Contribution Of Banking Sector To The GDP Of Nepal

August 20, 2019 | DWAIPAYAN REGMI

Imagine a bank that is earning a profit of 1 crore. As per the policy, 10% has to be set aside for employees as ‘Bonus’. But, before that 30% of the profit has to be set aside in the name of ‘Tax’. So, the real picture comes this way – greater the profit that a bank earns, more the fund Government collects. More than the staff working in the bank, and more than the shareholders.

Related: Current Status of Banking in Nepal

Tracking World Bank Data, ever since 2007 itself almost 50% of contribution towards GDP has been done by Service sectors on average. There are several reports and studies stating the financial sector’s development is a key way to foster economic growth as well. Banks and Financial Institutions have been major players in this regard. So, there certainly lies a query regarding how banks and the financial sector contribute to the GDP of any country.

The recent report showed that in the last fiscal year of 2075/76, A-class commercial banks earned a total of 65 Arba. The profit earned by 28 commercial banks is 18% of the entire GDP. This is how banks directly contribute to GDP. However, there are other ways through which banks again contribute to the economy through the indirect channel. They include:

Banks help in circulation of money

Those idle funds, which individual holds or keeps under their pillow is collected by the bank. This fund is then granted to others as ‘lending’ who carry out several activities within the nation contributing towards GDP.

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Banks help in carrying out a financial transaction

Through several ranges of instruments – cheques to demand drafts, banks have been helping as a key mediator for any financial progress. People make transactions through these instruments, which has somehow been beneficial for the GDP as a whole.

Banks facilitate in promotion of the productive sector

Be it for agriculture, or renewable energies like hydropower, banks have been always supportive. Those, who apply to satisfy all the criteria are always made eligible for the lending of loans, because of which they produce something within the nation. People work for the productive sector and make huge earnings because of this financial support contributing to GDP.

Read: History Of Modern Banking In Nepal

Banks act as a mediator

For any sort of trading, be it stock exchange trading or remittances, banks have been acting as one important mediator. Those in Qatar or Dubai send funds to banks through remittances or SWIFT transfer – and people hereby get benefitted. This fund, which comes to their homeplace is utilized for the establishment of some business, or for any purchases which again contributes to GDP.

Banks support foreign trade

Banks are the only authorized space from where foreign trade-related transactions can be carried out. Letter of Credit is widely practiced culture for importing goods or raw materials.  Lube oil manufacturers, or cosmetic manufacturers – they have been importing raw materials on a large scale from abroad because of this foreign trade letting the firm grow up.

Related: Financial Analysis of Commercial Banks of Nepal

Banks facilitate manufacturing firms

Manufacturing firms, who require huge working capital; or financing – they have been facilitated by banking sectors. Banks lend them money so that they can operate with full functionality. These firms again create employment to a larger scale. With the expansion of businesses and firms, the requirement of the next level of working capital can be expected. Banks have been facilitating them in every step that they take over.

Banks provokes entrepreneurship

In this latest period, banks have been actively working for entrepreneurship promotion as well. They have been coming with impressive and motivating schemes to promote youths for entrepreneurship. Meanwhile, for new ventures – banks have been supporting in one way or the other as well. Government banks have been coming up with impressive schemes to promote entrepreneurship be that through Mahila Udhyamshilata Karja or other forms of loans.

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Support through Consolidated Financing

For bigger projects, banks involve in consolidated financing. This has not only helped in economical infrastructure development but has helped other forms of the economy who are linked financially thereby as well. From employment generation to market expansion, banks have been playing an important role in contributing again to GDP.

Hence, besides direct contribution over the economy, banks have been major players in the indirect form of the economy as well. Bing financial mediators, banks have been working to boost up the economy of the nation at every scale.

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