and Supervision............................................................................................ 16
3.4 Government Financing: Size and Trend ....................................................................................... 16
3.5 Three-year Average Growth Rates of Money Supply Components ............................................. 16
3.6 Monetary Authority Assets ........................................................................................................... 16
3.7 NRB Monitoring and Supervision ................................................................................................ 16
3.8 Foreign Exchange Reserves.......................................................................................................... 17
3.9 Conclusions................................................................................................................................... 17
Chapter 4: Commercial Banking................................................................................................................ 18

4.1. Introduction .............................................................................................................................. 18
4.2 Assets' Growth of Commercial Bank............................................................................................ 18
4.3 Interest Rate Structure................................................................................................................... 19
4.4 Deposits ........................................................................................................................................ 19
4.5 Cash Reserve Ratio ....................................................................................................................... 19
4.6 Liquid Assets ................................................................................................................................ 19
4.7 Loans and Advances ..................................................................................................................... 19
4.8 Growth of Deposits ...................................................................................................................... 19
4.9 Banking Concentration ................................................................................................................. 20
4.10. Capital Adequacy ..................................................................................................................... 20
4.11 Conclusions .............................................................................................................................. 20
Chapter 5: Nonbank Financial Institutions in Nepal.................................................................................. 21

5.1 Introduction................................................................................................................................... 21
5.2 Growth of Nonbank Financial Institutions.................................................................................... 21
5.3 Performance of Nonbank Financial Institutions ........................................................................... 23
5.3.1 Development Banks ............................................................................................................. 23
5.3.2 Finance Companies .............................................................................................................. 24
5.3.3 Microcredit Development Banks ......................................................................................... 25
5.3.4 Saving and Credit Cooperatives........................................................................................... 26
5.3.5 Insurance Companies ........................................................................................................... 26
5.3.6 Money Changers (Foreign Exchange Bureaus).................................................................... 27
5.3.7 Postal Savings Banks ........................................................................................................... 27
5.3.8 Employees Provident Fund .................................................................................................. 27
5.3.9 Citizens Investment Trust (Mutual Fund) ............................................................................ 28
5.3.10 Real Estate............................................................................................................................ 28
5.3.11 The Condominium ................................................................................................................... 29
5.4 Issues and Challenges ................................................................................................................... 29
Chapter 6: Nepal Stock Exchange ............................................................................................................. 30

6.1 Introduction................................................................................................................................... 30
6.2 International Financial Centre....................................................................................................... 31
6.3 Securities Market in Nepal............................................................................................................ 31
6.3.1 Securities Issue..................................................................................................................... 32
6.3.2 Rights Issue .......................................................................................................................... 33
6.3.3 Listing of Securities ............................................................................................................. 33
6.3.4 Market Capitalization........................................................................................................... 34
6.3.5 Liquidity............................................................................................................................... 35
6.3.6 NEPSE Index ....................................................................................................................... 37
6.3.7 Collective Investment Scheme ............................................................................................. 38
6.4 Primary Market ............................................................................................................................. 38
6.5 Policies Adopted by the Tenth Plan (2002-2007) ......................................................................... 39
6.6 Relevant Issues and Challenges Observed in Nepalese Primary and Secondary market.............. 39
Chapter 7: Challenges and Opportunities in Financial Institutions' Development .................................... 42

7.1 The Economy................................................................................................................................ 42
7.2 Central Banking ............................................................................................................................ 42
7.3 Commercial Banking .................................................................................................................... 43
7.4 Nonbanks ...................................................................................................................................... 43
7.4.1 Summary .............................................................................................................................. 43
7.4.2 Conclusions .......................................................................................................................... 43
7.4.3 Major Issues ......................................................................................................................... 44
7.4.4 Recommendations ................................................................................................................ 44
7.5 Nepal Stock Exchange .................................................................................................................. 45
7.5.1 Summary .............................................................................................................................. 45
7.5.2 Conclusions .......................................................................................................................... 46
7.5.3 Major Issues.............................................................................................................................. 47
7.5.4 Recommendations ................................................................................................................ 47
7.6 Conclusions................................................................................................................................... 48
Select References ................................................................................................................................... 49
Annex ....................................................................................................................................................... 1
Appendix ................................................................................................................................................ 14
Abbreviations
ADB Asian Development Bank

ADBL Agricultural Development Bank Limited
BSE Bombay Stock Exchange
BIS Bank for International Settlements
CBOs Community Based Organizations
CIT Citizens Investment Trust
CRR Cash Reserve Ratio
CUS Citizen Unit Scheme
DNI Disposable National Income
FSAP Financial Sector Assessment Program
GDP Gross Domestic Product
GNI Gross National Income
IFC International Financial Centre
IMF International Monitory Fund
INGO International Non-government Organization
IPO Initial Public Offerings
NBFIs Nonbanking Financial Institutions
NBL Nepal Bank Limited
NCM Nepal Capital Market
NCMMF Nepal Capital Market Mutual Fund
NEPSE Nepal Stock Exchange Ltd
NGO Nongovernmental Organization
NIDC Nepal Industrial Development Corporation
NRB Nepal Rastra (Central) Bank
NSE National Stock Exchange
NYSE New York Stock Exchange
OMO Open Market Operation
PSB Postal Savings Bank
RBB Rastriya Banijya Bank
SAARC South Asian Association for Regional Cooperation
SEBON Securities Board of Nepal
SEC Securities Exchange Centre
SMC Security Marketing Centre
T-bill Treasury-Bill
VDC Village Development Committee
WEFs World Economic Forum
i
Overview
1. Setting
This study examines to development of Nepalese financial institutions in the context of the
overall governance environment. It provides on overview of the economy by discussing the
economic performance in the post-1990 period, from 1990 to 2007 to the possible extent. In this
contest, the wealth of the nation in terms of natural resources, human resources and man-made
infrastructure and institutions is quite low. Then the highlight of the development of financial
institutions, banks and nonbanks, has been derived through the analysis of available information,
both quantitative as well as qualitative.
Nepal is on the southern aspect of the mid-Himalaya, lying between China in the north and India
on the east, south and west. It is predominantly mountainous and landlocked, too. The country
has, however, physiographic variations, and thus seven climatic zones, from subtropic to arctic
within a distance of 150 km, with the elevation from 59 meters above the sea level to 8,848
meters – the Everest. Nepal is broadly categorized into the Mountain, Hill, and the Terai.
The government is unitary so far, and has been lingering on in transition since the early 2006.
There are 75 administrative districts, 58 municipalities, and 3,915 VDCs. The total local
administrative units or wards in the country are 36,039 altogether – 804 urban wards and 35,235
rural wards.
The Nepalese society is multicultural, and is being regarded as the "ethnic turntable of Asia", a
la Tony Hagen, consisting of the Caucasians, Mongoloids, and natives. The upper caste Hindus
predominate. The people speak either the Indo-Aryan or the Tibeto–Burman languages. And
Nepali is the lingua franca, and other major languages are the Maithili, Tharu, Tamang and
Newari.
Nepal is least developed, and has low economic size of nominal US$ 8.1 billion in 2006. And it
falls into the low income economy category of the World Bank.
2 The Post-1990 Economy

2.1 The Size of the Economy
Nepal is least developed (among 50 countries) as well as a landlocked (among 40 countries). It is

a low income (among 53 countries) country, too. This study deals with the post-1990 economic
state of the country as it augured liberalization in the economy in the early 1990s, with the
obvious implications for the development of financial institutions in the country as the pre-1990
economic scenario was primarily under the state dominance. The banking and nonbanking
institutions then were virtually under the public sector, except a commercial bank, the joint-
venture Nabil Bank, established in the late 1980s.
The size of the economy increased gradually over the years in the 1990s, and doubled in 16
years, that is between 1990 and 2006. Nevertheless, the low level of the economy implies a low
level of financial transactions, and thus a limited financial sophistication and the consequent
limited financial development.
ii
The production activity was greater than the national income in the early 1990s as the ratio of
GDP to GNI was greater than unity during 1990-2000, implying an increased foreign
investment, especially from India. During 2001-2007, this ratio was less than unity, indicating
the falling foreign collaboration in the national production activity. Such a fall could have been
the effect of the insurgency taking place since the late 1996.
2.2 Per Capita Income
The real per capita income (GNI) level is low, 61 US cents or 38 Nepalese rupees a day in 1990,
and 89 cents or about 89 Nepalese rupees a day in 2007. In nominal terms, the per capita income
was $ 212 in 1990 and $ 290 in 2006, and $ 300 in 2007. Thus, Nepal remains one of the poorest
countries in the world. Furthermore, the level of the per capita income has improved slowly.
2.3 The Structure of the Economy
The economy remains mainly agrarian as over a third of its GDP originates from agriculture.
The share of agriculture in the GDP has declined over the years since 1990. The share of
industry in the GDP peaked in the mid-1990s, but declined thereafter because of the insurgency.
In fact, the activities in manufacturing, construction and mining decreased as indicated by their
falling shares in the industrial GDP due to the nationwide insurgency in the country in the post -
1995 to date. The rising share of services in the GDP has been at the cost of the other sectors,
not because of their improvements.
2.4 Annual Growth Rates of Population, National Income and Production
The population of Nepal increased by 2.26% per annum during 1990-2007. The population
growth rate was higher in the 1990s than in the later period. The share of agriculture in the GDP
has declined over the years since 1990. The national income (DNI) and production (GDP)
declined. Their annual growth rates decreased at an increasing rates from one period to the other,
and was due to the effect of the post-1995 insurgency, which has still affecting adversely the
productions in all the sectors of the economy . Furthermore, the production in the early 1990s
was slightly higher than that of the 1980s as the GDP during 1980–1990 increased by 4.6
percent per year. In general, the economic growth in the early 1990s was moderate, and the post-
1996 economic performance was quite low because of the nationwide insurgency, and its
aftermath as the peace in the country remains elusive.
2.3 Production Efficiency and Poverty
The economy has low production efficiency. The agriculture productivity has remained low in
relation to other SAARC members. Nepal's agricultural productivity (agricultural value added
per worker) is low in relation to the South Asia, low income economies and the Sub-Saharan
Africa. Its productivity grew by 0.54% per annum between 1991 and 2002, both mid-years of
three-year averages, and this is quite low in relation to the Sub-Saharan Africa (0.61%), low
income economies (1.30%) and the South Asia (1.33%). Thus, there is financing potential in the
inputs and services delivery in agriculture. And the limited industrial activity is hardly well
managed, and thus is plagued with low productivity, implying the potential for its financing.
The poverty level, which remains high as around one-third of the people are below the national
poverty line, is ubiquitous. The insurgency, which has disrupted the production throughout all
the sectors of the economy nationwide, could have made more people further poorer. This has
iii
definite adverse implications in the functioning of the financial institutions. For instance, the
banking services available to the rural areas are now no longer in existence, to a large extent.
3. Nepal in the Global Economy

Nepal ranks 50th in population size (28 millions in 2006). It is 108th in GNI size in 2006
(among 112 economies of the world, inclusive of Macao, Nauru, Taiwan, and Tuvalu, and 110th
in GDP size. The country ranks 201st in nominal per capita GNI, and 185th in PPP GNI per
capita in 2006. Among the 177 countries or economies in the world, the country stood at 138th
in the 2004 human development rank and slid down to the 142nd in 2005. It ranked 112th among
117 countries in per capita wealth in 2000. In brief, Nepal is at the bottom in development.
4. Governance
The country is quite fragile in governance. The political leadership lacks vision and direction
and commitment toward the national development. Frequent changes in government leadership
has plagued the country throughout the post-1990 till to date. The bureaucracy is weak and least
competent, and devoid of incentives, pecuniary as well as non-pecuniary. There is almost no rule
of law. And the country is now in transition, and in a mess, too. Bureaucratic inefficiency
abounds whereas the extent of corruption is almost ubiquitous with an increasing tendency due
to the absence of the rule of law.
5. The Wealth of Nepal

Nature and diverse ethnicity endow Nepal enough for development. The per capita wealth,
consisting of "produced, natural and human and institutional capital", a la "Where is the Wealth
of Nations" (The World Bank, 2006), was $ 3,802 in 2000 , and ranked 112th among 117
countries (Niger, Republic of Congo, Burundi, Nigeria, and Ethiopia, in a deseeding order, and
with lower per capita wealth than that of Nepal). The low per capita wealth poses both the
challenge as well as the opportunity to the country in the global context, and thus offers a scope
to promote financing for the generation as well as maintenance of the national wealth.
5.1 Natural Resources
Nepal has a unique place in the world. It has 14 out of 17 highest mountain peaks (of above
8,000 meters), and offers unique scenic beauty as well as nature exploration opportunities.
Tourism could have prospered but the insurgency did constrain. Thus, the financial sector
involvement in the proper utilization of the Nepalese natural resources remained quite disturbed.
Deforestation, which occurred at 1.6% a year during 1990-2005, has further been rapid in recent
years, 2006 and 2007, due to a lapse in its management caused by the insurgency and its
aftermath. Nevertheless, the scope of financing exists in the future
5.2 Human Resources
The population, of 28 millions in 2006, is increasing at 2% per annum. The population is young,
with about 59% of the total population under 25.
iv
The working age population (15-64 years) in 2005 was 57.3%, the young population (under 15
years) 39%, and the elderly (above 64 years) 3.7%. The labor force forms almost 68% of the
working age population (15-64 years), and increased by 2.6% per year during 1990-2005.
Agriculture absorbs most of the labor force, about 79%. However, farming is dependent on the
vagaries of the monsoon as the all-season irrigation facility is limited. Furthermore, the level
land, which is 21.8% of the total land area, has been encroached for urbanization, especially in
the hill river valleys. Recently, the highly productive age (20-28) workforce in a sizable number
is working abroad, and is fetching remittances. But it is unskilled, and earns less than the gainful
remunerations.
The adult literacy is low (around 50%), especially of women. The enrollment levels are low, but
the dropouts and failure rates are high. The repetition rate remains sizable.
The very foundation of the education sector remained disturbed in the past, and is still in a
limbo. In fact, it is overpoliticized and thus mismanaged. Thus, the development of human
resources remains, in fact, a fare cry so far.
5.3 Infrastructure Development
There was limited infrastructure development in the pre-1995. The insurgency has destroyed
valuable infrastructure of the country. Regular supply of electricity is of a distant past. Potable
water supply is hardly available. The institutions providing basic health services to the needy are
in shambles. All these have financial implications and thereby enhance the future financing
scope. The foreign aid would be crucial to develop the infrastructure.
5.4 Institutions
The institutional foundation was weak in the past. The post-1990 government tried, but could
not develop institutions. Whatever institutional framework existed prior to 1997 was disturbed
and then fractured by the insurgency. The creation of pragmatic institutions is a future
challenging task, which would entail financing from aboard, in particular.
6. Central Banking
The functioning of the central bank, the NRB, has ever been precarious. It has limited scope in
bringing price stability because of the open border with India, and managing the money supply,
which depends on the deficit financing of the government. Regarding the creation of a friendly
environment for a sound development of financial institutions, the central bank has hardly been
effective because it has ever remained weak in monitoring and supervision. The mushrooming of
financial firms – commercial banks, development banks, and finance companies– is cosmetic
rather than of any substance; and their population raises the concern for efficiency and
innovation. The long vacancy in the post of the governor of the central bank, the NRB, (since the
mid-2007 to date, as of 29th November 2007) indicates the state of stewardship of the financial
institutions.
7. Commercial Banking
The performance of the three dominant commercial banks –the Nepal Bank, the Rastriya
Banijya Bank, and the Agriculture Development Bank – has improved in recent years. Other
v
private commercial banks are operating so far. There is no liquidity problem to them. Their
operating costs are moderate. However, investing in non-government sectors has been the
challenge because of the political uncertainty.
The commercial banks are concentrated in urban areas, and the political environment, especially
the insurgency, has narrowed down their reach to rural areas. Also, the excess government
intervention, especially in the Nepal Bank, has disturbed their smooth functioning.
8. Nonbanking Institutions
In the Nonbank sector, major challenge lies in maintaining financial stability. The effort should
be oriented toward developing financial infrastructure, avoiding deceiving competitive policies,
strengthening regulation of the NRB supervision, and widening the access of the financial
services. At present, most of the nonbank financial institutions are concentrating their services in
the Kathmandu Valley. Despite of the government policy to give permission to open nonbanks at
the Kathmandu Valley only after opening one branch outside the Valley, the growth of Nonbank
financial institutions during the last two decades has not witnessed any remarkable progress in
terms of their numbers in rural areas. The overall performance of the nonbank institutions could
be judged by considering the sources and the uses of funds. In Nepal, large scale of development
lending is required to support the development of agricultural and industrial sector. All the
nonbanks are aimed to improve socioeconomic status of the rural poor residing in most of the
inaccessible areas. The deposit of the nonbank financial institutions grew significantly over the
years even though the country needs to do a lot of homework to set up a strong foundation for
making a healthy financial system.
9. Nepal Stock Exchange

The Nepalese security market is small, but growing one. During the last 13 years of its
operation, the securities market has many ups and downs. The market capitalization of the listed
stocks climbed from NRs. 13872.00 millions to NRs. 96,813.74 millions during the study period.
In spite of expansion in size, the securities market is yet to create quality transformation gaining
depth and maturity. The market lacks sectoral diversification, and an access to secondary trading
services is limited. Transparency and efficiency of the issuer and market is not sufficient, while
capacity of the regulator, exchangers and the players is limited. The market is dominated by
active individual investors whereas the institutional investors are virtually absent. The market
infrastructure supporting the trading, clearing and settlement are not adequate. Thus the effort to
build a dynamic market is a challenging task requiring a lot of commitments and efforts of the
government, regulator, maker-players and the investors. Nepalese capital market is focusing on
reforming the laws, regulations and policies, building institutional capacity, above all visualizing
a dynamic capital market in order to tap the inherent potential and managing the cross border
issue and trading of securities. The government is responsible to frame securities laws and also
has its role in formulating capital market development plan and addressing economic, fiscal and
public borrowing policies bearing close linkages to the capital market growth. The banking
regulation is closely linked to the capital market regulation. The Nepal Rastra Bank (NRB), the
banking regulator, can play a pivotal role in promoting the growth of capital market, at least, for
the early stage of the market development. The stock exchange is a place for providing efficient
trading platform for the listed companies through its members. The present legal framework has
defined the responsibility of the exchange in admitting securities for trading, providing
membership to the brokers and the dealers, and providing trading, clearing and settlement of
vi
securities. In order to enhance the supply of securities, a new system of securities' registration is
indeed essential. Such a regulation sets the disclosure standards for going public through Initial
Public Offerings (IPO) or secondary offerings through stock exchange, which encourages
closely held companies to come to the capital market.
10. Challenges and Opportunities in Financial Institutions' Development
10.1 The Economy

The economic performance during 1990-2007 has been dismal because of a high political
uncertainty. The major critical challenge is how to establish a legitimate, functioning
government through the enactment of a legitimate constitution.
10.2 Central Banking

The central bank is leaderless over a long time. Its monetary policy lacks effectiveness because
of the government's financial requirement and open border with India. Its supervisory functions
have been least effective.
10.3 Commercial Banking

The mushrooming in the banking has taken place. However, almost all the commercial banks are
urban based, except the large three banks ─ the Nepal Bank, the Rastriya Banijya Bank, and the
Agricultural Development Bank Limited. However, a branch still covers a sizable population.
The government intervention in the former two banks is least pragmatic.
10.4 Nonbank Financial Institutions

The mushrooming is also phenomenon here, too. There is an enough scope for their
consolidation and better management.
10.5 The Nepal Stock Exchange

The NEPSE is young and needs proper supervisions as well as management. At present, it is
dominated by the banking sector.
11. Conclusions
The government is in transition, and in shambles, too. And there is virtually no rule of law. The
long vacancies in the posts of most secretaries in the government indicate precariousness in
governance. The low remuneration compels bureaucracy to drive for implicit pecuniary gains.
The gray economy is increasing.
First of all, this country needs two fundamentals- a functioning, legitimate constitution and a
legitimate government, with a pragmatic policy environment. There ought to be a governor in
the Nepal Rastra Bank.
vii
CHAPTER 1
INTRODUCTION
1 Background
The financial sector in Nepal is just evolving. Recently, there has been a proliferation of
formal financial institutions in Nepal. Also, the informal financial institutions, such as Guthis,
moneylenders, and pawnshopers are in operation in the rural, and, to a limited extent, in the
urban areas since long. Furthermore, the microfinancing has been expanding in the country
since the 1990s.
The development of financial institutions has, however, been nascent. The prevailing political
conflict, which began in 1996, has further constrained their development, and has confined
banking in urban Nepal. It is generally held that the central bank supervision is weak. And
the nonperforming lending is sizable, especially in the two major commercial banks, namely
the Nepal Bank and the Rastriya Banijya (national commercial) Bank. The initiation of the
banking sector reform through the Financial Sector Technical Assistance Project in the
country indicates the precariousness of the financial sector here.
How the formal and informal financial institutions are functioning in Nepal is pertinent in the
development of financial institutions as the sound financial development is of policy concern
in Nepal and elsewhere. This study was concerned with the extent of sound development of
the financial institutions in Nepal.
2. Objectives of the Study

The overall objective of this study was to examine the development of the structure of
Nepalese financial institutions, and derive its implications for future research and
policymaking. The specific objectives of the study were:
To evaluate the functioning of the central bank, Nepal Rastra Bank, in the promotion of
financial development;
• To examine the size, structure and performance of financial institutions;
• To examine the size, activity and performance of the stock market; and
• To derive implications for future research and policymaking.
3. Methodology
3.1 Conceptualization
Prudential institutional development is crucial to realize rapid economic growth and reduction
of poverty as sound institutions promote dynamic processes of economic development (This
section is based on the review of the relevant literature). In fact, sound banking and other
financial institutions improve resource allocation and thus stimulate economic growth. Also,
prudent regulatory mechanisms promote healthy financial development. Sound financial
institutions provide timely and factual information and analyses, enable risk sharing and
Senai_Report (Bharat) 1
manage the liquidity provision. Four major financial crises of the late twentieth century - the
Latin American in the early 1980s, and Mexican, Asian and Russian in the 1990s – arose
because of unsustainable buildup of the short-term foreign debt. They highlight the fact that
prudent institutional and regulatory frameworks are critical for sound functioning of financial
institutions. The promotion of a sound financial system would be pertinent to achieve rapid
economic growth without confronting any financial volatility. These have been the recent
regional as well as global experiences as well as concerns. Thus how to fathom financial
system's soundness so as to contain a potential financial crisis is the fundamental concern.
Such an effort would enable to build an inclusive world economy. The regional financial
coordination could be a prelude toward that direction. In this context, it would be pertinent to
examine the size, activity, and efficiency of Nepalese financial institutions- monetary
authority (the central bank), commercial banks, and nonbank financial institutions. Such an
exercise would enable to provide a prudential approach in the prevailing financial structure
and financial development in examining the prevailing financial structure and its
development in Nepal. While undertaking the exercise it would be pragmatic to group
financial institutions into four categories, namely,
a. Central bank
b. Depository banks
c. Non bank financial institutions
d. Stock market
3.2 Methods
This study utilized both quantitative and qualitative techniques to generate information
regarding the structural development of financial institutions.
i) Qualitative Approach
A critical review of pertinent documents, of Nepal as well as others was made to trace out the
institutional development of financial institutions over time, especially since 1990. The
structure and functioning of the central bank, Nepal Rastra Bank, were examined through the
checklist tool to generate both qualitative as well as quantitative information. Furthermore,
this exercise was pursued, keeping in view the initiations made under the joint World Bank –
IMF Financial Sector Assessment Program (FSAP) introduced in Nepal in May 1999. In this
context, efforts were made to understand the working mechanisms between the IMF and
Nepal. The thrust in the qualitative approach was to obtain information from the selected
financial institutions – Nepal Rastra Bank, Nepal Bank, Rastriya Banijya Bank, Agricultural
Development Bank of Nepal, Employees Provident Fund, Citizen Investment Fund, Nepal
Rastriya Bima Sansthan on their experiences and perceptions regarding their development.
ii) Quantitative Approach
This approach utilized both micro-prudential and macro-prudential indicators developed in

the IMF, to the possible extent. The collection of information was made, to a degree, in line
with the IMF's recent Monetary and Financial Statistics Manual, developed to promote the
adoption of harmonized monetary and financial frameworks among member countries. The
CAMELS framework was adapted, to the possible extent, to analyze the health of selected
main financial institutions, namely capital adequacy, asset quality, management soundness,
earnings, liquidity, and sensitivity to market risk (CAMELS).
4. Information Processing and Analyses
This study generated required information through both primary and secondary sources. The
main secondary information sources were the Nepal Rastra Bank, and the Nepal Stock
Exchange. The primary information, mainly qualitative in nature, were obtained from
concerned agencies, the list of which is given in Annex 1, and were on the experiences and
perceptions of institutional heads and department or division chiefs, with regard to the
functioning of the formal as well as informal financial institutions.
5. Limitations of the Study

This study has adopted macro approach and thus micro studies are a few. It has utilized
simple statistical tools, such as percentages and ratios. The use of three-year averages is
utilized to smooth annual fluctuations in quantitative information. Access to "user –friendly"
(standardized) information in time remained in fact truly an arduous task. New national
account covering 2001 to 2007 only compounded the task further.
6. The Study Setting

Chapter one deals is introductory and with the background, study objectives and,
methodology, and limitations of the study. Chapter two provides an overview of the Nepalese
economy, together with its immediate post-1990 onwards- performance, challenges and
opportunities. Chapter three deals with the functioning of the central bank and its
interrelationship with the Ministry of Finance and the National Planning Commission.
Chapter four provides an analysis of the functioning of the commercial banking, depository
banking. Chapter five examines how the nonbanking financial institutions are performing,
particularly of development banking, financial companies, financial cooperatives and
microfinancing institutions. Chapter six assesses the evolution and performance of the Nepal
Stock Exchange. Chapter seven, finally, provides challenges and opportunities inherent in the
development of financial institutions in Nepal, and suggests implications of this study for
future policy making and research.
CHAPTER 2
THE ECONOMY
2.1 The Setting

Nepal is situated on the southern aspect of the mid-Himalaya, and appears elongated
rectangular in shape. It has an 800 km long border with the Tibetan Autonomous Region of
China in the north and a 1,751 km long open border with India in its eastern, southern and
western sides. The total surface area of the county is 147, 181 square kilometers, with the
land area of 143,000 square kilometers. Nepal has physiographic variations, resulting in
seven climatic zones, from subtropical to arctic climates within a distance of 150 km from
Musaharniya of Dhanusha district in the south (59 meters' elevation of above the sea level) to
the Everest (8,848 meters) in the north. About 18.2 percent of the land area is barren and
rocky while the inland water covers 4,181 square kilometers, or 2.84 percent of the surface
area.
Nepal is predominantly mountainous as the mountain zone (with the elevation from 4,877 to
8,848 meters above the sea level), is 35 percent, proper hill zone (610 to 4,876 meters) 41
percent, the Kathmandu Valley (at 1,400 meters in altitude) 0.6 percent, the Inner Terai 5
percent, and the Terai (59 to 600 meters) 18 percent (Table 2.1).The level land is 21.82
percent, of which most are in the Terai. Nepal has, however, been categorized into three
broad physiographic regions, namely the Mountain, the Hill (inclusive of the Kathmandu
Valley), and the Terai (including the Inner Terai, lying between the Shiwalik Range and the
Mahabahrat Range).
The government is unitary so far, and has been lingering on in socalled transition since the
early 2006. For the administrative purpose, Nepal is divided into 75 districts. At the local
level, there are 58 municipalities – 1 metropolis (Kathmandu), 4 submetropoles (Lalitpur,
Pokhara, Biratnagar, and Birgunj), and 53 municipalities, most of which are in the plains- the
Inner Terai and Terai, with 804 wards altogether, the lowest administrative units. And the
total Village Development Committees (VDCs) in the rural Nepal are 3,915, with 35, 235
wards.
Nepal has a multicultural society with ethnic, linguistic and cultural diversity, and has thus
been called the "ethnic turntable of Asia" (Toni Hagen), because of the habitation of the
Caucasians, indigenous or natives, and Mongoloids. In Nepal, the upper caste Hindu forms
about 32.8%─the Hill Hindu 30.9% and the Terai Hindu 1.9%; the Hill Janajati (indigenous)
31.7%; the Newar 5.5%; Dalit 11.8%─the Hill Dalit 7.1% and the Terai Dalit 4.7%; the Terai
native 9.8%; the Tharu 6.8%; the Muslim 4.3%; and the others 4.1%. The main ethnic groups
in the country are the Chhetri (15.80%), Hill Brahmin (12.74%), the Magar (7.14%), the
Tharu (6.75%), the Tamang (5.64%), the Newar (5.48%), the Muslim (4.27%+ Churaute
0.02%), the Kami (3.94%), the Yadav (3.94%), the Rai (2.79%), the Gurung (2.39%), the
Damai (1.72%), the Limbu (1.58%), the Thakuri (1.47%), and the Sarki (1.40%).
Linguistically, they speak either the Tibeto –Burman languages or the Indo-Aryan. The
country's lingua franca, however, is Nepali, which is spoken by 17 millions spread in 4
countries. The other major languages are the Maithili, Bhojpuri, Tharu, Tamang, Newari
Bantawa, Magar, Abdhi, Limbu, and Gurung.
Table 2.1: Area, Households, Population Density and Administrative Unites
Region Surface Land area: Level land House- Population House-hold Population Administrative Units VDCs
area: squ. squ. kms area: squ. holds 2001 2001 size (persons) Density: Districts Muni-
Kms %) (%) Kms (%) (%) (%) 2001 persons cipa-lities
per squ. kms
Mountain 51,817 50,351 200 (0.64) 7.52 7.29 5.28 33 16 2 544
(35.21) (35.21)
Hill Proper 60,446 58,730 2,180 38.49 37.17 5.26 146 36 22 1,892
(41.07) (41.07) (6.99)
Kathmandu 8,99 8,72 820 (2.63) 8.12 7.11 4.76 1,882 3 5 114
Valley (0.61) (0.61)
Inner Terai 7,335 (4.98) 7,122 5,500 6.44 6.47 5.47 210 3 5 148
(4.98) (17.63)
Terai Proper 26,684 25,925 22,500 39.43 41.96 5.79 374 17 24 217
(1813) (1813) (72.11)
Nepal 147,181 143,000 31,200 4,253,220 23,151,423 5.44 162 75 28 3,915
(100) (100) (100)
Note: Each Village Development Committee (VDC) has 9 wards, thereby 35,235 wards in rural Nepal. A municipality consists of 9 to 35 wards, hence 840 urban wards.
Source: Based on information of the Central Bureau of Statistics.
2.2 The Post 1990 Economy
2.2.1 The Size of the Economy
Nepal is least developed (among 50 countries) as well as a landlocked (among 40 countries).

It is a low income (among 53 countries) country, too. This study deals with the post-1990
economic state of the country as it augurs liberalization in the economy, with the obvious
implications for the development of financial institutions in the country as the pre-1990
economic scenario was primarily under the state dominance. The banking and nonbanking
institutions then were virtually under the public sector, except a commercial bank, the joint-
venture Nabil Bank, established in the late 1980s.
The size of the economy increased gradually over the years in the 1990s, and doubled in 16
years, that is between 1990 and 2006 (Table 2.2). Nevertheless, the low level of the economy
implies a low level of financial transactions, and thus a limited financial sophistication and
the consequent limited financial development.
Table 2.2: National Economic Level Indicators
Economy's Size Per Capita

The National Income and Production Nominal GNI At 2001 US At 2001
End- dollars Nepalese rupees
year of Nominal, US At 2001 Nepalese US PPP GNI GDP GNI GDP
the dollars rupees dollars US
fiscal GNI, GDP, GNI, GDP, dollars
year Billions Millions Billions Millions
1990 4.0@ 3,628 253.0 257,088 212 960* 223 198 13,991 14,220
1995 4.5@ 4,232 326.0 330,289 210 1,145 255 224 16,116 16,327
2000 5.6 5,450 417.7 417,992 230 1,360 290 253 18,452 18,465
2001 5.9 5,525 443.2 441,819 250 1,780 300 260 19,144 19,071
2006 8.1 8,052 513.8 509,911 290 1,630 320 270 19,867 19,716
2007 8.3* 8,253* 525.9 522,666 290* 1,710* 324 272 19,888 19,966
Notes: 1. @ is adjusted based on the 2000/2001 World Development Report of the World Bank
2. GNIs or GDPs prior to 2001 are based o the ratios of the pre-2001 figures to that of the 2001 GNI or GDP of
the old series.
3. Asterisk (*) is based on the growth rates given in the 2007 Economy Survey.
Sources: 1 World Development Reports (of relevant years), The World Bank.
2. Economic Surveys (of recent years), Ministry of Finance, Kathmandu.
The production activity was greater than the national income in the early 1990s as the ratio of
GDP to GNI was greater than unity during 1990-2000, implying increased foreign
investment, especially from India. During 2001-2007, this ratio was less than unity, indicating
falling foreign collaboration in the national production activity. Such a fall could have been
the effect of the insurgency taking place since the late 1996.
2.2.2 Per Capita Income
The real per capita income (GNI) level is low, 61 US cents or 38 Nepalese rupees a day in
1990, and 89 cents or about 89 Nepalese rupees a day in 2007 (Table 2.2). In nominal terms,
the per capita income was $ 212 in 1990 and $ 290 in 2007. Thus, Nepal remains one of the
poorest countries in the world. Furthermore, the level of the per capita income has improved
slowly.
2.2.3 The Structure of the Economy
The economy remains mainly agrarian as over a third of its GDP originates from agriculture
(Table 2.3). The share of agriculture in the GDP has declined over the years since 1990. The
share of industry in the GDP peaked in the mid-1990s, but declined thereafter because of the
insurgency. In fact, the activities in manufacturing, construction and mining decreased as
indicated by their falling shares in the industrial GDP due to the nationwide insurgency in the
country in the post -1995 to date. The rising share of services in the GDP has been at the cost
of the other sectors, not because of their improvements.
Table 2.3: Structure of the Economy
Economy's Structure Mid-end year of the fiscal year (of three-year

averages)
1990 1995 2000 2006
1. Agriculture 48.78 41.04 39.22 37.10
2. Industry 16.64 21.96 21.37 18.96
2.1 Manufacture 6.20 9.34 9.11 6.99
2.2. Construction 9.37 10.74 10.11 9.40
2.3. Electricity, gas and water 0.60 1.35 1.65 2.11
2.4. Mining 0.48 0.54 0.50 0.46
3. Services 34.58 37.00 39.41 43.94
Total 100.00 100.00 100.00 100.00
Source: Economic Surveys (of recent years), Ministry of Finance, Kathmandu.
2.2.4 Annual Growth Rates of Population, National Income and Production
The population in Nepal during 1990-2007 in creased was 2.26% per annum (Table 2.4). The
population growth rate was higher in the 1990s than in the later period. The share of
agriculture in the GDP has declined over the years since 1990. The national income (GNI)
and production (GDP) declined (Table 2.4). Their annual growth rates decreased at an
increasing rates from one period to the other , and was due to the effect of the post-1995
insurgency, which has still affecting adversely the productions in all the sectors of the
economy . Furthermore, the production in the early 1990s was slightly higher than that of the
1980s as the GDP during 1980–1990 increased by 4.6 percent per year. In general, the
economic growth in the early 1990s was moderate, and thepost-1996 economic performance
was quite low because of the nationwide insurgency, and its aftermath as the peace in the
country remains elusive.
Table 2.4: Annual Average Real Growth Rates (Three-Year Averages)

(Percent)
Period (Mid- Per Capita
years) GNI GDP Per GNI GDP Population
1990-1995 5.18 5.17 2.85 2.84 2.27
1995-2000 5.01 4.665 2.67 2.33 2.28
2000-2006 3.46 3.36 1.19 1.10 2.25
1990-2006 4.48 4.33 2.17 2.03 2.26
Source: Appendix Table B3
2.3 Production Efficiency and Poverty
The economy has low production efficiency. The agriculture productivity has remained low
in relation to other SAARC members. Nepal's agricultural productivity (agricultural value
added per worker) is low in relation to the South Asia, low income economies and the Sub-
Saharan Africa. Its productivity grew by 0.54% per annum between 1991 and 2002, both
mid-years of three-year averages, and this is quite low in relation to the Sub-Saharan Africa
(0.61%), low income economies (1.30%) and the South Asia (1.33%). Thus, there is
financing potential in the inputs and services delivery in agriculture. And the limited
industrial activity is hardly well managed, and thus is plagued with low productivity,
implying the potential for financing it.
The poverty level, which remains high as around one-third of the people are below the
national poverty line, is ubiquitous. The insurgency, which has disrupted the production
throughout the sectors of the economy nationwide, could have made more people further
poorer. This has definite adverse implications in the functioning of the financial institutions.
For instance, the banking services available to the rural areas are now no longer in existence.
2.4 Nepal in the Global Economy

Nepal ranks 50th in population size (28 millions in 2006). It is 108th in GNI size in 2006
(among 112 economies of the world, inclusive of Macao, Nauru, Taiwan, and Tuvalu, and
110th in GDP size. The country ranks 201st in nominal per capita GNI, and 185th in PPP
GNI per capita in 2006. Among the 177 countries or economies in the world, the country
stood at 138th in the 2004 human development rank and slided down to the 142nd in 2005. It
ranked 112th place in per capita wealth in 2000(among 117 countries).In brief, Nepal is at the
bottom in development.
2.5 Nepal in Global Competitiveness Ranking

Nepal is least competitive in the global context. It was ranked in the 110th position among
125 countries in the world Global Competitiveness Rank (of the WEF's 2006 Global
Competitiveness Report), and 114th among in 131 countries in 2007. It also ranked 111th
position among world's 121 countries in the Business Competition Index in 2006, and 120th
among 127 countries.
In fact, the information provided in the Worldwide Governance Indicators, 1996-2006 of the
World Bank indicates the decline in the quality of governance in the country. The
transparency International in terms of the 2007 corruption perceptions Index ranks Nepal in
the 131st position among 180 countries worldwide. In the 2008 Doing Business of the World
Bank Nepal is placed in the 111th position among 178 economies. In short, Nepal's position
rendered fragile due to very weak governance.
2.6 Governance
The country is quite fragile in governance. The political leadership lacks vision and direction
and commitment toward the national development. Frequent changes in government
leadership has plagued the country throughout the post-1990 till to date. The bureaucracy is
weak and least competent and devoid of incentives, pecuniary as well as non-pecuniary. The
government employees' remuneration levels have ever remained low, and insensitive to the
inflation. The increase in the basic pay-scales of the employees during 1973-2007 was a
meager 1% per annum in the aggregate, and basic pay-scales of senior officer–joint
secretaries and secretaries – in real terms were lower in 2007 than those of 1973. Since the
public sector remuneration levels effect the private sector ones in general, it was hardly
pragmatic to keep the public sector remuneration levels low. There is almost no rule of law.
And the country is now in transition, and in shambles, too.
2.7 The Wealth of Nepal

Nature and diverse ethnicity endow Nepal enough for development. The per capita wealth,
consisting of "produced, natural and human and institutional capital", a la "Where is the
Wealth of Nations" (The World Bank, 2006), was $ 3,802 in 2000 (among 117 countries).
Nepal ranked 112th among 117 countries (Niger, Republic of Congo, Burundi, Nigeria, and
Ethiopia, in a deseeding order, and with lower per capita wealth than that of Nepal). The low
per capita wealth poses both the challenge as well as the opportunity to the country in the
global context, and thus offers a scope to promote financing for the generation as well as
maintenance of the national wealth.
2.7.1 Natural Resources
Nepal has a unique place in the world. It has 14 out of 17 highest mountain peaks (of over
8,000 meters above the sea level), and offers a unique scenic beauty as well as nature
exploration opportunities. Tourism could have prospered, but the insurgency constrained.
Thus the financial sector involvement in the proper utilization of the Nepalese natural
resources remained quite disturbed. Deforestation, which occurred at 1.6% a year during
1990-2005, has further been rapid in recent years, 2006 and 2007, due to a lapse in its
management caused by the insurgency and its aftermath. Nevertheless, the scope of financing
exists in the future.
2.7.2 Human Resources
The population, of 28 millions in 2006, is increasing at 2% per annum. The population is

young as about 59% of the total population is under 25.
The working age population (15-64 years) in 2005 was 57.3%, the young population (under
15 years0 39%, and the elderly (above 64 years) 3.7%. The labor force forms almost 68% of
the working age population (15-64 years), and increased by 2.6% per year during 1990-2005.
Agriculture absorbs most of the labor force, about 79%. However, farming is dependent on
the vagaries of the monsoon as the all–season irrigation facility is limited. Furthermore, the
level land (Table 2.1), which is 21.8% of the total land area, has been encroached for
urbanization, especially in the hill rive valleys. Recently, the highly productive age (20-28)
workforce in a sizable number is working abroad, and is fetching remittances. But it is
unskilled and earns less than the gainful remunerations.
The adult literacy is low (annex Table A 1) especially of women is under 25 years. The
enrollment levels are low, but the dropouts and failure rates are high. The repetition rate
remains sizable.
The very foundation of the education sector remained disturbed in the past, and is still in a
limbo. In fact, it is overpoliticized and thus mismanaged. Thus the development of human
resources remains, in fact, a fare cry so far.
2.7.3 Infrastructure Development
There was limited infrastructure development in the pre-1995. The insurgency has destroyed
valuable infrastructure of the country. Regular supply of electricity is of a distant past.
Potable water supply is hardly available. The institutions providing basic health services to
the needy are in shambles. All these have adverse financial implications, and thereby enhance
the future financing scope. The development of infrastructure would be quite essential, and it
would require foreign aid.
2.7.4 Institutions
The institutional foundation was weak in the past. The post-1990 government tried, but could
not develop institutions. Whatever institutional framework existed prior to 1997 was
disturbed and then fractured by the insurgency. The creation of pragmatic institutions to
promote a sustainable economic growth and poverty alleviation would be quite challenging,
and this would entail external financing, particularly aid.
CHAPTER 3
CENTRAL BANKING
3.1 Introduction
The central bank, the Nepal Rastra Bank (NRB), has been in operation since the early 1956
(established on 26th April 1956). It manages the money supply and the monetary policy of
Nepal, subject to the financing requirements of the government, and is responsible to
maintain price stability, and to promote sustainable economic growth. It is also entrusted with
the responsibility of managing the foreign exchanges. However, it has a fixed exchange rate
system with India rupee, which is aligned with the US$ but operates with the market
mechanism for other currencies. It pursues banking policies and regulates credit creation
through the conventional monetary instruments-the reserve ratio, benchmark interest rate, and
open market operations through sells or purchases of securities, i.e. government bills and
bonds. In addition, the NRB provides banking services to the government and commercial
banks (inclusive of interbank transactions), undertakes supervision of the financial system,
and renders, last but not least, advisory services to the government on monetary and financial
policies.
3.2 Monetary Policy

The fundamental tenets of the NRB are to maintain price stability, and promote sustainable
external and financial systems, and thereby to create enabling environment for high and
sustainable economic growth. It has been pursuing its policies on these tenets through the
adoption of monetary policy instruments, such as the cash reserve ratio (CRR), the refinance
rates, and open-market operations for governments bonds – treasury bills, development bonds
and national savings certificates. Also, it supervises, regulates and monitors all the financial
institutions plus recognized /licensed NGOs and financial cooperatives. Thus, the NRB
provides norms for capital adequacy, liquidity, loan classification and provision, and
reporting as well as auditing requirements under its supervisory and regulatory functions.
3.2.1 Cash Reserve Ratio (CRR)

The cash reserve ratio (CRR) is an instrument of the NRB to control money supply. Cash
reserves are held as required with the NRB and on a commercial bank's vault, and earn no
interest. The cash reserve with the NRB is an interest-free loan from a bank to the NRB.
The required /mandatory CRR was 12% and total domestic deposits prior to April 1998, and
the "vault cash" was 3% of total deposits. The mandatory CRR was 6% in 2000 and 5% in
2007 (The CRR was 8% in the UK and 12.5% in the US$ in the late 1990s). There has been a
downward trend in the mandatory CRR (table 3.1). In general, it indicates relaxation in the
control of he money supply.
The central bank assets are growing. It lacks, however, leadership and direction. Thus, its
monitoring as well as supervisory roles have not been pragmatic, to the possible extent.
The NRB pursues monetary instruments such as the cash reserve ratio (CRR), the bank rate,
refinancing rates applicable to export, agriculture and sick industries, and open market
operation (OMO). The CRR is mandatory. The refinance rates as well as the bank rate have a
downward trend, to some extent. The CRR has remained steady at 5% since 2005. Since 2004
the refinance rate is 1.50% to sick industries and 3.50% to exports and rural development
banks: the refinance rate is lower against foreign currency loans, 3.25% (all these rates were
of the mid-July 2007.).
The short-term interest rates are the 91-day Treasury-Bill (T-bill) rate and inter-bank interest
rate. The T-bill rate has a downward trend, and is 2.77% with a range while the inter-bank
interest rate is 3.03% (these rates prevailed in the mid-July.).
Table 3.1: Mandatory Cash Reserved Ratio and Structure of Interest Rates
Percent per annum
Interest Rates 1990 1995 2000 2007
1. Mandatory cash reserve ratio 6.00 6.00 6.00 5.00
2. Policy rates 6.50
2.1. Bank rate 6.50 6.50 6.50 6.25
2.2. Refinance rate 9.00 9.00 6.5-7.5 1.50
2.2.1 Rural development banks 5.00 4.50 4.50 3.50
2.2.2 Refinance rate against local currency loan 5.00 4.50 4.50 3.50
2.2.3 Refinance rate against foreign currency loan 2.00 2.00 2.00 3.25
2.2.4. Sick industries 3.00 1.50
3. Interbank transactions rate 4.00 3.03
4. Treasury Bills (91 days) 6.20 7.35 4.66 2.42
5. Lending rate (average) 12.41 12.85 10.50 8.50
6. Deposit rate (average) 10.50 5.02 5.40 3.25
Source: Quarterly Economic Bulletin (various issues) Nepal Rastra Bank.
3.2.2 Bank Rate

The bank rate (the discount rate in the US) is an interest rate charged by the NRB to its
borrowing banks which need to replenish their temporary reserve requirements. This
monetary instrument is used to control money supply. This bank rate remained steady at
6.50% in the1990s, implying no need to change the money supply. However, its lowering in
recent tears implies an easy monetary policy.
3.2.3 Refinancing Rates

The NRB has adopted different refinancing rates. The refinancing rate to commercial banks
were high and steady at 11% in the early 1990s and then declined to about 7% in 2000 (Table
3.1). It, however, used different refinancing rates to rural development banks and local
currency borrowing exporters, and to foreign currency borrowing exporters. Nevertheless, the
rates declined in recent years, and the sick industries are the most favored ones. In general,
this refinancing is for the targeted activity promotion.
3.2.4 Interbank Transactions Rate

This rate eases the flow of funds from creditors to the needy. This rate has a downward trend
in the early 21st century (Table 3.1).
3.2.5 Open Market Operations
The NRB utilizes this tool for short-term liquidity management as it is a flexible short-term
monetary instrument. The auctioning of Treasury –bills (T-bills) was first introduced in 1988.
The auctioning of T-bills, and a fixed –price offer of development bonds and national savings
certificates were initiated since September 1989. The available information of recent two
years indicates a sizable net liquidity absorption by the NRB as commercial banks are flooded
with excess liquidity because of limited financing opportunities.
Table 3.2: Open Market Operation

NRs billions
1990 1995 2000 2006 2007
A. Liquidity Absorption na na na 20.01 32.74
a.1 Sale auction na na na 13.51 18.40
a.2 Reverse repo na na na 6.50 14.34
B. Liquidity injection na na 16.3* 1.28 2.00
C. Net liquidity absorption na na na 18.73 30.74
* as of 2001
3.3 Money Supply

The money supply facilitates economic transactions. The money supply has various
dimensions. The monetary base or high –powered money changes the money supply d-
narrow money (M1) or broad money (M2), and recently very broad money (M3).
3.3.1 High-powered Money or Monetary Base (Mo)

This money consists of currency in circulation and cash reserves (cash in hand, balance with
the NRB and foreign currency in hand) of commercial banks. It helps the central bank, the
NRB, to influence the money supply, and also the deficit financing of the government. The
monetary base to GDP and GNI ratios increased sharply between 1990 and 1995 mid-years of
three-year averages, and thereafter they move up gradually (Table 3.3). Their levels of
upward change during 16 years remains moderate, implying caution in the money supply
expansion. The monetary base in Nepal during 1990-2006, mid-years of three-year averages,
increased at 13.47% a year, and could be considered a moderate growth rate (Table 3.3). This
growth rates consist of a relatively high growth rate of 18.38% during 1990-95, and
consequently did slowdown at 13.55% during 1995-2000 and 9.48% during 2000-06. It
indicates cautiousness of the monetary authority in the post-1995.
Table 3.3: Three-Year Average Annual Nominal Growth Rates, %

1990-95 1995-00 2000-06 1990-2006
1.M0 18.38 13.55 9.48 13.47
2. M1 18.31 13.26 11.02 13.95
3. M2 20.48 17.85 11.2 16.11
4. Domestic Credit Supply 19.3 17 12.1 15.84
4.1. Real Sector 25.89 20.35 13.87 19.55
4.2. Private Sector 28.58 20.81 13.76 20.44
4.3. Net claims on
a. Government 10.89 18.04 24.81 18.21
b. Government non-financial enterprises -3.33 3.58 19.86 7.11
c. Government financial enterprises 13.71 17.89 3.06 10.84
5. CPI 11.17 7.69 4.41 7.51
6. GDP Deflator 10.65 6.22 4.72 7.01
7. GDP 16.34 11.16 8.24 11.63
8. GNI 16.35 11.53 8.34 11.79
9. GDI na na 9.73* na
10. Government Spending 14.25 11.53 9.02 11.42
11. Budget Deficit -5.45 -10.7 -3.27 -6.23
12. Imports of Goods & Services 27.27 10.3 8.11 14.48
12.1. Merchandise Imports 26.82 11.32 7.63 14.49
13. Exports of Goods & Services 34.29 10.86 -0.1 13.2
13.1. Merchandise Exports 27.66 23.57 1.97 16.16
Note:* Refers to the growth rate between 2002 and 2006,The mid-years of fiscal years.
3.3.2 Narrow Money Supply (M1)

The narrow money (M1), consisting of the fiat money (coins and paper notes) and demand
deposits held by the public, increased by almost 14% a year during 1990-2006, the mid-years
of three-year averages (Table 3.3). It has a similar trend in relation to GDP and GNI (Table
3.3), a high upward move during 1990-95, and then gradual upward movement. The annual
growth rates of M1 exceed those of Mo, except during 1995-2000, in which M1's lags behind
that of Mo's. This discrepancy is due to a slow growth of the public demand deposits, in
particular.
3.3.3 Broad Money Supply (M2)

The broad money supply is the sum of M1 and time deposits, and indicates monetization of
the economy. The ratio of M2 to GNI in 2006 was 0.5351, and M3 to GNI 0.5736, implying
low level of monetization of the economy (Table 3.4). In developed economies, the M2 to
GNI ratio are greater than unity (This ratio exceeds 2 in Taiwan and Hong Kong).
Table 3.4: Ratios of Money Supply Components to GDP and GNI

Mid-end- M0 M1 M2 Total net Net Net
year of GDP GNI GDP GNI GDP GNI assets to domestic foreign
three fiscal GNI assets to assets to
years GNI GNI
1990 0.1288 0.1310 0.1258 0.1280 0.2853 0.2901 0.2901 0.1942 0.0959
1995 0.1405 0.1429 0.1368 0.1391 0.3393 0.3454 0.3454 0.1879 0.1575
2000 0.1562 0.1562 0.1502 0.1501 0.4550 0.4550 0.4550 0.2632 0.1918
2006 0.1673 0.1664 0.1748 0.1739 0.5351 0.5321 0. 5376 0.3385 0.1991
3.3.4 Government Financing: Size and Trend

The size of the government in the national economy, in terms of the government expenditure
to GDP, is moderate. And it declined somewhat in 2006 compared to 1990 (Table 3.5). It
implies dominance of the private sector. Also, the size of the state declined somewhat in the
late 1990s, and then increased perhaps due to a squeeze in the private activities because of the
post-1995 insurgency.
The budget deficit in relation to GDP has a downward trend. This is because of the sizable
decline in development activities after the insurgency in the late 1996. Regarding the deficit
financing sources, the foreign loans prevailed overall, except in the post-2000, and it is the
aftermath of the same phenomenon, the insurgency.
Table 3.5: Government Spending and Deficit Financing Sources

Mid-end-year Government Budget deficit Deficit financing sources
of three fiscal expenditure Foreign loans Domestic loans Cash use
years
1990 18.22 8.22 5.32 2.39 0.50
1995 16.64 5.02 3.62 0.83 0.58
2000 16.91 4.92 2.94 1.42 0.57
2006 17.66 3.71 1.42 1.98 0.31
3.3.5 Financial deepening

The ratios of the currency held by the public and the currency in circulation to narrow money
supply (M1) have a gradual downward trend (Table 3.6a). This indicates gradual financial
deepening.
Table 3.6a: Select Financial Deepening Indicators

Mid-July Currency held by Currency in Private to Credit to GDP %
public to M1 circulation to M1 domestic credit
1990 68.33 74.01 39.4* 15.2
1995 68.19 74.37 58.1 22.0
2000 69.11 74.86 69.3 32.2
2007 65.92 74.12 80.3 30.82
Table 3.6b: Credit Supply, Remittances and All that

Mid-July Domestic Credit Workers' Private sector Private Real sector
supply total remittances credit supply remittances credit
1990 29,661.6 Na 11,687.6 1,747.9 27,656.2
1995 72,184.7 Na 41,943.1 5,063.6 68,363.2
2000 158,001.1 36,818 109,447.6 12,662 149,498.3
2007 376,692.5 100,145 273,477.4 na
In nominal terms, the private sector credit supply increased (Table 3.6b). The nominal growth
rates in the domestic credit supply, especially to the real sector, and that of workers'
remittances have been high. Their growth rates are hardly matched by the nominal GDP
growth. This gap is very interesting, keeping in view the time lag involved. In brief, the
growth of the credit supply is compatible with the nominal GDP growth.
3.3.6 Monetary Authority Assets

The total net assets in the economy increased by 16.19% a year during 1990-2006, mid-years
of three-year averages. The growth rate of net foreign assets, 17.0% per year, was dominant
over the net domestic assets, which grew by 15.74% a year. Thus, the foreign assets prevailed
in the money supply in the economy. It implies limited role of the NRB monetary instruments
in influencing the money supply. The use of the Indian currency in the private sector
transactions has further limited the NRB role in the money supply.
3.3.7 NRB Monitoring and Supervision
The monitoring and supervisory functions of the NRB have been evolving. The NRB has
been least effective in undertaking these tasks. The information flow and functioning of the
financial institutions indicate an enough scope for improving these functions.
3.4 Government Financing: Size and Trend

The size of the government in the national economy, in terms of the government expenditure
to GDP, is moderate. And it declined somewhat in 2006 compared to 1990 (Table 3.7). It
implies dominance of the private sector. Also, the size of the state declined somewhat in the
late 1990s, and then increased perhaps due to a squeeze in the private activities because of the
insurgency.
The budget deficit in relation to GDP has a downward trend. This is because of the sizable
decline in development activities after the insurgency in the late 1996. Regarding the deficit
financing sources, the foreign loans prevailed overall, except in the post 2000, and it is the
aftermath of the same phenomenon, the insurgency.
Table 3.7: Government Spending and Deficit Financing Sources

Mid-end-year Government Budget deficit Deficit financing sources
of three fiscal expenditure Foreign loans Domestic loans Cash use
years
1990 18.22 8.22 5.32 2.39 0.50
1995 16.64 5.02 3.62 0.83 0.58
2000 16.91 4.92 2.94 1.42 0.57
2006 17.66 3.71 1.42 1.98 0.31
3.5 Three-year Average Growth Rates of Money Supply Components

Be considered a moderate growth rate (Table 3.5). This growth rate consists of a relatively
high growth rate of 18.38% during 1990-95, and consequently slowdown at 13.55% during
1995-2000 and 9.48% during 2000-06. It indicates cautiousness of the monetary authority in
the post-1995.
3.6 Monetary Authority Assets

The total net assets in the economy increased by 16.19% a year during 1990-2006, mid-years
of three-years' averages. The growth rate of net foreign assets, 17.0% per year, was dominant
over the net domestic assets, which grew by 15.74% a year. Thus, the foreign assets prevailed
in the money supply in the economy. It implies limited role of the NRB monetary instruments
in influencing the money supply. The use of the Indian currency in the private sector
transactions has further limited the NRB role in the money supply.
3.7 NRB Monitoring and Supervision

The monitoring and supervisory functions of the NRB have been evolving. The NRB has
been least effective in undertaking these tasks. The information flow and functioning of the
financial institutions indicate enough scope for improving these functions. The NRB pursuing
banks to maintain capital adequacy ratio of 8%.
3.8 Foreign Exchange Reserves
The foreign exchange reserves of Nepal improved over the years since 1990 (Table3.8). Thus,
its imports coverage improved, too. Nepal has been comfortable situation in foreign exchange
reserves as they cover around 10 months of imports of goods and services. In nominal terms,
the foreign exchange reserves grew by 11.53 per cent a year during 1990-2007 whereas the
imports of goods and services increased by 14.80% per annum–from NRs. 21,073.6 millions
in 1990 to NRs. 220,166.3 millions in 2007 (the end years of the respective fiscal years, i.e.
Fy. 1989-90 and Fy 2006-07).
Table 3.8: Foreign Exchange Reserves

Year, mid-July Nominal * $ millions Imports coverage, months
Amount Three year Merchandise Goods and
average amount goods services
1990 294.0 291.9 4.84 3.93
1995 683.3 657.9 6.17 5.04
2000 927.9 901.9 6.87 5.87
2006 1,775.0 1,760.7 8.96 7.45
2007 2,029.1* na na na
Note: Asterisk (*) denotes estimates
Sources:1. Quarterly Economic Bulletin Vol. 41. No. 3, Nepal Rastra Bank, 2007
2. Current Microeconomic situation, Nepal Rastra Bank, September, 2007
The Nepalese currency depreciated in the early period up to 2006, and thereafter, it started
appreciating (Table3.9).
Table 3.9: Nepalese Rupees Exchange Rate per US Dollar

Fiscal year and Period end Period average
(Mid-July) Buying Middle Buying Middle
1990 29.10 29.20 28.54 28.64
1995 50.45 50.70 49.70 49.94
2000 70.40 70.75 68.74 69.07
2006 72.08 72.39 72.03 72.32
2007 70.05 70.35 70.19 70.49
Sources:1. Quarterly Economic Bulletin Vol. 41. No. 3, Nepal Rastra Bank, 2007
2. Current Microeconomic situation, Nepal Rastra Bank, September, 2007
3.9 Conclusions
The functioning of the central bank, the NRB, has ever been precarious. It has limited scope
in bringing price stability because of the open border with India, and managing the money
supply, which depends on the deficit financing of the government. Regarding the creation of a
friendly environment for a sound development of financial institutions, the central bank has
hardly been effective because it has ever remained weak in monitoring and supervision. The
mushrooming of financial firms–commercial banks, development banks, and finance
companies – is cosmetic rather than of any substance; and their population raises the concern
for efficiency and innovation. The long vacancy in the post of the governor of the central
bank, the NRB, (since the mid-2007 to date, as of 29th November 2007) indicates the state of
stewardship of the financial institutions.
CHAPTER 4
COMMERCIAL BANKING
4.1. Introduction
The modern commercial banking was introduced in 1938 with the establishment of the Nepal
Bank Limited (NBL). The establishment of the Rastriya (national) Banijya (commerce) Bank
(RBB) in 1966 was to promote banking further to semi-urban and rural areas of Nepal. The
participation of foreign banks through joint –ventures begun since 1984 when the Nabil Bank
was created. Then there came Nepal indo-Suez Bank in 1985 and Nepal Standard Chartered
Bank in 1987. The mushrooming of banks did happen since the early 21st century.
At present, there are twenty commercial banks in the country (10 in 1990). A few of them are
international in nature, some foreign ones are less so, and many more of national origin.
Nevertheless, the NBL, RBB, Nabil, Standard Chartered Bank and the Himalayan Bank are
major commercial banks. Since 2006 the Agricultural Development Bank came into this
category and is now termed as the Agricultural Development bank Limited (ADBL).
4.2 Assets' Growth of Commercial Bank

The total assets of all commercial banks increased by 19.14% a year during 1990-2007 (Table
4.1). The growth of assets was high during 1990-95, and then the growth rate declined.
Table 4.1: Nominal Assets of Commercial Banks

Year NRs Millions Annual Growth%
1990 26687.9 -
1995 83795.5 25.71
2000 210894.8 20.27
2007 439735.4 13.03
Table 4.2a: Commercial Banks' Total Deposits and Its Annual Growth Rates
Mid-year of fiscal three years NRs Millions % per year
1990 21,885.0 -
1995 61,045.5 22.77
2000 154,530.3 20.41
2007 334,453.3 11.66
1990-07 17.40
Table 4.2b: Commercial Banks' Total Deposits and Their Annual Growth Rates
Year Demand Savings Time Marginal
deposits
1990-95 22.85 34.26 16.10 18.90
1995-2000 11.07 23.61 21.80 6.62
2000-07 11.20 14.99 8.00 6.41
1990-07 14.47 22.94 14.30 10.01
4.3 Interest Rate Structure
The interest rate structure has a downward trend (Table 4.1). The spread rate, which is 5.9%,
is worth considering.
Table 4.1: Interest Rate Structure

Interest Rate % per annum
1990 2005
Deposit 11.9 2.3
Lending (to prime customers) 14.4 8.1
Real (on lending ) 3.3 3.2
Interest rate spread na 5.9
Risk premium on lending na 5.9
Source: World Development Indicators 2007, The World Bank, 2007
4.4 Deposits
The total deposits of all the commercial banks in nominal terms increased by 17.40% per
annum during 1990-2007 (Table 4.2a), the end years of the fiscal year. The nominal annual
growth rates of the total deposits (demand, savings, time and margin deposits) declined over
the periods. Among the deposits, the annual nominal growth rate during 1990-2007 was
highest in savings deposits and lowest in time deposits. In general all the deposits registered
declining growth rates. The fall in the interest rate of he banks and the emergence of
alternatives, finance companies and financial cooperative could have lowed the growths of
deposits in the commercial banks. Also, the withdrawal of banking services far-off areas due
to the insurgency might have influenced the decline.
4.5 Cash Reserve Ratio

The cash, reserve to total deposits declined from 16.6% in 1990 to 9.2% in 2007. In 2007, the
commercial banks kept 2.2% of total deposits as cash in hand.
4.6 Liquid Assets

The liquid assets in relation to total deposits registered a downward trend as they stood at
42.9% in 1990, 42.1% in 1995, 41.0% in 2000, and 38.0% in April 2007.
4.7 Loans and Advances

The loans and advances as percentage of total deposits stood at 70% in 1990, 76.9 in 1995,
76.4 in 2000, and 83.4 in April 2007.
4.8 Growth of Deposits

The annual nominal growth rate of deposits (demand, savings and time) was 17.67% during
1990-2006. It was high during 1990-95, and then took a downward trend. The same
phenomena was in case of the ADBL, a bank with wider outreach than those of the NBL and
the RBB. But growth pattern, zigzagged in case of the NBL, perhaps, the urban inflow of the
banking deposits due to the safety reason arising from the insurgency.
4.9 Banking Concentration

The NBL was dominant by accounting close to half of all the banking deposits (demand,
savings and time) in 1990, but its share in total deposits declined thereafter. The share of the
ADBL increased somewhat from 8.2% of all deposits in 1990 to 10.1% in 2006.
4.10. Capital Adequacy

The banks are required to maintain capital adequacy (CA) and thus keep the CA ratio, at
least, at 8%. They have enough funds, and searching investment activities as they have
adequate liquidity
4.11 Conclusions
The nominal growth of deposits has been normal as it is in line with the nominal GDP
growth. The interest rate structure has a downward tendency (Table 4.1). The banks have
comfortable liquidity position. The main challenge has been how to pragmatically utilize the
available deposits.
The commercial banks are concentrated in urban areas, and the political environment,
especially the insurgency, has narrowed down to their reach to rural areas. Also, the excess
government intervention, especially in the Nepal Bank, has disturbed their smooth
functioning.
CHAPTER 5
NONBANK FINANCIAL INSTITUTIONS IN NEPAL
5.1 Introduction
Financial development contributes to the economic development of the country. It also plays
a fundamental role in promoting industrialization by mobilizing finances of severs. Financial
development is also contributes to reducing poverty, by access to finances so that the poorer
segment of the society will also benefit. The development of the formal financial institutions
with a good system not only benefits the rich but also the poor. Besides, a sound public
finance system, a stabilized currency is the means to the development of the private financial
institutions within the country. In Nepal, the financial sector represents both banking sector
and nonbanking sector. The banking sector consists of the Nepal Rastra Bank (NRB) the
Central Bank, and all the commercial banks operating within the country and is classified
under ‘A’ category of financial institutions. The nonbanking sector consists of development
banks, finance companies, micro-credit development banks, saving and credit cooperatives;
and nongovernmental organizations (NGOs) performing limited banking activities. Besides,
other financial institutions such as insurance companies, employee’s provident fund, citizen
investment trust, and other financial institutions not licensed by the NRB such as postal
savings bank, microfinance institutions, cooperative societies, community based
organizations (CBOs) and the Nepal Stock Exchange are also included under the category of
the nonbank financial institutions in Nepal. This chapter deals with the Nonbanking Financial
Institutions (NBFIs). The NBFIs are an important subsector for the efficient functioning of
the economy. They broaden the spectrum of risks to investors, encourage investment and
saving. The NBFIs efficiently complement banks by providing services that are not provided
by the former banking sector. They provide competition for banks in the provision of
financial services. Highly developed and properly managed NBFIs can provide a basis for
financing needed for the economic growth and prosperity. The World Bank has classified the
nonbank financial institutions as Investment Institutions, Merchant Banks, Contractual
Savings Institutions (life insurance companies, mutual funds and pension funds), Securities
Market, Specialized Financial Institutions (Leasing Financiers and Real Estate Financiers)
and Financial Cooperatives. However, the Nepal Rastra Bank (NRB) has classified it as
Development Banks, Financial Companies, Microfinance Institutions, NRB licensed
cooperatives and the NGOs. The cooperatives are undertaking banking transactions as well,
whereas the NGOs are undertaking microfinance activities only. Similarly, the Economic
Survey published by the Ministry of Finance of the Government of Nepal also classified the
nonbank financial institutions as the Employees Provident Fund, the Citizens Investment
Trust, insurance Companies and security markets. The definition provided by the World Bank
has been adopted as far as possible.
5.2 Growth of Nonbank Financial Institutions

There has been a sizable increase in financial institutions after the introduction of financial
sector reform or economic liberalization since the mid-eighties. Before 1980 there were only
two commercial banks and two development banks providing banking services to the firms
and individuals. However, the growth of financial sector in terms of the emergence of
financial entities during the last two decades witnessed remarkable progress. The role of
private sector in the financial intermediation and financial market development has become
quite significant over the years. Such achievement has increased the number of financial
institutions and also the beneficiaries of the financial services so that firms and individuals
have better access to the credit market.
Table 5.1: Growth of Nonbank Financial Institutions

Type of nonbank financial institutions Number of institutions
1980 1985 1990 1995 2000 2005 2006 2007*
Development Banks 2 2 2 3 7 26 28 37
Finance Companies - - - 21 45 60 70 73
Micro-credit Development Banks - - - 4 7 11 11 11
Saving and Credit Cooperatives - - - 6 19 20 19 17
NGOs with limited banking activities - - - - 7 47 47 47
Total 2 2 2 34 85 164 175 185
* As per Quarterly Economic Bulletin of Mid April 2007. P. 52
Source: Banking and Financial Statistics No.48. The NRB, Mid-January, 2007.
The total number of NRB licensed NBFIs was 175 in 2006 (Table 5.1). At present, their
number has reached to a total of 185. Out of them, 37 fall under class ‘B’ development banks,
73 under class ‘C’ finance companies, 11 under class ‘D’ microcredit development banks.
Similarly, 17 savings and credit cooperatives and 47 NGOs are in a non-classified category.
There are other nonbank financial institutions operating in Nepal which is not licensed by
NRB but operating under the licenses of Cooperative Department. Total number of such
cooperatives operating in the country was 2,912 in 2006. There are other communitybased
organizations (CBOs) established at the local level which are also meeting financial needs of
the local people in their respective locations.
Table 5.2: Region-wise Distribution of Nonbank Financial Institutions in Nepal

Financial Institutions Development Region
Eastern Central Western Mid- Far- Total
western western
Development Banks 3 (8.57) 18 (51.43) 10(28.57) 3 (8.57) 1 (2.86) 35(100)
Finance Companies 4 (5.56) 58 (80.55) 9 (12.50) 0 (0.00) 1 (1.39) 72(100)
Microfinance Institutions 1 (9.09) 6 (54.55) 2 (18.18) 1 (9.09) 1 (9.09) 11(100)
NRB licensed Cooperatives 2 (10.53) 11 (57.88) 2 (10.53) 2 (10.53) 2 (10.53) 19(100)
(undertaking limited banking
transactions)
NRB licensed NGOs 10 (21.28) 21 (44.68) 8 (17.02) 7 (14.89) 1 (2.13) 47(100)
(undertaking micro-finance
transactions)
Total 20 (10.87) 114 (61.96) 31(16.85) 13 (7.06) 6 (3.26) 184(100)
Note: Figure in parentheses indicate percentage
Source: Research Department Statistics Division NRB, January 2007
Among all the five development regions, most of the banks are concentrated in the central
development region, followed by the western and eastern development regions, whereas the
mid- and far-western development regions have a few of them (Table 5.2). Most finance
companies are in the central development region with a share of 80.55 percent in the total. On
the contrary, there are a few in the mid-western region. Similarly, the NRB licensed
Cooperatives undertaking limited banking transactions are concentrated in the central region.
In case of NRB licensed NGOs undertaking micro finance transactions, their concentration is
highest (44.68 percent) in the central region, followed by 21.28 percent, 17.02 percent, 14.89
percent and 2.13 percent in the eastern, western, mid-western and far-western development
regions respectively.
5.3 Performance of Nonbank Financial Institutions

The performance of the nonbank institutions can be gauged by considering the sources and
use of funds. The components under the sources or the liabilities are Capital Fund (which is
the sum of paid-up capital, general reserve, and other reserve), deposits, borrowings (from
various sources like NRB, Commercial Banks and others) and other liabilities. In the same
manner, the uses of funds (or the assets side) comprises of liquid funds, investment (in
government securities, in shares and others), and loan and advance (loan to government
enterprises and private sectors), and other assets. Therefore, the performance of the nonbank
institutions is evaluated on the basis of aforementioned indicators.
5.3.1 Development Banks
In Nepal, all the banks registered under the Development Bank Act of 1996 are regarded as
development banks. They were established to perform specific types of activities in a
specified region. These banks are responsible to provide loans for the development of
agriculture and industrial sectors, and also the larger scale developmental lending needed to
support agriculture and industrial sector. Therefore, to supplement the lending needs, the five
development banking institutions, which provide microfinance support in the five regions of
Nepal, emerged in the country. They are modeled on the Grameen Bank of Bangladesh and
were established between 1992 and 1996. All of these institutions aim at improving the
socioeconomic status of poor rural women by promoting the formation of self-help groups
and facilitating their access to formal credit.
Table 5.3 Sources and Uses of Fund of Development Bank Groups Nonbank Financial
Institutions
NRs. in millions
First Six Months
Description 2001/02 2002/03 2003/04 2004/05 2005/06 2005/06 2006/07*
Liabilities
Capital Funds+ 2,143.0 3,464.0 2,847.0 3,674.0 3,939.0 3,773.0 3,485.0
Deposits 3,869.0 4,860.0 3,193.0 6,858.0 35,902.0 34,288.0 11,708.0
Borrowing 5,932.0 5,889.0 5,961.0 5,118.0 5,226.0 5,236.0 1,828.0
Other Liabilities 25,898.0 32,797.0 35,900.0 42,166.0 15,129.0 15,089.0 -14.0
Assets=Liabilities 37,842.0 47,010.0 47,901.0 57,816.0 60,196.0 58,386.0 17,007.0
Assets
Liquid Funds 3,629 4,149.0 4,054.0 4,565.0 5,241.0 4,709.0 2,737.0
Investment 2,792 2,379.0 2,312.0 1,991.0 2,117.0 2,020.0 1,412.0
Loans and Advances 27,555 31,027.0 31,905.0 29,894.0 31,224.0 30,214.0 11,287.0
Other Assets 3,866 9,455.0 9,630.0 21,364.0 21,364.0 21,443.0 1,571.0
No. of Banks - 10 14 26 29 28 35
*Provisional
+Profit and Loss Adjusted
Source: Economic Survey 2006-07, Ministry of Finance, July 2007
The total assets and liabilities of all the development banks in the mid-July 2006 was NRs.
60.196 billion, but its assets-liabilities declined to NRs. 17.00 billion in the mid-January
2007. The reason behind such a substantial drop off is not because of their bad performance
but rather due to ADB/N being upgraded to commercial bank and its transaction excluded
from development bank from mid-January 2007. Considering the various components under
the liabilities, the share of deposit accounted to 68.84 percent followed by capital fund and
borrowing as 20.49 percent and 10.74 percent respectively. Looking at the assets side, the
share of loan and advances amounted to 66.37 percent, liquid funds 16.09 percent, and
investment to 8.30 percent. The growth of capital funds determines the strength of
institutions. However, its growth trend is not much encouraging which will also reflect in the
growth trend of total loans and advances in the assets side. The deposit liabilities also grew in
a slow pace. This could be the reason to lower down the interest rate in running deposits.
5.3.2 Finance Companies
The history of the finance companies began with the establishment of the Nepal Housing
Development Finance Company Limited in 1992. In addition to the private banks, there are
73 private finance companies operating in Nepal. These institutions have all commenced
operations over the past six years since the Finance Company Act was promulgated. The Act
permits these companies to offer installment credit for the purchase of vehicles, equipment, or
durable household goods, for purchase or construction of residential buildings, for leasing
financing, and for operating industrial, commercial or other enterprises. Majority of the
finance companies have their corporate offices in the Kathmandu Valley, and a very few are
operating outside the Valley. The feature of assets and liabilities of the finance companies
shows a different picture (Table 5.4). Their total assets/liabilities have been increasing every
year from NRs. 13.05 billion in the year 2000 to Rs. 44.99 billion in mid-January 2007. In
their liabilities side, total deposits occupy major percentage of share 70.22 percent, other
liabilities 13.11 percent, capital fund 11.43 percent and the borrowing 5.24 percent in the first
six-months of the fiscal year 2007.
Table 5.4: Sources and Uses of Fund of Financial Companies

NRs. in million
First Six Months
Description 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2005/06 2006/07*
Liabilities
Capital Funds+ 1,733.0 2,263.0 2,929.0 3,683.0 4,111.0 5,159.0 4,887.0 4,046.0 5,141.0
Deposits 9,749.0 11,654.0 13,454.0 16,510.0 19,474.0 22,341.0 27,316.0 24,340.0 31,596.0
Borrowing 176.0 215.0 245.0 134.0 1,313.0 991.0 1,155.0 1,312.0 2,360.0
Other Liabilities 1,392.0 1,665.0 1,825.0 1,789.0 2,363.0 1,945.0 5,496.0 4,175.0 5,900.0
Assets=Liabilities 13,050.0 15,797.0 18,453.0 22,116.0 27,261.0 30,436.0 38,854.0 33,873.0 44,997.0
Assets
Liquid Funds 1,729.0 2,049.0 2,862.0 2,674.0 5,049.0 3,905.0 5,387.0 3,910.0 5,527.0
Investment 1,129.0 1,268.0 1,624.0 2,392.0 1,865.0 2,411.0 2,784.0 2,698.0 3,540.0
Loans and 9,063.0 27,079.0
Advances 10,865.0 11,950.0 14,474.0 17,834.0 21,223.0 23,848.0 31,154.0
Other Assets 1,129.0 1,615.0 2,017.0 2,576.0 2,513.0 2,897.0 3,604.0 3,417.0 4,776.0
*Provisional
Source: Nepal Rastra Bank
In the assets side, during the same period, the maximum percentage of share is occupied by
loans and advances (69.24 percent), followed by liquid funds (12.28 percent), other assets
(10.61 percent), while the investment occupied 7.87 percent only.
5.3.3 Microcredit Development Banks
There is abundance of organizations involved in microfinance in Nepal -formal and informal

-mainly cooperatives and NGOs. Credit cooperatives first emerged in 1956 and were
registered under the Cooperative Act in 1959. With a view to limiting political intervention
and to institutionalizing cooperatives, a new Cooperative Act was enacted in 1992. This Act
specified that a minimum of 25 persons were required to form a primary cooperative.
Although around 5,000 credit and multipurpose cooperatives have been registered under the
new Act, only 35 have obtained permission from the Nepal Rastra Bank to undertake limited
banking functions. The nongovernmental organizations are also permitted to provide limited
banking services in Nepal. To date, thirty NGOs have been licensed to conduct a limited
banking business, of which two -Nirdhan and CSD -are Grameen replicator banks. NGOs are
registered under the Societies Registration Act. As with the cooperative societies, there is
little supervision and oversight of these institutions by the central bank. On the other hand,
however, some of them, such as the two privately owned Grameen replicator banks, appear to
be performing well. Among 11 NRB licensed microfinance companies operating in Nepal
one is functioning as Rural Micro Credit Development Centre and another is Small Farmers
Development Banks Limited. Both of them are responsible for providing wholesale credits.
The remaining 9 institutions under this category are directly providing micro credit to the
people.
The total assets and liabilities of these banks was NRs. 7.12 billion in the first six-months of
fiscal year 2005/2006 which increased to NRs. 9.42 billion in the fiscal year 2006/2007
(Table 5.5). The amount of liabilities increased to 24.42 percent as of the previous year. The
deposit of these banks increased to NRs. 994 million, borrowing to NRs. 6.15 billion, and the
capital funds to NRs. 1.05 billion. During the same period their liquid assets increased to
NRs. 1.59 billion, investment to NRs. 1.91 billion and the loans and advances to NRs. 4.95
billion.
Table 5.5: Sources and Uses of Fund of Microfinance Development Banks

NRs. in million
First Six Months
Description 2001/02 2002/03 2003/04 2004/05 2005/06 2005/06 2006/07*
Liabilities
Capital Funds+ 448.00 515.00 541.00 828.00 949.00 900.00 1,057.00
Deposits 415.00 625.00 700.00 749.00 932.00 818.00 994.00
Borrowing 1,517.00 2,391.00 2,833.00 3,402.00 5,325.00 4,620.00 6,154.00
Other Liabilities 462.00 723.00 890.00 1,318.00 989.00 789.00 1,217.00
Assets=Liabilities 2,842.00 4,254.00 4,964.00 6,297.00 8,195.00 7,127.00 9,422.00
Assets
Liquid Funds 531.00 441.00 621.00 648.00 1,321.00 1,127.00 1,591.00
Investment 663.00 1,048.00 1,231.00 1,516.00 1,672.00 1,680.00 1,908.00
Loans and Advances 1,484.00 2,427.00 2,822.00 3,538.00 4,302.00 3,898.00 4,954.00
Other Assets 164.00 338.00 290.00 595.00 900.00 422.00 969.00
*Provisional
Source: Nepal Rastriya Bank
5.3.4 Saving and Credit Cooperatives
The total financial strength of financial cooperatives licensed by the NRB to operate limited
banking services recorded a little more than NRs. 3.18 billion in 2006/2007(Table 5.6). The
components under the total liabilities of these cooperatives show increasing trends. Total
deposits increased to NRs. 2.28 billion, borrowings to NRs. 56 million, and the capital funds
to NRs.402 million. Under the assets side, loans and advances occupied maximum share
amounting to NRs. 1.88 billion, investment NRs. 186 million and liquid funds NRs. 486
million.
Table 5.6: Sources and Uses of Fund of Financial Cooperatives

NRs. in million
Description 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 First Six Months
Liabilities 2005/06 2006/07*
Capital Funds 161.0 212.0 252.0 265.0 205.0 262.0 325.0 350.0 402.0
+
Deposits 1,073.0 1,425.0 1,571.0 1,924.0 1,667.0 1,769.0 2,012.0 1,831.0 2,286.0
Borrowing 62.0 67.0 59.0 66.0 41.0 46.0 71.0 64.0 56.0
Other 164.0 330.0 413.0 395.0 428.0 385.0 470.0 388.0 444.0
Liabilities
Assets = 1,460.0 2,034.0 2,295.0 2,650.0 2,341.0 2,462.0 2,878.0 2,633.0 3,188.0
Liabilities
Assets
Liquid Funds 265.0 354.0 449.0 389.0 413.0 449.0 493.0 418.0 486.0
Investment 138.0 181.0 189.0 252.0 182.0 142.0 162.0 156.0 186.0
Loans and 875.0 1,221.0 1,313.0 1,463.0 1,298.0 1,441.0 1,665.0 1,609.0 1,882.0
Advances
Other Assets 182.0 278.0 344.0 546.0 448.0 430.0 558.0 550.0 634.0
* Provisional
+ Profit and Loss adjusted
5.3.5 Insurance Companies
All the insurance business in Nepal is regulated by the Nepal Insurance Board. It invests in
National Saving Certificate and Government Bonds, fixed deposits, shares and loans to
insurance policyholders. Altogether, inclusive of both life and non-life insurance, till the end
of the fiscal year 2005/06 there are 21 insurance companies operating in Nepal. Of the total,
there are 4 life, 16 non-life, and 1 both life and non-life insurance companies in operation in
the country. Regarding the ownership structure of insurance companies, most, 13 out of 21,
are owned by the private sector, 4 are under the joint venture, 3 are owned by the foreign
investors, and the remaining 1 is under the government ownership. The amount of premium
collected by all the insurance companies amounted to NRs. 7.1 billion in mid-July 2007. Of
this, the life insurance accounted for 50 percent of the total and the remaining 50 percent by
the non-life insurance (car insurance, fire, etc). The investment made by the insurance
companies was NRs. 15.58 billion in 2005/2006, and NRs. 18.23 billion in the fiscal year
2006/2007.
Table 5.7: Premium and Investment of Insurance Companies
NRs. in millions
Description 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06# 2006/07*
Premium
Life Insurance 559.0 1,363.0 1,726.0 2,180.0 2,850.0 3,210.0 3,560.0
Non-Life Insurance 1,597.0 2,150.0 2,315.0 2,567.0 3,000.0 3,110.0 3,560.0
Total 2,156.0 3,513.0 4,041.0 4,747.0 5,850.0 6,320.0 7,120.0
Investment
Life Insurance 5,595.0 7,189.0 7,963.0 9,779.0 12,000.0 12,313.0 14,163.0
Non-Life Insurance 2,422.0 2,865.0 2,456.0 2,676.0 3,000.0 3,271.0 4,072.0
Total 8,017.0 10,054.0 10,419.0 12,455.0 15,000.0 15,584.0 18,235.0
* Projected
# Provisional
5.3.6 Money Changers (Foreign Exchange Bureaus)
Altogether there are 324 NRB licensed money-changers operating in Nepal at present. Of
them, 138 are operating at the Kathmandu Valley, and the remaining 186 are operating in
major cities outside the Valley. These exchanges are providing their services to the non-
Nepali citizens in particular. At the end of every fiscal year, it is mandatory to submit an
annual transaction report to the NRB by all the money-changers.
5.3.7 Postal Savings Banks
The Postal Savings Bank (PSB) was established in 1975 with a view to nurture saving habits
of the people residing in villages. In the initial few years of their establishment, these banks
were successful to attract small savers, to some extent. Later on, the PSBs were not able to
expand their service activities and failed to attract the small rural savers at the anticipated
level. At present, 117 PSBs are operating and the amount of money the Postal Services
Department has collected reached NRs. 623.76 million in mid-May 2007, and there were
29,530 saving accounts in operation. Besides, it has also extended the total loan of NRs.
476.71 million through its 52 loan operating offices. Till now it has collected, as a form of
savings deposits, NRs. 395.2 million, and the total loan investment was NRs.278.3 million.
As compared to other nonbank financial institutions its contribution seems to be limited.
5.3.8 Employees Provident Fund
This is an autonomous body functioning under the Employees Provident Fund Act, 1962. It
mobilizes the savings collected from employees. Total contributions and earnings under this
scheme are completely tax-free. Upon the completion of the service the contributors or their
nominees get all accumulated principal amounts plus the interests earned. The Fund’s total
loan disbursement was NRs 2.5 billion in the fiscal year 2000/2001, whereas its disbursement
increased to NRs. 3.12 billion in the fiscal year 2006/2007 (Table 5.8). At present, most of its
assets are invested in state-owned banks and the government bonds. The remainder is given
out as loans including syndicated bank loans, with maturities of up to eight years, and
member loans.
Table 5.8: Distribution of Loans by Employee Provident Fund
NRs. in millions
Description 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 First Eight Months
2005/06 2006/07*
Employees'
Provident Fund
Loan Disbursement 2,524.9 3,616.4 5,455.1 4,775.0 7,212.0 5,562.7 2,957.4 3,127.6
Realization 585.9 564.4 899.7 1,569.1 1,693.0 2,129.0 1,268.3 2,164.7
Loan Disbursement, 1,939.0 3,052.0 4,555.4 3,205.9 5,519.0 3,433.7 1,689.0 962.5
Net
Outstanding loan 6,518.0 9,570.3 14,125.4 17,321.9 22,841.0 26,806.4 25,061.7 27,768.9
* Estimate
Note: 1. Including capitalized interest of loan details of FY 2062/63 of Employee Provident Fund
2. Without capatilized interest of loan details of mid-March of Employee Provident fund.
Source: Employees' Provident Fund.
5.3.9 Citizens Investment Trust (Mutual Fund)
The Citizens Investment Trust was established under the Citizens Investment Trust Act, 1990.
It encourages general public to save some percentage of their income. It collects funds by
operating various schemes like Employees Savings and Growth Schemes, Citizen Unit
Scheme, Gratuity Fund Scheme and Investor's Account scheme. Trust invests in corporate
securities, government bonds, term loans, and borrowings. The total financial assets of CIT
continued to increase from NRs. 1.13 billion in the fiscal year 2000/2001 to NRs. 8.42 billion
in 2006/2007 (Table 5.9). Its total assets increased substantially during the recent seven years
period. The basic reason behind such increment is due to increase in both deposit collection
and investment. The deposit collection has occupied major percentage of share of the total
assets/liabilities. Similarly, in the assets side, investment occupied the maximum percentage
share. The figure of loans and advances had diminished in the fiscal year 2003/04 compared
to previous year’s figure.
Table 5.9: Sources and Uses of Fund of Citizens Investment Trust

Rs. in million
Description 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06# 2006/07*
Liabilities
Capital Funds + 49.0 54.0 61.0 81.0 86.0 115.0 115.0
Deposits 987.0 1,429.0 2,750.0 4,039.0 5,269.0 6,716.0 7,710.0
Borrowing 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other Liabilities 95.0 223.0 215.0 693.0 477.0 417.0 600.0
Assets = Liabilities 1,131.0 1,706.0 3,026.0 4,813.0 5,832.0 7,248.0 8,425.0
Assets
Liquid Funds 47.0 121.0 418.0 1,166.0 692.0 864.0 1,330.0
Investment 752.0 1,126.0 1,858.0 2,866.0 3,616.0 5,136.0 5,510.0
Loans and Advances 187.0 323.0 514.0 488.0 1,014.0 734.0 990.0
Other Assets 145.0 136.0 236.0 292.0 510.0 514.0 595.0
# Provisional
* Projected
5.3.10 Real Estate
Procuring and selling land by a company is called real estate business. To transfer the real
estate’s property to the intended buyers many additional legal provisions may be acquired,
owned, and conveyed (or transferred) by individuals; business corporations; charitable,
religious, educational, fraternal, and various other nonprofit corporations; fiduciaries, such as
trustees and executors; partnerships; and generally by any legal entity as determined and
defined by the laws. But in Nepal, such a business has not yet institutionalized. Local level
brokers are much more active in doing such types of business for their livelihoods. However,
they are not very significant in number.
5.3.11 The Condominium
Condominium ownership, which was introduced in the U.S. in 1961, and has since been
widely adopted, implies separate ownership of individual apartments or units in a multiunit
building. The purchaser of a condominium becomes the owner of a particular unit and of a
proportionate share in the common elements and facilities. The unit may be separately
mortgaged. In the sale of a unit, the seller executes and delivers to the buyer a deed
conveying all right, title, and interest in and to the entire condominium as well as the
particular unit. But such a system has not yet developed in Nepal. Couple of years ago some
businessmen invested their money in building apartment houses, and therefore, opened it to
the individuals to invest money to secure apartments. Later on, few apartment buildings were
constructed in Kathmandu, but due to the lack of separate condominium laws the people are
still facing the problem of getting legal papers.
5.4 Issues and Challenges

In Nepal, nonbank financial institutions have made significant progress in terms of their
number and services. However, it needs to address the following issues and challenges.
• Nonbank financial institutions are mostly concentrated in the urban areas especially in
the Kathmandu Valley. Their financial transactions are thus urban biased. Then the
task of outreaching rural areas by the financial institutions appears as a big challenge
in the Nepalese financial system.
• Employees working in nonbank financial institutions lack technical skills to use of
modern technologies. The technical support in designing new human resource policy
is thus imperative.
• The NRB lacks effective supervision to make nonbank financial institutions
sustainable.
• The paid-up capital base for the development banks has been raised. However, the
capital requirement for opening new financial institutions has not changed till now.
• To minimize risk, an adequate level of capital reserve is essential. It is necessary to
maintain, at least, 11 percent capital adequacy in all financial institutions. Such a
reserve is not fully maintained by most of the institutions in Nepal.
• Financial institutions hardly address the urgent needs of service-seekers to expand
their financial services. Due to the lack of up-to-date financial policies in the country,
most of the financial institutions are reluctant to expand the domain of their services.
• The nonbank financial system lacks adequate provision of buying and selling active
loan between one financial institution and another for the purpose of intensifying the
financial transactions.
• The nonbank financial system in Nepal lacks strong legal and information systems.
CHAPTER 6
NEPAL STOCK EXCHANGE
6.1 Introduction
Securities enable to raise funds to meet the financial requirements of a company. Most of the
companies require huge amount of money to meet their financial requirements. Therefore,
securities like equity shares, preference shares, and debentures are crucial for meeting the
company’s monetary requirements. A sound and well developed security market can easily
help meet their financial requirements. A security market consists of activities in organizing,
distributing and trading in securities. A security market includes stock exchange as well. A
stock exchange is the organized market for buying and selling of the financial instruments,
such as stocks, options, and futures. Stock exchanges serve important roles in national
economies. They encourage investment by providing places for buyers and sellers to trade
securities, stocks, bonds, and other financial instruments. Companies issue stocks and bonds
to obtain capital to expand their businesses. Most stock exchanges have specific locations
where intermediaries called brokers conduct buying and selling of shares and debentures.
Stocks are shares of ownership in a company. People who buy a company’s stock are entitled
to dividends, or shares of any profit. A company can list its stock on only one major stock
exchange, though options on its stock may be traded on another. Each exchange establishes
requirements that a company must meet to have its stock listed. The different exchanges tend
to attract different kinds of companies. Smaller exchanges typically trade the stock of small,
emerging businesses, such as high-tech companies. Corporations issue new securities in the
primary market (as opposed to the secondary market, where securities are bought and sold),
usually with the help of investment bankers. In the primary market, corporations receive the
proceeds of stock sales. Thereafter, they are not involved in the trading of stocks. Owners of
stocks trade them on a stock exchange in the secondary market. In the secondary market,
investors, not companies, earn the profits or bear the losses resulting from their trades. Stock
exchanges encourage investment by providing this secondary market. By allowing investors
to sell securities, exchanges increase the safety of investing. Stock exchanges also encourage
investment in other ways. They protect investors by upholding rules and regulations that
ensure buyers will be treated fairly and receive exactly what they pay for. Exchanges also
support the state-of-the-art technology and the business of brokering, both which help traders
to buy and sell securities quickly and efficiently. Stock brokers must be registered with the
exchange in which they trade. Most brokers belong to brokerage firms. Brokerage firms
maintain staffs of many brokers, each of whom have experience in the trading of securities of
certain companies or those of particular economic sectors, high tech, utilities, or
transportation businesses, for instance. Brokerage firms also tend to trade in the stocks of
specific companies, and, therefore, keep inventories of the stocks of those companies. To
become a member of an exchange, a firm must register its brokers by buying seats for them.
A seat is simply a right to trade on an exchange. Member firms have the right to vote on
exchange policy and must also arbitrate in disputes among customers. In larger exchanges,
seats could sell for several hundreds of thousands of rupees. Exchanges attract larger or
smaller brokerage firms depending on how high or low their fees are. Brokerage firms
that pay high membership fees to exchanges like the New York Stock Exchange (NYSE)
have the opportunity to make large profits trading in the stock of very successful businesses.
They also risk losing large amounts, and, therefore, charge their clients higher prices than do
smaller firms. To some extent large companies use large brokerage firms and list on large
exchanges because of the potential losses possible to those trading on securities.
6.2 International Financial Centre

International Financial Centre (IFC) designates a city as a most important participant in
international financial markets for the trading of cross-border assets. There are three
international financial centres they are (i) London Stock Exchange of London, which is the
world’s largest small-cap exchange and Lloyds of London insurance market; (ii) New York
Stock Exchange (NYSE) is considered as the world’s biggest exchange in terms of
capitalization. Similarly, the NASDAQ is another financial market of USA, and (iii) the Hong
Kong is the biggest exchange in Asia. Besides, other exchanges are also considered as
important financial markets like Chicago Board of Trade, Eurex and Chicago Mercantile
Exchange which are the home of the leading derivatives market. Frankfort Stock Exchange is
the Europe’s second largest exchanges and also XETRA of Europe. Other cities referred as
highly potential future markets are: (i) Brussels (home of Euroclear), (ii) Dubai, (iii)
Johannesburg, (iv), Singapore (v) Tokyo, and (vi) Zurich. These are the notable exchanges of
the world.
World’s Emerging Markets:
It is indeed very difficult to trace out the exact inventory of world’s emerging markets. But
the best source available is the latest findings of the Grant Thornton, International Business
Report published in April 19, 2007. The report has identified Mexico, Indonesia, Pakistan and
Turkey are the emerging market to watch. The study has identified them as a next generation
potential countries which can put significant impact on the world economy. But Mexico had
already demonstrated as an important economy. The same study suggests that the BRIC
(Brazil, Russia, India and China) are expected to join as a global economic power. Indonesia
and Pakistan have the potential of reducing the cost of production by using labor intensive
technique. However, China has already exploited such an opportunity. Furthermore, the stock
exchanges of China, India and Pakistan are emerging markets and those of Bangladesh and
Nepal are just emerging ones. Also, Sri Lanka has an evolving a stock exchange market.
6.3 Securities Market in Nepal

In Nepal the history of security market did start by issuing the shares to the public in the year
1937. Two companies, namely the Biratnagar Jute Mills and the Nepal Bank Limited, issued
their shares to the public. These two companies were considered as the pioneer of issuing the
security to the general public. Since then for almost four decades, there were no formal
institutions that came into existence to look after the security issues in the country. In the year
1976 the Security Marketing Centre (SMC) was established with a view to develop security
market in Nepal. In the initial period the SMC started trading of securities. The SMC changed
its name into the Security Exchange Centre in 1984, that was the only institution responsible
for managing and operating primary and secondary markets. It acted as a sole agent of
operating primary and secondary markets for long-term government and corporate securities.
Later individuals began to think of having a separate body for regulating security markets in
Nepal. The first amendment of the Security Exchange Act 1983 in the year 1993 lay concrete
on restructuring the security markets in Nepal. Consequently, the Security Board of Nepal
(SEBON) was established on 7th of June 1993 as an apex institution of regulating securities
market in the country. The main mandated objectives of the Board was to regulate issue and
trading of securities and market intermediaries, promote the market and protect investor’s
rights. The former Securities Exchange Centre (SEC) was converted into the Nepal Stock
Exchange Ltd. (NEPSE) with the objective of operating and managing secondary transactions
of securities. Following this conversion, the open out cry system of securities trading among
the stock brokers commenced. Since then all the intended investors can deal in security only
through licensed brokers. The second amendment of the Security Exchange Act of 1993 in
1997 made several provisions that were: to register all the securities business persons in
SEBON, to issue licenses to the stockbroker, securities dealer, market-maker and issue-
manager, and also submit their semi-annual as well as annual reports.
6.3.1 Securities Issue
In the fiscal year 2005/2006 altogether 18 companies issued their securities to the public.
Among them 5 are commercial banks, 4 development banks, 7 finance companies, 1
insurance company and 1 hydro-power company. The total amount of money issued to the
public in various forms was NRs. 1,429.83 millions (Table 6.1). Out of this, the amount
issued as ordinary share was NRs. 579.83 millions whereas the debenture issue was NRs. 850
millions.
Table 6.1: Companies by Types of Securities and Issue Amounts

NRs. In Millions
S.N Name of the Company Types of Securities Issued Amount
1 Chilime Hydropower Co.Ltd Ordinary Share (for staff) 237.41

2 Prudencial Bittya Sanstha Ltd. Ordinary Share 24.50
3 Siddhartha Bank Ltd. Ordinary Share 150.00
4 Bank of Kathmandu Ltd. Debenture 200.00
5 Srijana Finance Ltd. Ordinary Share 4.00
6 Gandaki Development Financial Institution Ltd. Ordinary Share 15.00
7 Business Development Financial Institution Ltd. Ordinary Share 12.00
8 Royal Merchant Bank Banking & Financial Ltd. Ordinary Share 17.50
9 Bhajuratna Financial and Saving Co. Ltd. Ordinary Share 10.50
10 Guheshori Merchant Banking and Finance Ltd. Ordinary Share 20.00
11 Siddartha Bikash Bank Ltd. Ordinary Share 20.00
12 IMF Financial Institution Ltd. Ordinary Share 17.50
13 Shikhar Insurance Co. Ltd. Ordinary Share 25.00
14 Brikuti Bikash Bank Ltd. Ordinary Share 6.42
15 Nepal Investment Bank Ltd. Debenture 250.00
16 Nepal Industrial and Commercial Bank Ltd. Debenture 200.00
17 Patan Finance Ltd. Ordinary Share 20.00
18 Nepal SBI Bank Ltd. Debenture 200.00
Total 1,429.83
Source: Securities Board of Nepal, 2006.
The Chilime Hydropower Company Limited is on the top in terms of issuing the ordinary
shares (NRs. 237.41 millions), but its share was issued only to its staff members, and the
second position is occupied by the Siddhartha Bank Limited (NRs.150 millions), whereas the
other companies in terms of issuing the ordinary shares seem to be less as compared to
aforementioned two companies. Similarly, in case of issuing the debenture, the Nepal
Investment Bank Limited appears number one position (NRs. 250 millions) followed by three
banks, namely the Bank of Kathmandu Limited, Nepal Industrial and Commercial Bank
Limited and Nepal SBI Bank Limited. The amount of money issued is NRs. 200 millions
each. The Srijana Finance Limited is the lowest among the ordinary share issuers.
6.3.2 Rights Issue
In the fiscal year 2005/2006, altogether 11 companies, consisting of 2 commercial banks, 1

development bank, 7 finance companies and 1 hotel, issued rights shares amounting to NRs.
1013.45 millions(Table: 6.2).
Table: 2 Rights Shares Issue by Company, Issue Amounts and Ratios

NRs. In millions
S.N Name of the Company Issued Amount Ratio
1 Development Credit Bank Ltd. 80.00 2:1
2 Kumari Bank Ltd. 125.00 4:1
3 Fewa Finance Co. Ltd. 30.00 1:1.5
4 Om Finance Co. Ltd. 30.00 1:1.5
5 Goodwill Finance Co. Ltd. 25.00 1:1
6 Janaki Finance Co. Ltd. 10.00 2:1
7 Central Finance Ltd. 12.00 2:1
8 Taragoan Regency Hotels Ltd. 446.45 5:3
9 Macchapucchhre Banke Ltd. 165.00 10:3
10 Kist Merchant Banking and Finance Ltd. 50.00 1:1
11 Nepal Share Markets and Finance Ltd. 40.00 3:1
Total 1,013.45
Source: Securities Board of Nepal, 2006
In general, the company issues rights share to its existing shareholders in order to raise the
capital. This indicates either the bank is operating without sufficient amount of liquid capital
or it needs capital to expand and diversify its activities in the future. Therefore the issuing the
rights issue shares is not a very good indicator to judge its performance.
6.3.3 Listing of Securities
In 13th January 1994, the Nepal Stock Exchange Limited (NEPSE) opened its trading floor.
At that time altogether there were 66 listed companies and 25 share brokers. By the end of
the fiscal year 2005/2006, the total number of listed companies reached 135 in NESPE even
after the delisting of more than three dozens companies, but the number of stock brokers went
down to 23. In general, the total number of brokers should have increased considering the
volume of transactions. The increasing number of brokers will definitely increase healthy
competition in the secondary markets. If the number of brokers is not increased, then the
chances of practicing unhealthy competition in the stock market will be higher.
Consequently; the small investors who are willing to invest in the security market will find no
scope to come into the markets.
Table 6.3: Sectorwise Listing of Company by Paid-up Value and Turnover
S.N Sector Number of % Paid up % Trading %

Listed Company value Amount
(NRs. in (NRs. in
million) million)
1 Commercial Bank 15 11.11 8,522.73 42.60 2,696.28 78.12
2 Development Bank 8 5.93 816.91 4.08 82.76 2.40
3 Finance Company 50 37.04 2,564.81 12.82 305.85 8.86
4 Insurance Company 15 11.11 1,256.70 6.28 129.90 3.76
5 Hotel 4 2.96 1,552.88 7.76 19.77 0.57
6 Manufacturing & 29 21.48 2,756.96 13.78 17.19 0.50
Processing Company
7 Trading Company 8 5.93 76.64 0.38 15.80 0.46
8 Other Company 6 4.44 2,460.92 12.30 183.88 5.33
Total 135 100.00 20,008.55 100.00 3,451.43 100.00
In general, the large stock market size denotes the development of a stock market. The size of
the stock market enlarges with the increase in the number of listed companies. In Nepal the
number of listed companies with the NEPSE during the year 2005/2006 is 135 (Table 6.3).
The paid-up value of all the listed companies is NRs. 20008.55 millions. Most of the
companies listed in NEPSE belong to banking, finance and insurance sector. By adding first
four sectors there are a total of 88 listed companies among the 135. In terms of percentage
their aggregate percentage comes to 65.19 %. In the same manner, their paid-up value is NRs.
13161.15 millions, and the cumulative percentage is 65.78 %. Their turnover status shows
NRs. 3214.79 millions, and the cumulative percentage is 93.14 %. Thus it is quite clear from
the above data that the commercial banking sectors are considered as best performer,
followed by finance companies in the Nepalese capital market. The reason behind such a
development is due to the fact that the government changed its restrictive policy and opened
up from closed financial sector to private sector and foreign participation in the establishment
of banks. The economic liberalization policy of the government led to the emergence of more
financial institutions in the country.
6.3.4 Market Capitalization
Another important security market indicator for measuring the performance of a stock market
is market capitalization. To know the relative importance of stock market to the national
economy the market capitalization ratio is calculated. The market capitalization ratio is
calculated by dividing aggregate market value of the listed shares by Gross Domestic Product
(GDP). The market capitalization ratio shows maximum of 0.19 and minimum of 0.04 on an
average around 0.08 during the entire period (Table 6.4). Generally, in the developed
countries with highly developed stock market the ratio is always one or more than one.
However, in developing countries the ratio remains in between 0.2 to 0.4. Out of the seven
countries, (China 0.33, India 0.92, Japan 0.96, Malaysia 1.81, South Korea 0.94, Thailand
0.73 and USA 1.38) India’s market capitalization ratio at the end of 2006 is 0.92. Therefore,
India’s market capitalization ratio compares well with other emerging economies and shows
signs of catching up with some of the mature economies (Economic Survey: India
2006/2007). Thus, considering the very low market capitalization ratio for Nepal, the stock
market still has not played a significant role in terms of putting impact on the economic
activities of the country.
Table 6.4: Market Capitalization and Number of Companies Listed with NEPSE
(NRs. In Million)
Fiscal Market Gross Domestic Market No. of Paid up Value of
year Capitalization Product at Capitalization Companies Listed Securities
Producers Price Ratio Listed
1993/94 13,872.00 213,925.90 0.06 66 2,182.2
1994/95 12,963.00 235,292.51 0.06 79 2,961.8
1995/96 12,295.00 267,217.36 0.05 89 3,358.5
1996/97 12,698.00 301,141.13 0.04 95 4,476.5
1997/98 14,289.00 322,968.29 0.04 101 4,959.8
1998/99 23,508.00 367,188.36 0.06 107 6,487.4
1999/00 43,123.33 407,394.47 0.11 110 7,347.4
2000/01 40,063.33 441,519.00 0.09 115 8,165.2
2001/02 34,704.00 442,048.30 0.08 96 9,685.0
2002/03 35,240.39 459,488.40 0.08 108 12,560.1
2003/04 41,424.77 481,003.30 0.09 114 13,404.9
2004/05 61,365.89 496,026.00 0.12 125 16,771.8
2005/06 96,813.74 509,911.30 0.19 135 20,008.6
According to the number of transactions the National Stock Exchange (NSE) of India
continued to occupy the third position among the world’s biggest exchanges in the year 2006,
as in the previous three years. Again the Bombay Stock Exchange (BSE) of India occupied
the sixth position in the year 2006, slipping one position down from 2005. (Table: 6.5)
Table 6.5 Biggest Exchanges by Number of Transactions

Rank by number of transactions
during calendar year (2006)
Exchanges 2003 2004 2005 2006
NASDAQ 1 1 2 1
NYSE 2 2 1 2
NSE 3 3 3 3
Shanghai 4 4 6 4
Korea 7 6 4 5
BSE 5 5 5 6
Shexzhen 8 8 7 7
Taiwan 6 7 8 8
Deutsche Borse 9 9 9 9
London/euronet 11 10 10 10
Source: National Stock Exchange (NSE): Economic Survey: India (2006/2007)
6.3.5 Liquidity
Liquidity is also considered as one for the indicators of judging the performance of a stock
market. It makes the financial assets less risky. Liquidity is judge by considering the total
value of shares traded in the stock market as a percentage of GDP. Even though this indicator
does not measure the cost of trading of shares whereas, it does indicate the extent of easiness
in trading in a stock market. There are abundant evidences which support of growing stock
markets in the countries. The countries with relatively liquid stock markets can grow faster
than the countries with illiquid stock market. There is, however, low ratios of the value of
shares traded to GDP in Nepal. This ratio has a fluctuating tendency, and has declined in the
fiscal year 2005/06 over the fiscal year 2004/05.
Table: 6 Measures of Market Liquidity of NEPSE
(NRs. In Million)
Fiscal Value of Share Gross Domestic Value of Share Market Value of Share
year Traded(Annual Product at Traded to GDP Capitalization Traded to Market
Turnover) Producers Capitalization
Prices
1993/94 441.60 213,925.90 0.0021 13,872.00 0.0318
1994/95 1,054.30 235,292.51 0.0045 12,963.00 0.0813
1995/96 215.60 267,217.36 0.0008 12,295.00 0.0175
1996/97 416.20 301,141.13 0.0014 12,698.00 0.0328
1997/98 202.60 322,968.29 0.0006 14,289.00 0.0142
1998/99 1,500.00 367,188.36 0.0041 23,508.00 0.0638
1999/00 1,157.00 407,394.47 0.0028 43,123.33 0.0268
2000/01 2,344.20 441,519.00 0.0053 40,063.33 0.0585
2001/02 1,540.60 442,048.30 0.0035 34,704.00 0.0444
2002/03 575.80 459,488.40 0.0013 35,240.39 0.0163
2003/04 2,144.30 481,003.30 0.0045 41,424.77 0.0518
2004/05 4,507.70 496,026.00 0.0091 61,365.89 0.0735
2005/06 4,351.40 509,911.30 0.0085 96,813.74 0.0449
Source: Securities Board of Nepal, Annual Report, 2005/2006
The countries where the stock market figure is as high as 0.4 means they are developed in
stock market but in many developing countries the value of shares traded to GDP vary in the
range of 0.001 to 0.01 which means they are underdeveloped. The value is always below
0.0085, expect in the recent two years. During the period, between the fiscal year 1993/94 to
2005/06, the average value of shares traded to GDP accounted for a maximum of 0.0091 in
fiscal year 2004/05, and a minimum of 0.0013 in the fiscal year 2002/03. On average, the
value of share traded to GDP shows 0.0037 only. Similarly, another important measure of
share market liquidity is the value of shares traded to market capitalization. The higher value
indicates low transactions cost for buying and selling of shares. In many developing
countries, this ratio appears within the range from 0.15 to 0.30. However, in case of Nepal,
the ratios remained very low in comparison to the above norms. Thus, it has been quite clear
that the stock market in Nepal is small relative to its economy and is highly illiquid.
The 2007 World Development Indicators of the World Bank indicates the data of some South
Asian and South East Asian countries on market capitalization, market liquidity, turnover
ratio and the total number of listed domestic companies along with S&P/EMDB for the year
2000 and 2006. In all indicators Nepal is in the last position, except in market capitalization
as percentage of GDP, and Bangladesh come out in the last position. Comparing the data of
Table: 6.7 with the available data from the Securities Board of Nepal (published in January
2007 by Nepal Rastra Bank in its Quarterly Economic Bulletin) shows different pictures. The
data published by three different authorities however, does not tally. Thus, some discrepancy
in data has been clearly observed.
Table 6.7: Measures of Market Liquidity, Turnover Ratio and Market Capitalization of
Listed Domestic Companies
Country Market Market Market Turnover Listed S&P/EMDB
Capitalization Capitalization Liquidity: Ratio: value Domestic Indexes, %
($ millions) as % of GDP value traded shares traded Companies change
as % of GDP as % of
market
capitalization
2000 2006 2000 2006 2000 2006 2000 2006 2000 2006 2000 2006
Bangladesh 1,186 3,610 2.5 5.1 1.6 1.7 74.4 31.7 221 269 27.7b 12.9b
India 14,8064 818,879 32.2 68.6 110.8 55.0 133.6 96.4 5,937 4,796 33.6a 46.7a
Nepal 790 963 14.4 13.0 0.6 0.3 6.9 2.4 110 105 .. ..
Pakistan 6,581 45,518 9.0 41.5 45.0 127.3 475.54 251.4 762 652 58.5b 1.3b
Sri Lanka 1,074 7,769 6.6 24.4 0.9 4.8 11.0 14.8 239 237 29.3b 45.3b
China 58,0991 2426,326 48.5 34.9 60.2 26.2 158.3 136.4 1,086 1,440 13.3a 80.7a
South Korea 171,587 835,188 33.5 91.2 208.7 152.7 233.2 173.7 1,308 1,694 58.8a 13.3a
Singapore 152,827 208,300 164.8 178.4 98.7 102.6 52.1 63.1 418 557 - -
Hong Kong 623,398 1,006,228 369.4 223.9 258.9 61.3 49.3 779 1,126 .. ..
Notes: 1. Average market capitalization equals the average of the end period values for the current period and
the previous period.
2. The listed domestic companies are incorporated domestic companies at the end of the year.
a. S&P/IFC Investable index
b. S&P/IFC Global index
Source: World Development Indicators, The World Bank, 2007
6.3.6 NEPSE Index
The NEPSE index is the explanatory indicator of determining the performance of the
company in the secondary securities markets. The positive correlation between corporate
disclosure and the NEPSE index indicate increasing awareness among the investors regarding
the importance of disclosed financial information to ignore the risk factor. Therefore, the
higher price of the securities determines influences to the positive direction the performance
of the company concerned. Different techniques are used to calculate average value as an
indicator of market value. The value derived from such calculation is called an index. In
Nepal, the Nepal Stock Exchange calculates the NSPSE index, which represents the market
price. Considering the recent year the NEPSE index, the index point was recorded 222.04 and
286.67 in the fiscal year 2003/04 and 2004/05 respectively. Nevertheless, the index point of
386.83 is recorded in the fiscal year 2005/06. In August 2007, the country's sole secondary
stock market witnessed another milestone in its 14 year long history, as it inducted automated
trading system using the Computerized International Standard Security Trading Software.
This indicates an improvement in the NEPSE index over the year.
Box 6.1 Commercial Banks push NEPSE Index up
Propelled by rising share prices of major scrips, the stock trading at Nepal Stock Exchange (Nepse) continued to travel
northward. The share trading closed higher, as its index posted a growth of 1.75 points and finished off at 518.55 points.
The rising trend has been continued and Nepse had gained over three points. The groupwise share trading analysis shows
that the major groups, including commercial banks and financial groups, continued to post growth. Garners are the
commercial bank group, which is the largest scrip by volume at the Nepse, closed at 559.77 points. The group has
maintained a steady growth for the last couple of months. The development banks group’s index closed at 442.95 points. The
finance groups closed at 440.38 points. On the other hand, the insurance groups continued to post loss as its index dropped
by 4.94 points. The group’s index opened at 543.03 points and closed at 543.09 points. The manufacturing and trading
groups remained constant at 329.43 points and 148.71 points respectively. The commercial banks group continued to
dominate the market, as it captured the majority of total shares trading. The group cornered 59.85 percent of the total
trading, while the development banks groups came second with 16.77 percent. However, the other groups grabbed 12.97
percent and the finance groups had 5.47 percent while the insurance groups bagged 3.63 percent in the total shares trading.
Source: The Himalayan Times. Sunday, May 20, 2007 p. 11
6.3.7 Collective Investment Scheme
In many developed countries, most of the investors relay upon the collective investment
schemes for pouring their savings in the secondary market. Most of the investors have little or
no knowledge and skills of evaluating the financial strength of the listed companies, however,
instead of going by their own they go through the mutual fund. The mutual fund appoints
qualified financial analyst and investment in securities are made by studying available
financial data. To minimize high risk factor, the investors relay more on the mutual fund.
There are two mutual funds operating in Nepal. One is the NCM Mutual Fund managed by
the NIDC Capital Market Limited and another one is the Citizen Investment Trust. Both the
funds came with the objective of collecting the capital from the small and the medium savers
and the profit earned by investing their money in professional and efficient way is distributed
among the investors.
Table 6.8: Performances of Citizen Unit Scheme & NCM Mutual Fund
(NRs. In Million)
Citizen Unit Scheme NCM Mutual Fund
S.N Particulars FY FY FY FY FY FY
2003/04 2004/05 2005/06 2003/04 2004/05 2005/06
1 Investment 417.04 567.57 645.14 123.41 157.74 210.71
2 Net Income 36.26 41.92 50.31 9.50 11.47 13.89
3 Number of Unit 9,871 2,651 2,840 2,882 2,559 2,481
Holders
By the end of the Fiscal year 2005/06 the total investment of CUS increased to NRs. 645.14
millions in the fiscal year 2005/06from NRs. 567.57 millions. NRs. 417.04 millions in the
fiscal years 2004/05 and 2003/04 respectively. A similar situation has been observed in the
NCM Mutual Fund. The profit of both the CUS and NCMMF reached to NRs. 50.31 millions
and NRs. 13.89 millions in the fiscal year 2005/06 respectively. The number of the unit
holders reached 2,840 for the CUS which is more as compared to previous year’s figure. The
case of the NCMMF looks quite different. Their number has decreased from 2,882 in 2003/04
to 2,481 in 2005/6. Considering the data, in Nepal, both the mutual funds are operating in a
low scale or at infancy and therefore, they are not successful in attracting investments from
the general public.
6.4 Primary Market

The securities market consists of a new issue market (primary market) and a stock exchange
(secondary market). New securities are offered for the first time to the public through initial
public offering in a primary market. The primary market permits issuance of new securities in
the market. It gives the issuer companies to raise capital for starting new companies or to
expand and diversify the activities of the already existing companies. The importance of the
primary market is growing in Nepal as it provides a good source of corporate financing.
Table 6.9: Trend of Primary Market
(NRs. in Million)
Headings FY FY FY FY FY
2000/01 2001/02 2002/03 2003/04 2004/05
1. Issue Approval 717.2 1,555.1 853.8 1,547.8 1,270.3
a. Ordinary Shares 268.5 528.7 551.5 755.0 300.9
b. Rights Shares 36,508 387.9 162.2 429.9 669.4
c. Preferential Shares - 140.0 - - -
d. Debentures - 360.0 - 300.0 300.0
e. Mutual Fund - - 100.0 - -
f. Citizens Plans 82.9 138.5 40.1 62.9 45.5
2. Number of Companies 9 16 17 16 12
Making Public Issues
In the fiscal year 2004/05, only 12 companies have been authorized to mobilize the capital
from the primary stock market in a form of ordinary shares, rights shares, debentures and
citizens plans totaling NRs. 1270.3 millions worth of capital (Table 6.9). The authorized
amount is less than the last year figure. In the last fiscal year 16 companies was authorized to
mobilize its capital. The Nepalese primary market is characterized by an overwhelming
presence of retail investors, however, the institutional investors are not playing a significant
role to support the growth of the market.
6.5 Policies Adopted by the Tenth Plan (2002-2007)

The policies adopted by the Tenth Plan in relation to the capital market are:
• Effective regulatory norms related to the organized sector and the capital market to be
established as measures to protect the interest of the investors;
• Allocational and operational efficiencies of the capital market to be enhanced; and
• The stock market to be made transparent and reliable.
The recently completed Tenth Plan came with the objectives of expanding the security market
as an important source of long-term funds for the operation and development of companies.
However, the Plan completed its period without bringing institutional investors into the
markets. The Plan failed to encourage the individuals’ investors to invest their small savings
in corporate debt and equity.
6.6 Relevant Issues and Challenges Observed in Nepalese Primary and

Secondary market
The Nepalese stock market is still in an infancy stage. Nevertheless, the emerging market
shows sufficient potential for growth and development. But it needs to address relevant issues
and challenges, which posed to it, which are given below:
• Laws relating to security market are unclear and inadequate; and insolvency,
arbitration and trust laws, which supplement to the security laws, are absent. Due to
the lack of legal provisions the regulator is unable to correct unethical and unfair
market practices. The regulator does not have the power to suspend market
intermediaries indulging in such practices.
• The Nepalese regulator (SEBON) is weak both in term of fund and human resources,
particularly in legal and accounting.
• The security market provides liquidity to the issued securities only. The market will
have better liquidity if the securities are available to the price-takers, and the price
reflects all relevant information. But the Nepalese security market is performing
poorly in both the aspects.
• The prevalence of double taxation on dividend discourages the investor to invest in
the security market. First, it is taxed at the corporate level. Then it is taxed when the
benefit reached to the beneficiaries. Besides, the provision of capital gain tax imposed
on capital gains from the trading on securities can divert investment on security
markets.
• Companies with poor governance practices could not provide any returns to the
investors. Therefore, the investors are generally hesitating to subscribe shares
particularly of manufacturing and processing, trading and hotel sectors.
• Inadequate disclosure practices and poor transparency discourage the investor to
invest in the security market. During the fiscal year 2005/2006, of the total 135 listed
companies, only 10 companies have submitted their annual reports and financial
statements on the stipulated time to SEBON. The security issue and disclosure
provisions still come under the Company and Securities Ordinance, which normally
should be kept under the jurisdiction of the Securities Board of Nepal (SEBON).
• An institutional investor, like the Citizen Investment Trust, has very low participation
in stock market whereas, the Employees Provident Fund has no participation in the
capital market.
• The cost of public issue in Nepal is observed very high in comparison to the
neighboring country, India. In India the maximum cost of such an issue is 10.3
percent whereas in Nepal such cost is 24.24 percent, which is more than twofold.
• The cost for trading in security in Nepal is 1.0 percent to 1.5 percent, based on trading
value. The brokerage commission is 0.5 percent in Thailand, and almost 0 percent that
is 0.0002 percent on traded value in India.
• The Bank and Financial Institution Act has delegated the responsibility for the
prospectus and new issue to SEBON. But the required regulation to facilitate the
implementation of the Ordinance is still in the developing stage.
• Finance companies have extended their business to urban and rural areas. So their
primary market is broad in terms of providing service access to the customers. But the
outlet to the investors is possible only through stock exchange intermediaries located
at the Kathmandu Valley.
• The intended legal and institutional infrastructure needed to issue verity of capital
instruments, like the debenture, mutual fund and other marketable instrument, are not
yet developed.
• In the Nepalese security market accounting standards and auditing practices are in the
process of implementation which hinders to use free pricing for making the market
competitive.
• The stock price reflects little or no information about the company concerned, which
is prerequisite for smooth and efficient functioning of the capital market in Nepal.
• The maximum volumes of transactions taking place each year in the NEPSE are
mainly from banks, finance companies and insurance firms. Other important sectors
like hotels, manufacturing and others, are not functioning well as compared to the
financial sector.
• A company that offers its shares to the public is not getting any kind of tax holidays
or other concessions, which demotivate them to offer their shares to the public.
CHAPTER 7
CHALLENGES AND OPPORTUNITIES IN FINANCIAL
INSTITUTIONS' DEVELOPMENT
7.1 The Economy

The economic performance during 1990-2007 has been dismal because of high political
uncertainty. The major critical challenge is to establish a legitimate, functioning government
through the enactment of a legitimate constitution.
7.2 Central Banking

The functioning of the central bank, the NRB, has ever been precarious. It has limited scope
in bringing price stability because of the open border with India, and managing the money
supply, which depends on the deficit financing of the government. Regarding the creation of a
friendly environment for a sound development of financial institutions, the central bank has
hardly been effective because it has ever remained weak in monitoring and supervision. The
mushrooming of financial firms – commercial banks, development banks, and finance
companies – is cosmetic rather than of any substance; and their population raises the concern
for efficiency and innovation. The long vacancy in the post of the governor of the central
bank, the NRB, (since the mid-2007 to date, as of 29th November 2007) indicates the state of
stewardship of the financial institutions.
The central bank, the Nepal Rastra Bank (NRB), has been in operation since 1956. It manages
the money supply, subject to the financing requirement of the government, and is responsible
to maintain price stability. It is also entrusted with the responsibility of managing the foreign
exchanges. However, it has a fixed exchange rate system with India rupee, which is
dependent on the market mechanism. It pursues banking policies and regulates credit creation
through the conventional monetary instruments-the reserve ratio, benchmark interest, and so
on.
The central bank assets are growing. It lacks, however, leadership and direction. Thus, the
monitoring and supervisory roles have not been pragmatic, to the possible extent.
The NRB pursues monetary instruments such as the cash reserve ratio (CRR) bank rate,
refinancing rates applicable to export, agriculture and sick industries, open market operation
(OMO). The CRR is mandatory. The refinance rates as well as the bank rate have a
downward trend, to some extent only. The CRR has remained steady at 5%. Since 2004 the
refinance rates range from 1.5% to 6.25%, and is lower against foreign currency loans.
The short-term interest rates are the 91-day Treasury-Bill (T-bill) rate and inter bank interest
rate. The T-bill rate has a downward trend, and is 2.67% with a range while the inter bank
interest rate is 2.40%.
Financial deepening: The ratios of the currency held by the public and the currency in
circulation to narrow money supply (M1) have a gradual downward trend. This indicates
gradual financial deepening
7.3 Commercial Banking
The nominal growth of deposits has been normal as it is in line with the nominal GDP
growth.
The interest rate structure has a downward tendency. The banks have comfortable liquidity
position. The main challenge has been how to pragmatically utilize the available deposits.
The commercial banks are concentrated in urban areas, and the political environment,
especially the insurgency, has narrowed down to their reach to rural areas. Also, the excess
government intervention, especially in the Nepal Bank, has disturbed their smooth
functioning.
7.4 Nonbanks
7.4.1 Summary
The Nonbanking sector consists of development banks, finance companies, micro-credit

development banks, saving and credit cooperatives; nongovernmental Organizations (NGOs)
performing limited banking activities etc. Besides, other financial institutions such as
insurance companies, employee’s provident fund, citizen investment trust, including other
institutions not licensed by the NRB such as postal saving bank, micro finance institutions,
cooperative societies, community based organizations (CBOs) and Nepal stock exchange are
also included under the category of Nonbank financial institutions in Nepal. Nepal has made
significant progress in developing its financial sector only after the introduction of financial
sector reform or economic liberalization in the mid eighties. Going back to the history of
development of financial institutions in Nepal, before 1980 there were only two development
banks catering services to the public. In those days there were no micro-credit development
banks, finance companies, cooperatives and NGOs even with limited banking transactions.
However, the growth of financial sector during the last two decades witnessed remarkable
progress. Such achievement has increased the number of financial institutions and also the
beneficiaries of the financial services.
7.4.2 Conclusions
There have been mushrooming of financial institution, development banks and finance
companies in particular as there are 37 (regional) development banks and 73 finance
companies in a country divided into 75 administrative districts and 5 development regions.
In the nonbank sector, major challenge lies in maintaining financial stability. The effort
should be oriented toward developing the financial infrastructure, avoiding deceiving
competitive policies and strengthening regulation of the NRB supervision and widening the
access to the financial services. At present, most of the nonbank financial institutions are
concentrating their services in the Kathmandu Valley. Despite the government policy to give
permission to open nonbanks at the Kathmandu Valley only after opening one branch outside
the Valley, the growth of nonbank financial institutions during the last two decades has not
witnessed any remarkable progress in terms of their number in rural areas. The overall
performance of the nonbank institutions could be judged by considering the sources and uses
of funds. In Nepal the large scale of development lending is required to support the
development of agricultural and industrial sectors. All the nonbanks aim to improve the
socioeconomic status of the rural poor, residing mostly in inaccessible areas. The deposits of
the nonbank financial institutions grew significantly over the years even though the country
needs to do a lot of homework to set up a strong foundation for making a healthy financial
system.
7.4.3 Major Issues
• In Nepal, nonbank financial institutions are mostly concentrated in the urban areas.
• Employees working in the nonbank financial institutions lack technical skills related
to the use of modern technologies.
• For making stability among existing nonbank financial institutions, the NRB lacks
effective supervision.
• The paid-up capital base of the development banks has been raised. However, the
capital requirement for opening new financial institutions has not changed till now.
• To minimize the risk an adequate level of capital reserve is essential.
• Financial institutions fail to address the urgent need to expand their financial services.
• The financial system lacks adequate provision of buying and selling active loan
between one financial institution and another
• The financial system lacks strong legal and information system.
• The major challenge lies in maintaining financial stability.
• A large scale of development lending is required to support the development of

agricultural and industrial sector.
• The deposits of the non-bank financial institutions grew significantly over the years
even though the country needs to do a lot of homework to set up a strong foundation
for making a healthy financial system.
7.4.4 Recommendations
• Implement and enforce the new regulations regarding the minimum capital
requirements, provisioning policy, etc.
• Private bond markets are currently non existent due to legal and regulatory hurdles.
But their development would provide an alternate funding possibility for the private
sector development banks and other financial institutions.
• In view of low capital base and growing competition among the finance companies,
particularly in the area of resource mobilization and allocation, these companies could
enter into joint ventures with foreign partners so as to be an efficient and sustainable
unit.
• The NRB should develop a more robust off-site, supervision system, and have
followed in time by a reinforcing system of onsite supervision.
• The NRB should undertake a complete audit of the finance companies to benchmark
their current status as well as to check undesirable practices.
• The microfinance sector needs to articulate a vision and strategy based on a

consensus of all stakeholders.
• Proper targeting of the beneficiaries is imperative, so that the subsidized credit should
be accessed by the right people, and, therefore, chances of being misused through
proxy and other practices does not enlarge.
• A two-pronged approach should be undertaken to expand outreach. For the

inaccessible areas supply of microcredit should be increased and provide the
opportunities for engaging in productive activities while in the accessible areas such
credit facilities should be increased by employing various methods of credit delivery
adapted to suit the local conditions.
• The overall regulation and supervision of all microcredit activities needs to be

improved.
• The taxation of cooperatives should be reviewed so that "real cooperatives" can

generate operating surpluses to build up their capital.
• The EPF should set clear and transparent rules for the investment of its funds. This
will reduce the scope of misulitizing the fund both by government and others.
7.5 Nepal Stock Exchange

7.5.1 Summary
Securities are the powerful components of raising funds to meet the financial requirement of
the company. Most of the companies need huge amount of money to meet their financial
requirement. Therefore, securities like equity shares, preference shares, and debentures are
crucial for meeting the company’s monetary requirements. In Nepal the history of security
markets started by issuing the shares to the public in the year 1937 by two companies
Biratnagar Jute Mills and Nepal Bank Limited. These two companies were considered as the
pioneer of issuing the security to the public. Since then almost for four decades, there were no
formal institutions that came into existence to look after the security issues.
Later in the year 1993 Security Board of Nepal (SEBON) was established as an apex
institution of regulating securities and to promote the market and protect the rights of the
investors. One of the important security market indicators of measuring the performance is
market capitalization. However, market capitalization ratio for Nepal is very low as
compared with other countries. Looking at the performance of stock market, Nepalese stock
Market is still in infancy and could not play a significant role in terms of putting impact on
the economic activities in the country. In many developed countries most of the investors
relay upon the collective investment schemes for investing their saving in secondary market.
There are two mutual funds operating in Nepal. Both of them came with the objective of
collecting the capital from the small and the medium savers. The tenth plan came with the
objectives of expanding security market as an important source of long term funds for the
operation and development of companies had completed its period without bringing enough
institutional investors into the markets. The plan failed to encourage the individuals’ investors
to invest their small savings in corporate debt and equity.
7.5.2 Conclusions
The Nepalese security market is small but growing. During the last 13 years of its operation,
the securities market has observed many ups and downs. The market capitalization of the
listed stocks climbed from NRs. 13,872.00 million, to NRs. 96813.74 millions during the
study period. In spite of expansion in size, the securities market is yet to create quality
transformation gaining depth and maturity. The market lacks sectoral diversification, access
to secondary trading services is limited, transparency and efficiency of the issuer and market
is not sufficient, while the capacity of the regulator, exchangers and the players is limited.
The market is dominated by active individual investors whereas the institutional investors are
virtually absent. The market infrastructure supporting the trading, clearing and settlement are
not adequate. Thus the effort to build a dynamic market is an ardent task requiring a lot of
commitments and efforts of the government, the regulator, market- players, and the investors.
The Nepalese capital market is focusing on reforming the laws, regulations and policies,
building institutional capacity, above all visualizing a dynamic capital market in order to tap
the inherent potential and managing the cross border issue and trading of securities. The
government is responsible to frame securities laws and also has its role in formulating capital
market development plan and addressing economic, fiscal and public borrowing policies
bearing close linkages to the capital market growth. The banking regulation is closely linked
to the capital market regulation. The Nepal Rastra Bank (NRB), the banking regulator, can
played pivotal role in promoting the growth of capital market, at least, for early stage of
market development. The stock exchange is a place for providing efficient trading platform
for the listed companies through its members. The present legal framework has defined the
responsibility of the exchange in admitting securities for trading, providing membership to
the brokers and the dealers and providing trading, clearing and settlement of securities. In
order to enhance the supply of securities, a new securities registration system are indeed
essential. Such a regulation sets the disclosure standards for going public through Initial
Public Offerings (IPO) or secondary offerings through the stock exchange which encourages
closely held companies to come to the capital market. Nevertheless, the market is inward –
looking as it is not sensitive to international market behavior, such as the curent housing
market crisis in the U.S.
7.5.3 Major Issues
• Due to the lack of legal provision the regulator is unable to correct unethical and
unfair market practices.
• Nepalese regulator (SEBON) is lacks both funds and human resources.
• The security market provides liquidity to the issued securities only. The market will
have better liquidity if the securities are available to the price-takers and the price
reflects all relevant information.
• Prevalence of double taxation on dividend discourages the investor to invest in the
security market.
• The investors are generally hesitating to subscribe shares, particularly of
manufacturing and processing, trading and hotel sectors.
• Inadequate disclosure practices and poor transparency discourage the investor to
invest in security markets.
• Institutional investor like the Citizen Investment Trust has very low participation in
the stock market whereas the Employee Provident Fund has no participation in capital
market.
• The cost of public issue is observed to be very high in comparison to neighboring
country.
• Finance companies have extended their business to a very limited extent rural area. So
their primary market is hardly broad in terms of providing service access to the
customers. The outlet to the investors is possible only through stock exchange
intermediaries located at the Kathmandu Valley.
• In Nepalese security market accounting standards and auditing practices are in the
process of implementation which hinders to use free pricing for making the market
competitive.
• The stock price reflects little or no information about the company concerned which is
a prerequisite for the smooth and efficient functioning of the capital market.
• The maximum volume of transactions occurs each year in the NEPSE is mainly from
banks, finance companies and insurance firms. Other important sectors, like hotels,
manufacturing and others, are not functioning well.
• A company that offers its shares to the public is not getting any kind of tax holiday or
other concessions, which demotivate it to offer its shares to the public.
7.5.4 Recommendations
• To overcome the legislative gaps the proposed Securities Ordinance and Company
Ordinance should be enacted with adequate provisions required for addressing the
inadequacies and ambiguities in the in the security legislations as quickly as possible.
• Capability of the SEBON should be enhanced by providing enough funds for effective
operation and also provide training to the staffers of the SEBON in the critical areas
in which their expertise is lacking.
• Considering the developing stage of the securities market the provision of capital gain
tax should be rationalized.
• The tax holiday and other incentives should be given to those companies operating
with good corporate governance practices.
• To increase the participation of institutional investors in securities market the

Government of Nepal should take initiative in establishing a clear regulatory
provision.
• To check the possible manipulation and unhealthy competition and also to protect the
interest of investors, the number of stock brokers should be increased.
• To reduce the cost of securities trading the present open cry out trading system
should be replaced by on line trading system of securities.
• To increase the outlet of the investors, an alternative trading mechanism like over the
counter (OTC) trading system is recommended.
7.6 Conclusions
The government is in transition, and there is virtually no rule of law. The long vacancies in
the posts of most secretaries in the government indicate precariousness in governance. The
low remuneration compels bureaucracy to drive for implicit pecuniary gains. The black
economy is increasing.
First of all, this country needs two fundamentals a functioning, legitimate constitution and a
legitimate government, with a pragmatic policy environment. There ought to be a governor in
the Nepal Rastra Bank.
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Annex
Annex 1: Socioeconomic Development in South Asia, China, and Chile
Sri
Variables Low South Bangladesh Bhutan India Maldives Nepal Pakistan Lanka China Chile
Income Asia
1.Population:
a. Number, millions, 2006 2,403 1,493 144 0.65 1,110 0.34 28 159 20 1,312 16
b. Annual growth rate (2000-06)
i. Overall 1.9 1.7 1.9 2.4 1.5 2.5 2.1 2.4 0.4 0.6 1.1
ii. Rural 1.6 1.5 1.6 n.a 1.4 1.8 2 1.1 0.4 0.6
c. Under 15 population (%),2006 36 33 35 38 32 40 39 38 24 21 24
d. Urban population,% of total,2005 30 28 25 n.a 29 n.a 16 35 15 40 88
2. MDG status
i. Literacy and Education
a. Adult literacy rate(% of 15 years and above),
2000-06 61 58 47 60 61 96 49 50 91 91 96
Male 70 73 63 63 92 95 96
Female 45 48 35 36 89 87 96
b. Youth Literacy rate(15-24 years),%,2006
Male 80 80 51('90) n.a 84 n.a 81 76 95 99 99
Female 67 63 33('90) n.a 68 n.a 60 55 96 99 99
c.Net primary enrollment ratio, %,2005 78 86 93 90 78 68 97 97('91) 89('91)
76('06
d. Primary completion rate(%),2005 74 84 77 90 ) 63 97('91) 98 95
Male 79 74 93 80(06) 73 98('91) 96
72('06
Female 69 79 84 ) 52 96('91) 95
e. Primary repetition rate (% of enrollment),2005
21('06
Male 6 4 7 3 ) 3 < 0.5 3
20('06
Female 6 4 7 3 ) 3 < 0.5 2
Sri
Income Asia
f. Primary education quality, GCR 07
i. Rank among 131 countries 125 88 119 112 51 48 102
ii. Score (1=poor quality,7=best in the world) 2.1 3 2.3 2.5 4.1 4.1 2.7
ii. Health and Sanitation
a. Life expectancy at birth (years),2006
Male 58 63 63 63 63 68 62 64 72 70 75
Female 60 64 65 65 64 67 63 65 77 74 81
b. Child malnutrition prevalence,% of under
5,2000-06 n.a n.a 48 n.a n.a n.a 45 38 29 8 1
c. Infant mortality rate per 1000 live births,2005 75 62 54 n.a 56 n.a 56 79 12 23 8
d. Under 5 mortality rate per 1000 live
births,2005 115 83 73 n.a 74 n.a 74 99 14 27 10
e. Modeled maternal mortality rate per 100k live
births,2000 684 564 380 n.a 540 n.a 740 500 92 56 31
f. Access to an improved water source,2004 75 84 74 86 90 91 79 77 95
i. Urban 80 94 82 95 96 96 98 93 100
ii. Rural 70 81 72 83 89 89 74 67 58
g. Access to improved sanitation facilities,2004 38 37 37 33 35 51 91 44 91
i. Urban 61 63 51 59 62 92 98 69 95
ii. Rural 28 27 35 22 30 41 89 28 62
h. Paved road,% of total road network 95 47.4 30.3 64.7 81 81 20.2
i. HIV prevalence, % of 15-49 Population,2004 1.7 0.7 < 0.1 n.a 0.9 n.a 0.5 0.1 0.1 0.1 0.3
3. Infrastructure,2000-04
3,383,34 1,870,66
a. Total road network, km n.a n.a 239,236 4 17,380 258,340 97,286 1 79,602
b. Population density per km road network n.a n.a 602 328 1,611 615 206 701 201
c. Electricity consumption per capita, kwh 2004 375 414 140 457 69 425 344 1,585 3,084
d. Net electricity imports,% of energy use -3 19 19 19 11 21 45 5 70
e. Electricity transmission and distribution losses,%
of output 23 26 9 26 19 25 17 6 8
f. Telephones,2005
Sri
Income Asia
i. Fixed mainlines per 1000 people 37 39 8 45 17 34 63 269 211
ii. Mobile subscribers per 1000 people 77 79 63 82 9 82 171 302 649
iii. Human development index
a. The 2004 rank 137 135 126 98 138 134 93 81 38
b. The 2005 rank 140 133 128 100 142 136 99 81
c. HDI trend
1990 0.422 0.515 0.425 0.463 0.706 0.628 0.787
1995 0.454 0.548 0.467 0.493 0.729 0.685 0.818
2000 0.510 0.577 0.500 0.511 0.747 0.730 0.843
2004 0.530 0.538 0.611 0.739 0.527 0.539 0.755 0.768 0.859
2005 0.661 0.547 0.534 0.551
iv. Economic status
a. GNI, $ billions, 2006 1,562.30 1,142.70 69.9 0.915 906.5 0.902 8.1 122.3 25.7 2,641.60 114.9
1,611,83 1,142,31 2,668,07 145,84
b. GDP, $ millions, 2006 1 9 61,961 na 906,268 na 8,052 128,830 26,967 1 1
c. GNI, $ per capita, 2006 650 766 480 1,410 820 2,680 290 770 1,300 2,010 6,980
d. PPP GNI, $ per capita, 2006 2,698 3,444 2,340 5,690 3,800 n.a 1,630 2,500 5,010 7,740 11,270
e. GDP, $ per capita, 2006 671 765 430 n.a 816 n.a 288 810 1,348 2,034 9,115
f. Annual growth rate, percent
GDP, Total
1990 – 2000 3.4 5.6 4.8 6 4.8 3.7 5.3 10.3 6.8
2000 – 2006 6.5 6.9 5.6 7.4 2.7 5.4 4.8 9.8 4.3
1975 – 2004 4.2 4.6 3.9 5.3 4.3 5.7 4.6 9.6 5.4
GDP per capita 1990 - 2000 1.5 2.4 3.0 3.4 4.1 5.4 2.4 1.2 3.9 9.2 5.2
2000 - 2006 4.6 5.2 3.7 5.9 0.6 3.0 4.4 9.2 3.2
1975 - 2004 2.0 2.5 1.7 3.4 2.0 2.9 3.3 8.4 3.9
g. GDP implicit deflator, annual growth %, 2000-
06 4.1 4.1 4.5 6.8 8.8 3.4 4.3
4. Labour force, 2005
a. Number, millions 965.3 585 63.9 435 10.5 56.5 8.4 776 6.5
Sri
Income Asia
b. Labour force growth, % pa, 1990-05 2.1 1.9 2.1 1.7 2.6 3.2 1 1.2 1.8
c. Agricultural employmet, % of total, 2002-05 n.a n.a 51.7 n.a 65 42.1 34.7 44.1 13.5
d. Agricultural productivity, 1990-92 & 2001-03
i. Agricultural value added per worker, 2000 $,
2001-03 363 393 308 n.a 381 n.a 208 691 737 368 4,795
ii. Annual productivity agricultural productivity
growth,
%, 1992-03 1.3 1.33 2.06 n.a 1.26 n.a 0.54 1.46 0.4 3.43 2.59
5. Value added as % of GDP, 2006
a. Agriculture 20 18 20 18 39 20 16 12 6
b. Industry 28 28 28 28 21 27 26 47 47
c. Services 51 54 52 55 39 53 57 41 48
6. General govt. final consumption, % of GDP, 2006 11 10 6 11 10 8 8 11 11
7. Gross capital formation, % of GDP, 2006 29 31 25 33 30 20 27 41 22
8. Merchandise trade, 2006
a. Exports as % of total trade 45.43 39.99 42.81 40.8 26.57 36.19 40.15 55.04 60.52
b. Imports as % of GNI 24.89 20.72 23.03 19.24 25.93 24.39 39.79 29.97 33.5
c. Total trade as % of GNI 45.61 34.52 40.27 32.49 35.31 38.22 66.48 66.65 84.84
9. Per capita official aid, $ 2005 17 6 9 2 16 11 61 1 9
10. Banking sector domestic credit supply, % of
GDP, 2006 55 61 58 64 38 42 44 138 83
11. Energy efficiency: GDP per unit of energy use
(2000 ppp
$ per kg of oil equivalent). 2004 4.4 5.5 19.5 n.a 5.5 n.a 4 4.2 8.3 4.4 6.1
12. Inequality ratio: ratio of income(y) or
consumption ( c )
shares of the richest 20% to the poorest 20% of
the
Population 5c 5.6c 9.6c 4.3c 6.9c 12.1y 15.8y
13. Governance indicators
a. Governance framework: overall indicators 0.196 0.659 1.34 n.a -0.252 0.027 1.058 n.a n.a
14. Domestic market size rank among 131 countries,
GCR 07 28 3 74 25 56 2 46
Sri
Income Asia
15. Business cost of terrorism rank among 131
countries, GCR 07 119 93 131 123 130 109 28
16. Quality of overall infrastructure rank among 131
countries, GCR 07 117 79 127 70 74 65 30
17 Quality of roads rank among 131 countries, GCR
07 83 82 117 61 77 53 22
18. Quality of electricity supply rank among 131
countries, GCR 07 127 106 122 107 81 78 39
19 Telephone lines
a. Rank among 131 countries, GCR 07 119 102 112 107 98 48 59
b. Main lines per 100 population , GCR 07 0.8 4.5 1.8 3.4 6 26.6 22
Sources:
1. World Development Report, 2008
2. World Development Report, 2008
3. World Development Indicators, 2007
4. Human Development Report, 2006
5. The Global Competitiveness Report 2007-2008
Annex 2 : Landlocked Countries
Nominal $ GNI per Capita GNI per capita rank GDP
avg.
annual
%
growth
2005 2006 2005 2006 2000-
S.N. Country Region HDI rank (177), 2004 06
a. Low income economies (LIC)
1. Afghanistan, LDC S. Asia 300 320 196 n.a n.a
2. Burkina Faso, LDC Sub-Saharan Africa 400 460 180 174 5.7
3. Burundi, LDC Sub-Saharan Africa 100 100 208 210 169 2.5
4. Central African Republic, LDC Sub-Saharan Africa 350 360 186 191 172 -0.6
5. Chad, LDC Sub-Saharan Africa 400 480 180 187 171 14.3
6. Ethiopia, LDC Sub-Saharan Africa 160 180 202 206 170 5.7
7. Kyrgyz Republic, LDC C Asia 440 490 178 184 110 3.8
8. Laos, LDC Southeast Asia 440 500 178 183 133 6.4
9. Malawi, LDC Sub-Saharan Africa 160 170 202 207 168 4.1
10 Mali, LDC Sub-Saharan Africa 380 440 183 188 175 5.7
11 Nepal, LDC South Asia 270 290 195 199 138 2.7
12 Niger, LDC Sub-Saharan Africa 240 260 196 201 177 3.7
13 Rwanda, LDC Sub-Saharan Africa 230 250 197 202 158 5.1
14 Tajikistan, C Asia 330 390 190 190 122 9.1
15 Uganda, LDC Sub-Saharan Africa 280 300 194 198 145 5.6
16 Uzbekistan, LDC C Asia 510 610 172 181 113 5.7
17 Zambia, LDC Sub-Saharan Africa 490 630 174 180 165 4.9
18 Zimbabwe, LDC Sub-Saharan Africa 340 340 188 195 151 -5.6
b. Lower-middle income economies (LMC)
1. Armenia, LDC East Europe 1,470 1,930 132 146 80 12.6
2. Azerbaijan, LDC SW Europe 1,240 1,850 143 148 99 15.6
3. Belarus, LDC East Europe 2,760 3,380 108 67 8.1
4. Bhutan, LDC S.Asia 870 1,410 155 135
Nominal $ GNI per Capita GNI per capita rank GDP
avg.
annual
%
growth
2005 2006 2005 2006 2000-
S.N. Country Region HDI rank (177), 2004 06
5. Bolivia, LDC Latin America 1,010 1,100 147 166 115 3.3
6. Kazakhstan, LDC C.Asia 2,930 3,790 103 79 10.1
7. Lesotho, LDC Sub-Saharan Africa 960 1,030 150 149
8. Macedonia, FYR, LDC S Europe 2,830 3,060 106 66 2.1
9. Mongolia, LDC C Asia 690 880 161 171 116 6.6
10 Paraguay, LDC Latin America 1,280 1,400 139 91 2.9
11 Swaziland, LDC S Africa 2,280 2,430 124 146
12 Turkmenistan, LDC C Asia 105 1.4
c. Upper-middle income economies (UMC)
1. Botswana, LDC Sub-Saharan Africa 5,180 5,900 80 n.a 131 6.0
2. Hungary, LDC C Europe 10,030 10,950 60 35 4.3
3. Slovak Republic C Europe 7,950 9,870 68 42 5.1
4. d. High income economies
5. Andorra SW Europe n.a n.a
6. Austria, OECD C Europe 36,980 39,590 15 11 14 1.7
7. Czech Republic, OECD, C Europe 10,710 12,680 57 30 4.0
8. Liechtenstein C Europe n.a 8
9. Luxembourg, OECD W Europe 65,630 76,040 1 1 12
10 San Marino S Europe n.a n.a
11 Switzerland, OECD C Europe 54,930 57,230 3 3 9 1.2
Annex 3: Socioeconomic Status of Global Economies, 2006
Per capita Economy Par capita Nominal per capita PPP GNI per HDI rank GNI, 2006 GDP 2006 Population 2006 Urban
GNI rank GNI GNI, $ capita 2006 2004 population,
2006 rank 2005 2005 2006 $ Rank $ Ra $ millions Ran %pa millions Ran %pa % of total
billions nk k 2000-06 k 2000-06 2005
High Income, $11,116 or
More
Luxembourg@ 1 58,050 76,040 59,560 1 12 35.133 na na 0.462 0.9 91.9
Norway 2 69,590 66,530 43,820 3 1 308.9 310,960 2.1 5 0.6 77
Switzerland@ 3 54,930 57,230 40,930 4 9 425.90 16 379,758 20 1.2 7 0.6 75
Bermuda 4 51,000* 52,000* na na na na 0.064 0.4 100
Denmark 5 49,390 51,700 36,460 8 15 280.7 275,237 1.6 5 0.3 86
Iceland 6 48,570 50,580 36,560 7 2 15.122 na Na 0.299 1.0 92.8
United States 7 43,740 44,970 44,260 2 8 13,446.0 1 13,201,819 1 2.8 299 3 1.0 81
Liechtenstein@ 8 44,000* na na na 0.035 0.8 21.6
Ireland 10 40,150 45,580 35,900 4 191.9 222,650 5.3 4 1.7 61
Sweden 9 41,060 43,580 35,070 5 394.2 384,927 2.6 9 0.3 84
Netherlands 16 36,620 42,670 37,580 10 698.5 657,590 1.0 16 0.5 80
Finland 13 37,460 40,650 35,150 11 213.6 209,445 2.8 5 0.3 61
United Kingdom 12 37,600 40,180 35,580 18 2,425.2 2,345,015 2.4 60 0.2 90
Channel Islands 14 na 0.150 0.4 na
Austria@ 15 36,980 39,590 35,130 14 326.2 322,444 1.7 8 0.5 66
Belgium 17 35,700 38,600 35,090 13 404.7 392,001 1.7 10 0.4 97
Japan 11 38,980 38,410 33,150 7 4,900.0 2 4,340,133 2 1.6 128 10 0.1 66
Germany 19 34,580 36,620 31,830 21 3,018.0 3 2,906,681 3 0.9 82 0.0 75
France 18 34,810 36,550 33,740 16 2,297.8 2,230,721 1.5 61 0.6 77
Canada 20 32,600 36,170 34,610 6 1,177.4 1,251,463 2.6 33 0.9 80
Australia 21 32,220 35,990 34,060 3 738.5 768,178 3.1 21 1.2 88
Isle of Man 22 27,770 0.077 0.9 72.6
San Marino@ 23 35,000* 88.7
Qatar 25 28,500* 46 100
Monaco 24 33,000* 92.0
Italy 26 30,010 32,020 30,550 17 1,875.5 184,4749 0.7 59 0.5 68
Kuwait 32 24,040 30,630 29,200 33 77.7 80,781 7.3 3 2.9 98
Singapore 29 27,490 29,320 31,710 25 128.8 132,158 5.0 4 1.5 100
Hong Kong, China 28 27,670 28,460 38,200 22 199.5 189,798 5.0 7 8.0 100
Spain 33 25,360 27,570 28,030 19 1,200.7 1,223,988 3.2 44 1.3 77
New Zealand 31 25,960 27,250 27,220 20 112.4 103,873 3.3 4 1.1 86
Andorra@ 35 26,000* na 0.067 0.5 91.7
Cayman Islands (UK) 0.046 2.2 na
United Arab Emirates 34 23,770 23,950 23,990 49 103.460 na na 4.636 5.9 77
Faeroe Islands ( 0.048 0.2 38.6
Brunei 30 26,300* 34 0.381 2.2 76.2
Bahamas 37 21,000* 52 0.327 1.4 89.5
billions nk k 2000-06 k 2000-06 2005
Aruba (Dutch) 0.101 0.7 67
Greece 38 19,670 21,690 24,560 24 241.0 244,951 4.4 11 0.3 59
Guam 36 21,500* na 0.172 1.7 93.7
Greenland 82.2
Israel 41 18,620 18,580 25,480 23 128.7 123,434 1.9 7 1.9 92
French Polynesia 0.260 1.6 52.1
Slovenia 46 17,350 18,890 23,970 27 37.7 37,303 3.7 2 0.1 51
Cyprus 44 18,430 18,430 21,490 29 13.633 na na 0.765 1.6 69.2
Portugal 48 16,170 18,100 21,580 28 191.6 192,572 0.6 11 0.6 58
Korea, Rep. of 49 15,830 17,690 23800 26 856.6 888,024 4.6 48 0.5 81
Virgin Islands 27 30,000* 0.109 0.0 92.6
New Caledonia (Fr.) 15,060 0.238 1.9 79.0
Netherlands Antilles 14,720 0.184 0.7 69.6
(Dutch)
Tiwan 14,900 15,800 360.7 23 0.5 74
Bahrain 50 14,370 14,370 18,770 39 10.288 na na 0.740 1.6 90.0
Barbados 39 18,000* 31 0.270 0.2 51.7
Macao 51 19,000* 25,544* 100
Malta 53 13,590 13,610 18,630 32 5.491 na na .405 0.6 91.7
Trinidad and Tobago 58 10,440 13,340 16,260 57 17.461 na na 1.309 0.3 12
Czech Republic@ 57 10,710 12,680 21,470 30 129.5 141,801 4.0 10 -0.1 74
Saudi Arabia 55 11,770 12510 16,620 76 289.2 309,778 4.2 24 2.3 81
Estonia 63 9,100 11,410 17,540 40 15,307 na na 1.341 -0.4 69
Antigua and Barbuda 56 10,500 11,210 13,500 59 5.491 na na 0.084 1.5 37.7
Puerto Rico 40 14,000* na 3.929 0.5 75.6
Upper Middle Income,
UMC $3,596-$11,115
Hungary 60 10,030 10,950 18,290 35 110.1 112,899 4.3 10 -0.3 66
American Samoa 4,300 na
Northern Mariana Islands 12,000 90.0
(US)
Croatia 67 8,060 9,870 17,600 44 41.4 42,653 4.7 4 -0.2 57
Slovak Republic 68 7,950 9,870 17,600 42 53.2 55,049 5.1 5 0.0 56
Oman 62 9,070 9,070 14,570 56 23.0 24,284 3.0 3 1.2 72
St. Kitts and Nevis 66 7,840 8,840 12,690 51 0.428 na na 0.048 1.5 32.2
Seychelles 65 8,180 8,650 16,560 47 0.741 na na 0.086 0.9 49.9
Poland 72 7,110 8,190 14,830 37 312.2 338,733 3.6 38 -0.1 62
Equatorial Guinea, LDC 6,572 8,250 10,150 120 4.246 na na 0.515 2.3 48.1
Latvia 74 6,760 8,100 15,350 45 18.5 20,116 8.6 2 -0.6 68
Turkmenistan@ 8,000 8,000 10,150 105 na 10,496 na 5 1.4 46
Palau 70 7,670 7,990 na na 0.162 na na 0.020 0.8 68.6
billions nk k 2000-06 k 2000-06 2005
Lithuania 73 7,050 7,870 14,930 41 28.7 297,921 7.9 3 -0.5 67
75 Mexico 71 7,310 7,870 11,410 53 820.3 839,182 2.3 104 1.0
Libya 77 5,530 7,380 na 64 44.001 na na 5.965 2.0 85
Chile 76 5,870 6,980 11,270 38 114.9 145,841 4.3 16 1.1 88
Venezuela, R.B. de 84 4,810 6,070 7,440 72 164.0 181,862 3.4 27 1.8 93
Botswana 80 5,590 5,900 12,250 131 10.380 na na 1.758 0.0 57
Russian Federation 90 4,460 5,780 11,630 65 822.4 986,940 6.4 142 -0.5 73
Malaysia 82 4,960 5,490 11,300 61 141.4 148,940 5.1 26 1.9 67
82. Lebanon 75 6,180 5,490 5,460 78 22.2 22,722 3.7 4 1.2 87
Mauritius 78 5,260 5,450 13,510 63 6.833 na na 1.253 0.9 42
Turkey 86 4,710 5,400 9,060 92 393.9 402,710 5.6 73 1.3 67
South Africa 82 4,960 5,390 11,710 121 255.3 254,992 4.1 47 1.2 59
Uruguay 91 4,360 5,310 11,150 43 17.6 19,308 2.3 3 0.1 92
Argentina 89 4,470 5,150 15,390 36 201.4 214,058 3.6 39 1.0 90
St. Lucia 85 4,580 5,110 6,970 71 0.848 na na 0.166 1.0 30.5
Gabon 81 5,010 5,000 5,310 124 7.032 na na 1.406 1.7 84
90. Nauru 5,000* na 65.0 65,000 0.013 na 100.0
Costa Rica 88 4,590 4,980 10,770 48 21.8 22,145 4.8 4 1.8 62
Panama 87 4,630 4,890 7,680 58 16.1 17,097 5.1 3 1.8 71
Romania 93 3,830 4,850 9,820 60 104.4 121,609 6.0 22 -0.7 54
Brazil 97 3,460 4,730 8,800 69 892.8 1,067,962 3.0 189 1.4 84
Grenada 92 3,860 4,420 7,810 85 0.478 na na 0.108 1.1 40.7
Bulgaria 98 3,450 3,990 10,140 54 30.7 31,483 5.6 8 -0.8 70
Dominica 94 3,800 3,960 6,490 68 0.287 na na 0.072 0.2 72.0
St. Vincent and the 95 3,530 3,930 7,010 88 0.470 na na 0.120 0.5 58.3
Grenadines
Serbia 100 3,280 3,910 na na 29.0 31,808 5.3 7 -0.2 52
Montenegro 3,860 na na 2.317 na na 0.606 -1.7 52
Kazakhstan@ 103 2,930 3,790 7,780 79 58.0 77,237 10.1 15 0.5 57
Belize 96 3,570 3,650 6,650 95 1.084 na na 0.297 2.9 48.3
Lower Middle Income,
LMC $906-$3,595
Cuba 3,500 4,000 50 11.286 0.2 75.6
Jamaica 99 3,400 3,480 4,030 104 9.3 10,533 1.8 3 0.5 53
Iraq 3,400 68.2
Belarus@ 108 2,760 3,380 8,810 67 32.8 36,945 8.1 10 -0.5 72
Mayotte 0.187 3.9 na
Fiji 100 3,170 3,300 6,200 90 2.815 na na 0.853 0.9 51.7
Namibia 102 2,990 3,230 8,110 125 6.6 6,372 4.7 2 1.3 35
Suriname 115 2,540 3,200 8,120 89 1.446 na na 0.452 0.7 76.1
Macedonia,FYR@ 106 2,830 3,060 7610 66 6.2 6217 2.1 2 0.2 69
billions nk k 2000-06 k 2000-06 2005
Algeria 110 2,730 3,030 6,900 102 101.2 114,727 5.0 33 1.5 63
113. Iran 107 2,770 3,000 8,490 96 2.7.6 222,889 5.7 69 1.4 67
113. Marshall Islands 103 2,930 3000 na na 0.196 na na 0.065 3.6 66.3
Thailand 109 2,750 2,990 9,140 74 193.7 206,247 5.4 65 0.9 32
Bosnia & Herzegovina 118 2,440 2,980 na 62 11.7 11,296 5.1 4 0.3 46
Tunisia 105 2,890 2,970 8,490 87 30.1 30,298 4.6 10 1.0 65
Albania 114 2,580 2,960 5,840 73 9.3 9,136 5.3 3 0.4 45
Peru 113 2,610 2,920 6,080 82 82.7 93,269 4.9 28 1.5 73
Dominican Republic 121 2,370 2,850 8290 94 27.4 30,581 3.9 10 1.6 67
Ecuador 112 2,630 2,840 4,400 83 38.1 40,800 5.1 13 1.4 63
Colombia 123 2,290 2,740 7,620 70 125.0 135,836 3.9 46 1.5 73
Maldives, LDC 120 2,320 2,680 98 0.902 na na 0.337 2.5 28.8
Jordan 116 2,500 2,660 6,210 86 14.7 14,176 6.3 6 2.4 82
Guatemala 119 2,400 2,640 4,800 118 34.1 35,290 2.8 13 2.4 47
El Salvador 117 2,450 2,540 5,340 101 17.8 18,306 2.4 7 1.8 60
Swaziland@ 124 2,280 2,430 5,170 146 2.737 na na 1.126
Micronesia 122 2,300 2,380 7,830 na 0.264 na na 0.111 0.6 29.3
Samoa, LDC 126 2,020 2,270 6,400 75 0.421 na na 0.186 0.7 22.3
Tonga 125 1,750 2,170 8,580 55 0.223 na na 0.102 0.4 33.4
Cape Verde, LDC 127 1,930 2,130 5,980 106 1.105 na na 0.518 2.3 55.9
China 128 1,740 2,010 7,740 81 2641.6 2,668,071 9.8 1312 0.6 40
Angola 136 1,350 1,980 2,360 161 32.4 44,033 11.1 16 2.8 53
Ukraine 131 1,520 1,950 7,520 77 90.6 106,111 7.7 47 -0.9 68
Armenia@ 132 1,470 1,930 5,890 80 5.8 6,406 12.6 3 -0.4 64
Morocco 129 1,730 1,900 5,000 123 58.0 57,307 4.4 30 1.1 59
Azerbaijan@ 143 1,240 1,850 5,960 99 15.7 20,122 15.6 8 0.9 52
Vanuatu, LDC 130 1,560 1,710 3,280 119 0.369 na na 0.215 2.0 22.8
Tuvalu 1,200* na 14.0 14,400 0.012 na 55.2
Myanmar, LDC 1,700 130 na 50.962 1.1 55.2
Korea, DR 1,700 1,700 22.569 0.5 62
Syria 135 1,380 1,570 3,930 107 30.7 34,902 4.0 19 2.5 51
Georgia, LDC 136 1,350 1,560 3,690 97 6.9 7,550 7.8 4 -1.0 52
Indonesia 139 1,280 1,420 3,950 108 315.8 364,459 4.9 223 1.3 48
145. Philippines 138 1,300 1,420 5,980 84 120.2 116,931 4.8 85 1.8 63
Bhutan, LDC@ 155 1250 1,410 5,690 135 0.915 na na 0.647 2.4 8.5
Paraguay@ 139 1,280 1,400 5,070 91 8.4 9,110 2.9 6 2.0 59
Egypt 142 1,250 1,350 4,690 111 101.7 107,484 4.0 75 1.9 43
Sri Lanka 145 1,160 1,300 5,010 93 25.7 26,967 4.8 20 0.4 15
Kiribati, LDC 134 1,120 1,230 8,970 na 0.124 na na .101 1.7 47.3
151. West Bank & Gaza 139 1,280 1,230 na 100 4.5 4,059 0.2 4 3.9 72
Honduras 144 1,190 1,200 3,540 117 8.8 9,235 4.0 7 2.3 47
billions nk k 2000-06 k 2000-06 2005
Guyana 147 1,020 1,130 4,680 103 0.849 na na 0.751 0.2 37.6
Moldova 153 880 1,100 2,880 114 3.7 3,266 6.8 4 -1.3 47
Bolivia@ 147 1,010 1,100 2,890 115 10.3 11,163 3.3 9 1.9 64
Cameroon 147 1,010 1,080 2,370 144 18.1 18,323 3.6 17 1.9 55
Djibouti, LDC 146 1,020 1,060 2,540 148 0.857 na na 0.806 2.0 83.7
Lesotho, LDC@ 150 960 1,030 4,340 149 1.839 na na 1.789 0.0 19
Nicaragua 152 910 1,000 4,010 112 5.2 5,369 3.2 5 1.1 59
Congo, Rep. 151 950 950 940 140 3.8 7,385 4.5 4 3.0 60
Low Income, LIC $905 or
Less
Mongolia@ 161 690 880 2,280 116 2.3 2,689 6.6 3 1.2 57
Cote d' Ivoire 156 840 870 1,550 164 16.0 17,484 0.1 18 1.9 44.9
Timor-Leste, LDC 158 600 840 na 142 0.865 na 1.029 4.5 7.6
India 159 720 820 3,800 126 906.5 906,268 7.4 1,110 1.5 29
Sudan, LDC 164 640 810 2,160 141 29.9 37,565 6.9 37 2.0 41
Sao Tome & Principe, 182 440 780 na 127 0.124 na na 0.160 2.3 37.8
LDC
Pakistan 161 690 770 2,500 134 122.3 128,830 5.4 159 2.4 35
168. Papua New Guinea 163 660 770 2,410 139 4.6 5,654 2.0 6 2.1 13
Yemen, LDC 167 600 760 920 150 16.4 19,057 3.9 22 3.1 27
Senegal, LDC 160 710 750 1,840 156 8.9 8,936 4.5 12 2.4 42
Mauritania, LDC 169 560 740 2,600 153 2.3 2,663 5.0 3 2.9 40
Vietnam 166 620 690 3,300 109 58.1 60,884 7.6 84 1.3 26
Solomon Islands, LDC 168 590 680 2,170 128 0.331 na na 0.489 2.6 16.5
Comoros, LDC 164 650 660 2,010 132 0.406 na na 0.614 2.1 35.0
Nigeria 169 560 640 1,050 159 92.4 114,686 5.9 145 2.5 48
Zambia, LDC@ 174 490 630 1,000 165 7.5 10,907 4.9 12 1.7 35
Uzbekistan@ 172 510 610 2,250 113 16.2 17,178 5.7 27 1.2 37
Somalia 650|* na 5.515 5,515* 8.485 3.2 34.8
Kenya 171 530 580 1,300 152 20.5 21,186 3.8 35 2.3 21
Benin, LDC 172 510 540 1,160 163 4.7 4,775 3.8 9 3.1 40
Ghana 176 450 520 2,640 136 11.8 12,906 5.3 23 2.1 48
Laos P.D.R., LDC@ 178 440 500 2,050 133 2.9 3,404 6.4 6 1.6 21
Kyrgyz Republic@ 178 440 490 1,990 110 2.6 2,695 3.8 5 0.9 36
Cambodia, LDC 183 380 480 2,920 129 6.9 7,193 9.4 14 2.0 20
185. Bangladesh, LDC 175 470 480 2,340 137 69.9 61,961 5.6 144 1.9 25
185. Haiti, LDC 176 450 480 1,490 154 4.1 4,961 -0.3 9 1.4 39
185. Chad, LDC@ 180 400 480 1,230 171 4.8 6,541 14.3 10 3.3 25
Burkina Faso, LDC@ 180 400 460 1,330 174 6.3 6,205 5.7 14 3.1 18
Mali, LDC@ 183 380 440 1,130 175 6.1 5,929 5.7 14 3.0 31
Guinea, LDC 185 370 410 2,410 160 3.7 3,317 2.9 9 1.9 33
billions nk k 2000-06 k 2000-06 2005
Tajikistan@ 190 330 390 1,410 122 2.6 2,811 9.1 7 1.2 25
Central African Republic, 186 350 360 1,280 172 1.5 1,486 -0.6 4 1.3 38
LDC@
Tanzania, mainland only, 188 340 350 740 162 13.4 12,784 6.5 39 2.6 24
LDC
194. Togo, LDC 186 350 350 1,490 147 2.2 2,206 2.3 6 2.7 35.1
Mozambique, LDC 191 310 340 1,220 168 6.9 7,608 8.2 20 2.0 35
Zimbabwe@ 188 340 340 1,950 151 4.5 5,010 -5.6 13 0.6 36
Afghanistan@ 300 320 na 24.10 1.9 23.3
Gambia, LDC 192 290 310 1,970 155 0.488 na na 1.553 2.8 54
Uganda, LDC@ 194 280 300 1,490 145 8.9 9,322 5.6 30 3.4 13
Nepal, LDC 195 270 290 1,630 138 8.1 8,052 2.7 28 2.1 16
Madagascar, LDC 192 290 280 960 143 5.3 5,499 2.7 19 2.7 27
Niger, LDC@ 196 240 260 830 177 3.7 3,544 3.7 14 3.4 17
Rwanda, LDC@ 197 230 250 1,270 158 2.3 2,494 5.1 9 2.4 19
Sierra Leone, LDC 199 220 240 850 176 1.4 1,443 12.3 6 3.7 41
Eritrea, LDC 199 220 200 1,090 157 0.9 1,085 2.7 5 4.1 19
Guina-Bissau, LDC 201 180 190 830 173 0.307 na na 1.633 3.0 30
Ethiopia, LDC 202 160 180 1,190 170 12.9 13,315 5.7 73 2.0 16
Malawi, LDC@ 202 160 170 720 166 2.6 2,232 4.1 1.3 2.2 17
Liberia, LDC 206 130 140 na 0.469 na 3.380 1.6 58
Congo, D.R., LDC 207 120 130 720 167 7.7 8,543 4.7 59 2.8 32
Burundi, LDC@ 208 100 100 710 169 0.8 807 2.5 8 3.1 10
South Asia 692 766 3,444 1,142.7 1,142,319 6.9 1,493 1.7
Low income economies 585 650 2,698 1,562.3 1,611,831 6.5 2,403 1.9
World 7,011 7,439 10,218 48,481.8 48,244,879 3.0 6,518 1.2
Notes:
1. LDC refers to a Least Developed Country
2. @ indicates a Landlock Country
3. Asterisk (*) means an Estimate by the Author
Sources: 1. Atlas of Global Development, Collins (for the World Bank), Glasgo, 2006.
2. World Development Indicators, the World Bank, Washington, D.C. 2007.
3. World Development Report 2008, the World Bank, Washington, D.C. 2007.
4. Human Development Report 2006, the UNDP, Palgrave, New York, 2007
5. The World Almanac and Book of Facts 2007, World Almanac Books, New York, 2007.
Appendix
Table B 1a: Land Use Pattern in Nepal in 2004
Land Area (Thousand ha.) Percent of total area
1. Arable Land 4,121.0 28.00
a. Cultivated land 3,091.0 21.00
b. Uncultivated land (excludes permanent fallow land) 1,030.0 7.00
2. Forest Land 5,818.0 39.53
a. Forestland 4,264.0 28.97
b. Scrubland 1,554.0 10.56
3. Pastureland (including grassland) 1,760.0 11.96
4. Other (rocky, etc.) 2,601.0 17.67
5. Inland water 418.1 2.84
Nepal 14,718.1 100.00
Note: Hectare is denoted by ha.
Source: Central Bureau of Statistics and Ministry of Agriculture and Cooperatives
Table B 1b: Arable Land and Irrigation Facility

Region Arable Land Percent Irrigated Land Percent
(Thousand ha) (Thousand ha)
Mountain 350 8.40 28.34 3.07
Hill proper 1,509 36.61 120.59 13.06
Terai 2,262 54.90 774.74 83.88
Nepal 4,121 100.00 923.67 100.00
Note: Arable Land includes cultivated and uncultivated agricultural landholdings.
Source: Based on Information of the Central Bureau of Statistics.
Table B 2a: Population, National Income and Production, GDP Deflator, and Consumer Price Index
Fiscal Population Nominal Real GDP Nominal Nominal Real
year GDP (producers GDP/Real GNI GNI Real per capita, N.Rs Consumer
(producers GDP: (NRs. (NRs. Price
(Millions) Prices, Prices, GDP Millions) Millions) Index
NRs. NRs. implicit
Millions) Millions) deflator GDP GNI
1988/89 17.677 95,834.66 245,692.20 0.39006 94,161.97 241,404 13,898.98 13,656.38 35.99
1989/90 18.080 111,020.92 257,087.85 0.43184 109,237.47 252,958 14,219.46 13,991.04 39.46
1990/91 18.491 129,221.67 272,727.11 0.47381 127,037.94 268,118 14,749.18 14,499.93 43.30
1991/92 18.911 160,479.85 284,561.29 0.56396 157,818.33 279,842 15,047.40 14,797.84 52.43
1992/93 19.341 184,103.04 294,507.25 0.62512 181,151.70 289,786 15,227.10 14,982.99 57.06
1993/94 19.781 213,925.90 319,726.27 0.66909 210,630.78 314,801 16,163.30 15,914.34 62.20
1994/95 20.230 235,292.51 330,288.57 0.71238 232,257.41 326,028 16,326.67 16,116.07 66.98
1995/96 20.690 267,217.36 347,920.03 0.76804 261,795.60 340,861 16,815.85 16,474.67 72.41
1996/97 21.161 301,141.13 366,223.60 0.82229 295,696.02 359,602 17,306.54 16,993.61 78.28
1997/98 21.642 322,968.29 376,999.90 0.85668 318,193.65 371,426 17,419.83 17,162.30 84.79
1998/99 22.134 367,188.36 393,948.71 0.93207 365,939.81 392,609 17,798.35 17,737.83 94.42
1999/00 22.637 407,394.47 417,992.30 0.97465 407,100.61 417,691 18,465.00 18,451.68 97.61
2000/01 23.151 441,519.00 441,519.00 1.00000 443,220.00 443,220 19,070.94 19,144.41 100.00
2001/02 23.670 459,443.00 442,048.00 1.03935 458,838.00 441,466 18,675.47 18,650.89 102.90
2002/03 24.200 492,231.00 459,488.00 1.07126 491,556.00 458,858 18,986.97 18,960.90 107.82
2003/04 24.742 536,749.00 481,003.00 1.11589 535,065.00 479,494 19,440.54 19,379.55 112.09
2004/05 25.297 589,412.00 496,026.00 1.18827 591,048.00 497,403 19,608.48 19,662.92 117.16
2005/06 25.863 646,471.00 509,911.00 1.26781 651,426.00 513,820 19,715.74 19,866.87 126.50
2006/07 26.442 719,477.00 522,666.00 1.37655 723,921.00 525,894 19,766.13 19,888.24 134.61
Sourses:1. Quarterly Economic BulletionVvol.41,No.3, Nepal Rastra Bank, Kathmandu, Mid-April 2007.
Table B 2b: Population, National Income and Production, GDP Deflator, and Consumer Price
Index
Three Year Average

Year Population Nominal Real GDP Nominal Nominal Real GNI
GDP (producers GDP/Real GNI (NRs.
(producers GDP: (NRs. Millions) Real per
capita, Consumer
GDP Millions)
N.Rs Price
implicit
(Millions) Prices, Prices, deflator
NRs. NRs.
Millions) Millions) GDP GNI Index
1990 18.08 112,025.75 258,502.39 0.43190 110,145.79 254,160.04 14,289.21 14,049.12 39.58
1995 20.23 238,811.92 332,644.96 0.71651 234,894.60 327,230.14 16,435.28 16,168.36 67.20
2000 22.64 405,367.28 417,820.00 0.96891 405,420.14 417,839.98 18,444.77 18,444.64 97.34
2006 25.87 651,786.67 509,534.33 1.27754 655,465.13 512,372.33 19,696.78 19,806.01 126.09
Table B 2c: Structure of the Economy

Nominal Value, NRs Millions
∑Electricity
End Year Gas and
of F/y ∑GDP fc ∑AGDP ∑Industry ∑Manufacture Water ∑Construction Mining ∑Services
1989-1991 301,660 148,410 50,208 18,707 1,804 28,252 1,445 103,042

1994-1996 640,958 263,054 140,761 59,882 8,623 68,807 3,449 237,148
1999-2001 1,090,321 428,563 233,040 99,382 18,006 110,228 5,424 429,718
2005-2007 2,188,435 811,840 415,027 153,077 46,107 205,782 10,061 961,568
2003/04 474,919 183,117 92,498 3,4337 10,905 45,068 2,188 199,304

2004/05 517,265 196,146 99,052 3,6855 11,408 48,415 2,374 222,067
2005/06 567,698 207,601 107,562 3,9281 11,719 53,920 2,643 252,535
2006/07 628,553 224,977 115,914 42,604 12,076 58,379 2,856 287,662
2005/07 2,188,435 811,840 415,027 153,077 46,107 205,782 10,061 961,568
Table B 2d: Structure of the Economy

Real values, NRs Millions (1994/1995=100 )
∑Electricity
End Year ∑Manufa Gas and ∑Cocstru
of F/y ∑GDP fc ∑AGDP ∑Industry -cture Water -ction Mining ∑Services
1989-1991 495,280 235,969 93,131 31,955 5,756 52,757 2,663 166,180
1994-1996 636,302 260,755 141,935 60,056 8,829 69,591 3,459 233,612
1999-2001 798,992 303,419 188,025 79,151 12,272 92,159 4,443 307,548
2005-2007 734,643 362,938 219,773 85,416 20,788 108,040 5,529 371,705
2003-04 298,023 115,774 66,685 25,822 6,437 32,816 1,610 115,564

2004/05 238,308 119,826 68,676 26,498 6,692 33,766 1,719 118,483
2005/06 245,235 121,160 74,160 29,145 6,936 36,230 1,849 124,075
2006/07 251,100 121952 76,937 29,773 7,159 38,044 1,960 129,147
2005/07 734,643 362,938 219,773 85,416 20,788 108,040 5,529 371,705
Note: fc:- factor cost before deducting banking services charges
Table B 3.1a: Money Supply Trend
Currency Currency
Fiscal in held Demand Time
Year M0 M1 M2 M3 Circulation by Public Deposits Deposits
1988/89 11,701.9 11,775.4 26,605.1 na 8,707.9 7,946.6 3,828.8 14,829.7
1989/90 14,153.4 14,223.0 3,1552.4 na 10,526.4 9,718.2 4,504.8 17,329.4
1990/91 17,444.9 16,283.6 37,712.5 na 12,608.4 11,654.5 4,629.1 21,428.9
1991/92 19,487.7 19,457.7 45,670.5 na 14,786.7 13,639.7 5,818.0 26,212.8
1992/93 24,837.9 23,833.0 58,322.5 na 17,673.1 16,313.0 7,520.0 34,489.5
1993/94 29,403.4 28,510.4 69,777.1 na 21,519.1 19,659.7 8,850.7 41,266.7
1994/95 34,041.4 32,985.4 80,984.7 na 24,531.5 22,493.9 10,491.5 47,999.3
1995/96 37,230.9 36,498.0 92,652.2 na 27,492.8 25,046.4 11,451.6 56,154.2
1996/97 42,908.4 38,460.3 103,720.6 na 30,171.0 27,333.7 11,126.6 65,260.3
1997/98 47,966.4 45,163.8 126,462.6 na 33,782.9 30,893.2 14,270.6 81,298.8
1998/99 54,155.4 51,062.4 152,800.2 na 38,294.7 34,984.3 16,078.1 101,737.7
1999/00 62,670.0 60,979.8 186,120.8 na 45,650.0 42,143.0 18,836.8 125,141.1
2000/01 73,179.5 70,577.0 214,454.2 na 52,412.0 48,295.1 22,281.8 143,877.2
2001/02 82,245.1 77,156.2 223,988.3 241,636.8 60,567.2 55,658.3 21,497.6 146,832.1
2002/03 82,743.7 83,754.1 245,911.2 263,299.6 61,608.5 56,885.2 26,868.9 162,157.1
2003/04 96,449.1 93,969.5 277,305.9 298,480.5 67,502.8 63,218.9 30,750.7 183,336.4
2004/05 98,939.0 100,205.7 300,439.9 321,997.1 73,557.1 68,784.1 31,421.6 200,234.2
2005/06 112,895.4 114,233.1 347,266.1 372,354.2 83,679.8 77,771.3 36,461.9 233,033.0
2006/07 115,338.2 127,451.3 398,668.9 427,183.7 94,446.3 86,223.8 41,227.6 271,217.6
Notes: 1. M0=Monetary base or high-power money, which includes currency in circulation+ total bank
(net of government deposits of pages :3&9 of QEB mid- April 2007.2.Mo includes currency in circulation and
cash reserves ( cash in hand, balance sheet with NRB and foreign currency in hand ) of commercial banks.
2. Current Macroeconomic Situation, Nepal Rastra Bank, Kathmandu, September 2007.
Table B3.1b: Three Year Averages

Currency in Currency held Demand Ti Time
1990 14,433.40 14,094.00 31,956.67 0.00 10,614.23 9,773.10 4,320.90 17,862.67
1995 33,558.57 32,664.60 81,138.00 0.00 24,514.47 22,400.00 10,264.60 48,473.40
2000 63,334.97 60,873.07 184,458.40 0.00 45,452.23 41,807.47 19,065.57 123,585.33
2006 109,057.53 113,963.37 348,791.63 373,845.00 83,894.40 77,593.07 36,370.37 234,828.27
Table B3.1c: Money Supply... to GDP Ratios

Currency in Currency held Demand Time
1990 0.1288 0.1258 0.2853 0.0000 0.0947 0.0872 0.0386 0.1595
1995 0.1405 0.1368 0.3398 0.0000 0.1027 0.0938 0.0430 0.2030
2000 0.1562 0.1502 0.4550 0.0000 0.1121 0.1031 0.0470 0.3049
2006 0.1673 0.1748 0.5351 0.5736 0.1287 0.1190 0.0558 0.3603
Table B3.2a: Monetary Components
Reserve Foreign Total Net Net Claims on

Reserve Fund : Currency Net Domestic Foreign Domestic Domestic Credit Private
Year Money 9 NRB Deposits Assets Assets Assets Credit to Real Sectors Sector
1988/89
11,336.8 262.5 892.1 26,605.1 20,401.6 6,203.5 26,584.3 24,870.0 10,357.0
1989/90 13,924.8 372.5 927.2 31,552.4 22,213.5 9,338.9 29,661.6 27,656.2 11,687.6
1990/91 16,786.0 520.0 1,278.4 37,712.5 21,560.8 16,151.7 34,491.4 32,266.0 14,108.7
1991/92 18,863.1 720.0 2,254.8 45,670.5 24,878.1 20,792.4 41,609.1 38,821.1 17,780.2
1992/93 24,443.8 920.0 2,835.2 58,322.5 29,197.5 29,125.0 49,404.9 46,113.2 21,208.9
1993/94 28,405.7 1,220.0 3,372.3 69,777.1 33,559.0 36,218.1 57,828.1 54,600.9 29,606.9
1994/95 32,686.3 1,420.0 3,693.0 80,984.7 43,899.2 37,085.5 72,184.7 68,363.2 41,943.1
1995/96 35,390.0 1,490.0 4,800.1 92,652.2 54,948.6 37,703.6 89,265.7 85,014.7 55,524.7
1996/97 41,027.3 1,690.0 6,739.2 103,720.6 63,529.5 40,191.1 100,916.7 95,485.1 64,658.7
1997/98 45,995.5 2,057.5 8,501.7 126,462.6 70,889.8 55,572.8 115,812.1 109,641.7 76,830.1
1998/99 52,225.3 2,557.5 11,030.6 152,800.2 87,772.6 65,027.6 134,832.7 127,285.4 90,800.5
1999/00 61,003.7 2,967.5 13,025.2 186,120.8 105,653.3 80,467.5 158,001.1 149,498.3 109,447.6
2000/01 70,566.6 3,621.7 17,214.3 214,454.2 126,656.1 87,798.1 187,855.4 178,172.0 126,757.9
2001/02 78,969.7 904.6 17,648.5 223,988.3 135,569.2 88,419.1 207,323.0 195,967.9 133,315.3
2002/03 80,979.5 1,054.1 17,388.4 245,911.2 154,504.2 91,407.0 228,443.8 216,615.1 150,956.9
2003/04 94,415.2 1,114.6 21,174.6 277,305.9 168,501.2 108,804.7 246,171.8 232,827.9 172,516.5
2004/05 96,539.2 1,487.4 21,557.2 300,440.0 192,697.9 107,742.1 280,240.4 267,477.6 197,016.9
2005/06 110,743.2 1,487.4 25,088.1 347,266.3 207,733.4 139,532.9 313,115.9 300,396.1 225,367.9
2006/07 120,386.3 1,920.3 28,514.8 409,429.7 265,285.7 144,144.0 360,310.2 370,973.8 286,212.1
Table B3.2b: Three-year Average

Foreign Total Net Net Claims on
Reserve Reserve Currency Net Domestic Foreign Domestic Domestic Credit Private
Year Money Fund Deposits Assets Assets Assets Credit to Real Sectors Sector
1990 14,015.87 385.00 0.00 31,956.67 21,391.97 10,564.70 30,245.77 28,264.07 12,051.10
1995 32,160.67 1,376.67 0.00 81,138.00 44,135.60 37,002.40 73,092.83 69,326.27 42,358.23
2000 61,265.20 3,048.90 0.00 184,458.40 106,694.00 77,764.40 160,229.73 151,651.90 109,002.00
2006 109,222.90 1,631.70 25,053.37 352,378.67 221,905.67 130,473.00 317,888.83 312,949.17 236,198.97

Foreign Total Net Net Claims on
Reserve Reserve Currency Net Domestic Foreign Domestic Domestic Credit Private
Year Money Fund Deposits Assets Assets Assets Credit to Real Sectors Sector
1990 0.1251 0.0034 0.0000 0.2853 0.1910 0.0943 0.2700 0.2523 0.1076
1995 0.1347 0.0058 0.0000 0.3398 0.1848 0.1549 0.3061 0.2903 0.1774
2000 0.1511 0.0075 0.0000 0.4550 0.2632 0.1918 0.3953 0.3741 0.2689
2006 0.1676 0.0025 0.0384 0.5406 0.3405 0.2002 0.4877 0.4801 0.3624
Table B3.3a: Narrow Money and GDP
Nominal GDP
Producer
M0 Currency in Cash Reserve Price Rs. in
Year Total Circulation Reserve Fund Millions
1988/89 11,701.9 8,707.9 2,994.0 262.5 95834.66
1989/90 14,153.4 10,526.4 3,627.0 372.5 111,020.92
1990/91 17,444.9 12,608.4 4,836.5 520.0 129,221.67
1991/92 19,487.7 14,786.7 4,701.0 720.0 160,479.85
1992/93 24,837.9 17,673.1 7,164.8 920.0 184,103.04
1993/94 29,403.4 21,519.1 7,884.3 1,220.0 213,925.90
1994/95 34,041.4 24,531.5 9,509.9 1,420.0 235,292.51
1995/96 37,230.9 27,492.8 9,738.1 1,490.0 267,217.36
1996/97 42,908.4 30,171.0 12,737.4 1,690.0 301,141.13
1997/98 47,966.4 33,782.9 14,183.5 2,057.5 322,968.29
1998/99 54,155.4 38,294.7 15,860.7 2,557.5 367,188.36
1999/00 62,670.0 45,650.0 17,020.0 2,967.5 407,394.47
2000/01 73,179.5 52,412.0 20,767.5 3,621.7 441,519.00
2001/02 82,245.1 60,567.2 21,677.9 904.6 459,443.00
2002/03 82,743.7 61,608.5 21,135.2 1,054.1 492,231.00
2003/04 96,449.1 67,502.8 28,946.3 1,114.6 536,749.00
2004/05 98,939.0 73,557.1 25,381.9 1,487.4 589,412.00
2005/06 112,895.4 83,679.8 29,215.6 1,487.4 646,471.00
2006/07 115,338.2 94,446.3 30,682.1 1,920.3 719,477.00
Table B3.3b: Three Year Average

Nominal GDP
M0 Currency in Cash Reserve Producer Price Rs.in
Year Total Circulation Reserve Fund Millions
1990 14,433.40 10,614.23 3,819.17 385.00 112,025.75
1995 33,558.57 24,514.47 9,044.10 1,376.67 238,811.92
2000 63,334.97 45,452.23 17,882.73 3,048.90 405,367.28
2006 109,057.53 83,894.40 28,426.53 1,631.70 651,786.67

M0 Currency in Cash Reserve
Year Total Circulation Reserve Fund
1990 0.1288 0.0947 0.0341 0.0034
1995 0.1405 0.1027 0.0379 0.0058
2000 0.1562 0.1121 0.0441 0.0075
2006 0.1673 0.1287 0.0436 0.0025
Table B3.4a: Monetary Authority's Accounts
Comm.
Total Net Net bank's
Fiscal Net Domestic Foreign Time S +F
Year Assets Assets Assets M2 Deposits Deposits
1988/89 26,605.1 20,401.6 6,203.5 26,605.1 14,829.7 14,366.5
1989/90 31,552.4 22,213.5 9,338.9 31,552.4 17,329.4 16,979.7
1990/91 37,712.5 21,560.8 16,151.7 37,712.5 21,428.9 21,054.1
1991/92 45,670.5 24,878.1 20,792.4 45,670.5 26,212.8 25,961.2
1992/93 58,322.5 29,197.5 29,125.0 58,322.5 34,489.5 34,338.0
1993/94 69,777.1 33,559.0 36,218.1 69,777.1 41,266.7 40,819.4
1994/95 80,984.7 43,899.2 37,085.5 80,984.7 47,999.3 47,577.7
1995/96 92,652.2 54,948.6 37,703.6 92,652.2 56,154.2 56,042.8
1996/97 103,720.6 63,529.5 40,191.1 103,720.6 65,260.3 66,757.8
1997/98 126,462.6 70,889.8 55,572.8 126,462.6 81,298.8 84,184.9
1998/99 152,800.2 87,772.6 65,027.6 152,800.2 101,737.7 106,985.1
1999/00 186,120.8 105,653.3 80,467.5 186,120.8 125,141.1 132,219.8
2000/01 214,454.2 126,656.1 87,798.1 214,454.2 143,877.2 154,476.6
2001/02 223,988.3 135,569.2 88,419.1 223,988.3 146,832.1 158,191.4
2002/03 245,911.2 154,504.2 91,407.0 245,911.2 162,157.1 172,584.8
2003/04 277,305.9 168,501.2 108,804.7 277,305.9 183,336.4 197,374.5
2004/05 300,440.0 192,697.9 107,742.1 300,439.9 200,234.2 214,151.0
2005/06 347,266.3 207,733.4 139,532.9 347,266.1 233,033.0 251,778.9
2006/07 409,429.7 265,285.7 144,144.0 398,668.9 271,217.6 307,589.3
Table B3.4b: Three year average

Comm.
Net Domestic Foreign Time S +F
Year Assets Assets Assets M2 Deposits deposits
1990 31,956.67 21,391.97 10,564.70 31,956.67 17,862.67 17,466.77
1995 81,138.00 44,135.60 37,002.40 81,138.00 48,473.40 48,146.63
2000 184,458.40 106,694.00 77,764.40 184,458.40 123,585.33 131,227.17
2006 352,378.67 221,905.67 130,473.00 348,791.63 234,828.27 257,839.73
Table B3.4c: Ratio to GDP
Total Net
net domestic Net foreign Time Comm. Bank's
Year assets assets assets M2 deposits S+F deposits
1990 0.2853 0.1910 0.0943 0.2853 0.1595 0.1559
1995 0.3398 0.1848 0.1549 0.3398 0.2030 0.2016
2000 0.4550 0.2632 0.1918 0.4550 0.3049 0.3237
2006 0.5406 0.3405 0.2002 0.5351 0.3603 0.3956
Table B3.4d: Ratio to GNI

Comm.
Net Domestic Foreign Time S +F
Year Assets Assets Assets M2 Deposits deposits
1990 0.2901 0.1942 0.0959 0.2901 0.1622 0.1586
1995 0.3454 0.1879 0.1575 0.3454 0.2064 0.2050
2000 0.4550 0.2632 0.1918 0.4550 0.3048 0.3237
2006 0.5376 0.3385 0.1991 0.5321 0.3583 0.3934
Table B3.5a: Money: Narrow and Broad

Demand Deposits of Commercial Banks
Money Currency Deposits
Supply (held (held Total Current Savings Fixed Margin
Year M1 by Public) By Public) Deposits Deposits Deposits Deposits Deposits
1988/89 11,775.4 7,946.6 3,828.8 18,954.6 3,924.0 4,321.8 10,044.7 664.1
1989/90 14,223.0 9,718.2 4,504.8 21,885.0 4,293.7 5,218.2 11,761.5 611.6
1990/91 16,283.6 11,654.5 4,629.1 26,687.5 4,782.4 6,671.5 14,382.6 851.0
1991/92 19,457.7 13,639.7 5,818.0 33,328.5 6,451.2 8,634.9 17,326.3 916.1
1992/93 23,833.0 16,313.0 7,520.0 43,543.1 8,302.1 12,923.3 21,414.7 9,03.0
1993/94 28,510.4 19,659.7 8,850.7 52,168.5 10,156.8 17,460.7 23,358.7 1,192.3
1994/95 32,985.4 22,493.9 10,491.5 61,045.5 12,014.4 22,765.9 24,811.8 1,453.4
1995/96 36,498.0 25,046.4 11,451.6 71,207.6 13,215.6 25,887.3 30,155.5 1,949.2
1996/97 38,460.3 27,333.7 11,126.6 81,542.4 12,917.4 29,783.1 36,974.7 1,867.2
1997/98 45,163.8 30,893.2 14,270.6 102,401.6 16,409.4 36,884.4 47,300.5 1,807.3
1998/99 51,062.4 34,984.3 16,078.1 126,773.6 17,777.6 50,140.8 56,844.3 2,010.9
1999/00 60,979.8 42,143.0 18,836.8 154,530.3 20,307.6 65,703.6 66,516.2 2,002.9
2000/01 70,577.0 48,295.1 22,281.8 181,203.4 24,629.2 80,987.8 73,488.8 2,097.6
2001/02 77,156.2 55,658.3 21,497.6 183,728.1 23,749.2 83,817.7 74,373.7 1,787.5
2002/03 83,754.1 56,885.2 26,868.9 202,733.8 28,299.4 97,236.4 75,348.4 1,849.6
2003/04 93,969.5 63,218.9 30,750.7 232,576.3 33,038.7 114,106.3 83,268.2 2,163.1
2004/05 100,205.7 68,784.1 31,421.6 250,465.0 34,120.0 130,013.6 84,137.4 2,194.0
2005/06 114,233.1 77,771.3 36,461.9 289,975.9 35,716.1 151,710.7 100,068.2 2,480.9
2006/07 127,451.3 86,223.8 41,227.6 354,556.2 43,838.5 182,901.2 124,688.1 3,128.4
Table B3.5b: Three year average
Money Currency Deposits Margin
Supply (held (held Total Current Savings Fixed Deposits
Year M1 by Public) By Public) Deposits Deposits Deposits Deposits
1990 14,094.00 9,773.10 4,320.90 22,509.03 4,333.37 5,403.83 12,062.93 708.90
1995 32,664.60 22,400.00 10,264.60 61,473.87 11,795.60 22,037.97 26,108.67 1,531.63
2000 60,873.07 41,807.47 19,065.57 154,169.10 20,904.80 65,610.73 65,616.43 2,037.13
2006 113,963.37 77,593.07 36,370.37 298,332.37 37,891.53 154,875.17 102,964.57 2,601.10

Year M1 by Public) by Public) Deposits Deposits Deposits Deposits
1990 0.1258 0.0872 0.0386 0.2009 0.0387 0.0482 0.1077 0.0063
1995 0.1368 0.0938 0.0430 0.2574 0.0494 0.0923 0.1093 0.0064
2000 0.1502 0.1031 0.0470 0.3803 0.0516 0.1619 0.1619 0.0050
2006 0.1748 0.1190 0.0558 0.4577 0.0581 0.2376 0.1580 0.0040

Year M1 by Public) by Public) Deposits Deposits Deposits Deposits
1990 0.1280 0.0887 0.0392 0.2044 0.0393 0.0491 0.1095 0.0064
1995 0.1391 0.0954 0.0437 0.2617 0.0502 0.0938 0.1112 0.0065
2000 0.1501 0.1031 0.0470 0.3803 0.0516 0.1618 0.1618 0.0050
2006 0.1739 0.1184 0.0555 0.4551 0.0578 0.2363 0.1571 0.0040
Table B3.6a: Credit Supply
Claims on Net Govt.
Claims on Claims on Govt. Total Claims on Financial
Domestic Real Private Nonfinancial Claims Govt. Enterprises
Year Credit Sectors Sector Enterprises ( a+b) a B
1988/89 26,584.3 12,517.4 10,357.0 2,160.4 5,485.7 3,771.4 1,714.3
1989/90 29,661.6 13,708.5 11,687.6 2,020.9 5,587.9 3,582.5 2,005.4
1990/91 34,491.4 15,437.1 14,108.7 1,328.4 9,568.5 7,343.1 2,225.4
1991/92 41,609.1 19,812.0 17,780.2 2,031.8 11,986.6 9,198.6 2,788.0
1992/93 49,404.9 22,659.5 21,208.9 1,450.6 13,289.7 9,998.0 3,291.7
1993/94 57,828.1 31,111.4 29,606.9 1,504.5 12,121.3 8,894.1 3,227.2
1994/95 72,184.7 43,164.5 41,943.1 1,221.4 12,019.3 8,197.8 3,821.5
1995/96 89,265.7 57,475.5 55,524.7 1,950.8 11,799.4 7,548.4 4,251.0
1996/97 100,916.7 66,248.2 64,658.7 1,589.5 13,177.9 7,746.3 5,431.6
1997/98 115,812.1 77,881.1 76,830.1 1,051.0 16,451.1 10,280.7 6,170.4
1998/99 134,832.7 92,359.7 90,800.5 1,559.2 20,206.4 12,659.1 7,547.3
1999/00 158,001.1 111,248.2 109,447.6 1,800.6 26,679.5 18,176.7 8,502.8
2000/01 187,855.4 128,973.4 126,757.9 2,215.5 35,376.3 25,692.9 9,683.4
2001/02 207,323.0 136,383.8 133,315.3 3,068.5 40,498.9 29,143.8 11,355.1
2002/03 228,443.8 153,782.6 150,956.9 2,825.7 51,298.0 39,469.3 11,828.7
2003/04 246,171.8 175,431.4 172,516.5 2,914.9 70,740.5 57,396.6 13,343.9
2004/05 280,240.4 203,583.1 197,016.9 6,566.2 76,657.3 63,894.5 12,762.8
2005/06 313,115.9 229,828.8 225,367.9 4,460.9 83,287.2 70,567.4 12,719.8
2006/07 360,310.2 291,720.6 286,212.1 5,508.5 84,613.3 79,253.1 5,360.2
Table B3.6b: Three- year average

Claims on Net Govt.
Year Credit Sectors Sector Enterprises ( a+b) a b
1990 3,0245.77 13,887.67 12,051.10 1,836.57 6,880.70 4,899.00 1,981.70
1995 7,3092.83 43,917.13 42,358.23 1,558.90 11,980.00 8,213.43 3,766.57
2000 16,0229.73 110,860.43 109,002.00 1,858.43 27,420.73 18,842.90 8,577.83
2006 31,7888.83 241,710.83 236,198.97 5,511.87 81,519.27 71,238.33 10,280.93

Claims on Net Govt.
1990 0.2700 0.1240 0.1076 0.0164 0.0614 0.0437 0.0177
1995 0.3061 0.1839 0.1774 0.0065 0.0502 0.0344 0.0158
2000 0.3953 0.2735 0.2689 0.0046 0.0676 0.0465 0.0212
2006 0.4877 0.3708 0.3624 0.0085 0.1251 0.1093 0.0158
Claims on Net Govt.
1990 0.2746 0.1261 0.1094 0.0167 0.0625 0.0445 0.0180
1995 0.3112 0.1870 0.1803 0.0066 0.0510 0.0350 0.0160
2000 0.3952 0.2734 0.2689 0.0046 0.0676 0.0465 0.0212
2006 0.4850 0.3688 0.3604 0.0084 0.1244 0.1087 0.0157
Table B4a: Deposits of All Commercial Banks

Deposits of Commercial Banks
Demand Time Total Current Saving Fixed Margin
Year Deposits Deposits Deposits Deposits Deposits Deposits Deposits
1988/89 3,828.8 14,829.7 18,954.6 3,924.0 4,321.8 10,044.7 664.1
1989/90 4,504.8 17,329.4 21,885.0 4,293.7 5,218.2 11,761.5 611.6
1990/91 4,629.1 21,428.9 26,687.5 4,782.4 6,671.5 14,382.6 851.0
1991/92 5,818.0 26,212.8 33,328.5 6,451.2 8,634.9 17,326.3 916.1
1992/93 7,520.0 34,489.5 43,543.1 8,302.1 12,923.3 21,414.7 903.0
1993/94 8,850.7 41,266.7 52,168.5 10,156.8 17,460.7 23,358.7 1,192.3
1994/95 10,491.5 47,999.3 61,045.5 12,014.4 22,765.9 24,811.8 1,453.4
1995/96 11,451.6 56,154.2 71,207.6 13,215.6 25,887.3 30,155.5 1,949.2
1996/97 11,126.6 65,260.3 81,542.4 12,917.4 29,783.1 36,974.7 1,867.2
1997/98 14,270.6 81,298.8 102,401.6 16,409.4 36,884.4 47,300.5 1,807.3
1998/99 16,078.1 101,737.7 126,773.6 17,777.6 50,140.8 56,844.3 2,010.9
1999/00 18,836.8 125,141.1 154,530.3 20,307.6 65,703.6 66,516.2 2,002.9
2000/01 22,281.8 143,877.2 181,203.4 24,629.2 80,987.8 73,488.8 2,097.6
2001/02 21,497.6 146,832.1 183,728.1 23,749.2 83,817.7 74,373.7 1,787.5
2002/03 26,868.9 162,157.1 202,733.8 28,299.4 97,236.4 75,348.4 1,849.6
2003/04 30,750.7 183,336.4 232,576.3 33,038.7 114,106.3 83,268.2 2,163.1
2004/05 31,421.6 200,234.2 250,465.0 34,120.0 130,013.6 84,137.4 2,194.0
2005/06 36,461.9 233,033.0 290,427.7 36,898.2 151,573.2 99,475.4 2,480.9
2006/07 41,227.6 271,217.6 0.0
Table B4b: Deposits of Individual Commercial Banks
Nepal Bank Agri. Development Bank
Total Current Saving Fixed Total Current Saving Fixed
Year Deposits Deposits Deposits Deposits Deposits Deposits Deposits Deposits
1988/89 9,448.3 1,723.5 2,116.0 5,608.8 1,104.1 120.2 452.0 531.9
1989/90 10,469.9 1,958.5 2,443.4 6,068.0 1,742.2 168.0 675.2 899.0
1990/91 11,689.6 2,081.4 2,975.4 6,632.8 2,347.1 170.0 953.9 1,223.2
1991/92 12,994.8 2,277.8 3,472.6 7,244.4 3,125.6 278.5 1,207.9 1,639.2
1992/93 15,213.1 2,674.5 4,648.6 7,890.0 4,226.3 345.8 1,689.5 2,191.0
1993/94 17,505.9 3,124.5 6,180.5 8,200.9 5,319.7 533.8 2,308.2 2,477.7
1994/95 18,347.8 3,463.6 7,613.9 7,270.3 6,425.9 535.5 2,884.6 3,005.8
1995/96 19,895.2 3,852.3 8,544.5 7,003.5 7,495.4 534.9 3,434.7 3,525.8
1996/97 21,570.5 3,409.9 9,381.9 8,350.2 8,870.6 580.4 3,721.5 4,568.7
1997/98 28,138.3 10,194.8 731.5 4,826.9 4,636.4
1998/99 33,188.5 12,877.1 958.5 6,512.3 5,406.3
1999/00 35,768.3 14,386.6 684.8 8,290.3 5,411.5
2000/01 35,618.6 16,959.8 1,098.6 10,389.2 5,472.0
2001/02 34,264.8 19,888.1 1,078.9 11,086.6 7,722.6
2002/03 35,014.0 22,886.0 1,273.3 12,850.9 8,761.8
2003/04 35,735.0 25,436.3 8,96.9 14,682.8 9,856.6
2004/05 35,934.2 27,030.0 1,824.0 15,121.0 10,085.0
2005/06 35,790.0 28,931.1 1,279.5 16,225.4 11,426.2
2006/07 39,007.5 0.0
Table B4c: Deposits of Individuals in Commercial Banks including ADBN
Commercial Banks Agri. Dev. Bank of Nepal
Current Savings Fixed Current Savings Fixed
Year Deposits Deposits Deposits Total Deposits Deposits Deposits
1988/89 1,301.1 4,178.4 6,482.1 1,104.1 120.2 452.0 531.9
1989/90 1,533.4 4,971.4 7,337.7 1,742.2 168.0 675.2 899.0
1990/91 1,781.3 6,421.6 8,605.0 2,347.1 170.0 953.9 1,223.2
1991/92 2,017.3 8,213.6 10,513.1 3,125.6 278.5 1,207.9 1,639.2
1992/93 2,548.8 12,069.9 13,186.4 4,226.3 345.8 1,689.5 2,191.0
1993/94 2,728.5 16,362.3 14,529.4 5,319.7 533.8 2,308.2 2,477.7
1994/95 3,580.0 21,180.8 14,560.8 6,425.9 535.5 2,884.6 3,005.8
1995/96 3,925.5 23,935.7 15,617.6 7,495.4 534.9 3,434.7 3,525.8
1996/97 3,546.0 26,821.4 15,045.4 8,870.6 580.4 3,721.5 4,568.7
1997/98 4,458.9 33,021.5 20,111.6 10,194.8 731.5 4,826.9 4,636.4
1998/99 4,152.8 44,507.8 26,054.1 12,877.1 958.5 6,512.3 5,406.3
1999/00 5,310.9 59,771.9 25,720.2 14,386.6 684.8 8,290.3 5,411.5
2000/01 6,052.3 72,066.9 23,490.3 16,959.8 1,098.6 10,389.2 5,472.0
2001/02 6,131.9 72,913.6 27,971.5 19,888.1 1,078.9 11,086.6 7,722.6
2002/03 4,901.4 85,004.9 23,147.0 22,886.0 1,273.3 12,850.9 8,761.8
2003/04 5,114.0 97,931.9 21,154.6 25,436.3 896.9 14,682.8 9,856.6
2004/05 6,463.7 110,446.6 18,378.6 27,030.0 1,824.0 15,121.0 10,085.0
2005/06 8,825.8 128,148.1 18,525.0 28,931.1 1,279.5 16,225.4 11,426.2
Table B4d: Liquid Liabilities of Commercial Banks

Year Total Deposits Liquid Funds Total
1989 18,954.60 3,777.20 22,731.80
1990 21,885.00 5,842.20 27,727.20
1991 2,668.75 767.90 3,436.65
1992 3,332.86 830.40 4,163.26
1993 4,354.31 1,511.33 5,865.64
1994 5,216.85 1,890.50 7,107.35
1995 6,104.55 1,751.29 7,855.84
1996 7,120.75 2,070.09 9,190.84
1997 8,154.24 2,424.86 10,579.10
1998 10,240.16 3,104.86 13,345.02
1999 12,677.36 3,771.02 16,448.38
2000 15,453.03 4,516.09 19,969.12
2001 18,120.34 5,064.38 23,184.72
2002 18,372.81 4,695.19 23,068.00
2003 20,273.40 4,133.00 24,406.40
2004 23,257.60 5,038.50 28,296.10
2005 25,046.50 5,022.29 30,068.79
2006 29,042.60 6,267.20 35,309.80
Table B4e: The State of Select Commercial Banks
RBBL NBL ADBL
2007 2006 2007 2006 2007 2006
a. Staff Expenses 82,0327 745,186 1,137,719 711,715 1,414,369 1,775,337
b. Other Operating Expenses 34,2209 288,625 266,259 228,018 289,868 254,889
c. Total Operating Income 2,059,001 1,905,892 1,304,428 1,687,166 3,255,311 2,803,658
d.Net Profit /Loss 1,681,655 1,591,489 417,738 727,970 1,452,903 353,524
e. d/c 0.8167 0.8350 0.3202 0.4315 0.4463 0.1261
f. Non-Performing Loan(NPL)
to total Loan(%) 29.16 37.09 15.2 25.11 14.97 20.59
g. Overhead Cost 428650803.0 3.20%
h. Loan Recovery Rate in % NA NA 70.3
i. Total Outstanding Rs in 000 33,310,746

Development of Financial Institution in Nepal

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Development of Financial Institution in Nepal

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Revised Draft Report

Bharat Prasad Devkota

Study Team December 13, 2007

Chapter 1: Introduction ................................................................................................................................ 1

Chapter 2: The Economy ............................................................................................................................. 4

Chapter 3: Central Banking ....................................................................................................................... 11

Chapter 4: Commercial Banking................................................................................................................ 18

Chapter 5: Nonbank Financial Institutions in Nepal.................................................................................. 21

Chapter 6: Nepal Stock Exchange ............................................................................................................. 30

Chapter 7: Challenges and Opportunities in Financial Institutions' Development .................................... 42

Select References ................................................................................................................................... 49

ADB Asian Development Bank

2 The Post-1990 Economy

Nepal is least developed (among 50 countries) as well as a landlocked (among 40 countries). It is

2.2 Per Capita Income

2.3 The Structure of the Economy

2.4 Annual Growth Rates of Population, National Income and Production

2.3 Production Efficiency and Poverty

3. Nepal in the Global Economy

5. The Wealth of Nepal

5.1 Natural Resources

5.2 Human Resources

5.3 Infrastructure Development

9. Nepal Stock Exchange

10. Challenges and Opportunities in Financial Institutions' Development

10.1 The Economy

10.2 Central Banking

10.3 Commercial Banking

10.4 Nonbank Financial Institutions

10.5 The Nepal Stock Exchange

2. Objectives of the Study

This approach utilized both micro-prudential and macro-prudential indicators developed in

5. Limitations of the Study

6. The Study Setting

2.1 The Setting

Nepal is least developed (among 50 countries) as well as a landlocked (among 40 countries).

Table 2.2: National Economic Level Indicators

Economy's Size Per Capita

2.2.2 Per Capita Income

Economy's Structure Mid-end year of the fiscal year (of three-year

2.2.4 Annual Growth Rates of Population, National Income and Production

Table 2.4: Annual Average Real Growth Rates (Three-Year Averages)

2.4 Nepal in the Global Economy

2.5 Nepal in Global Competitiveness Ranking

2.7 The Wealth of Nepal

2.7.1 Natural Resources

2.7.2 Human Resources

The population, of 28 millions in 2006, is increasing at 2% per annum. The population is

2.7.3 Infrastructure Development

3.2 Monetary Policy

3.2.1 Cash Reserve Ratio (CRR)

3.2.2 Bank Rate

3.2.3 Refinancing Rates

3.2.4 Interbank Transactions Rate

Table 3.2: Open Market Operation

3.3 Money Supply

3.3.1 High-powered Money or Monetary Base (Mo)

Table 3.3: Three-Year Average Annual Nominal Growth Rates, %

3.3.2 Narrow Money Supply (M1)

3.3.3 Broad Money Supply (M2)

Table 3.4: Ratios of Money Supply Components to GDP and GNI

3.3.4 Government Financing: Size and Trend

Table 3.5: Government Spending and Deficit Financing Sources

3.3.5 Financial deepening