Financial sector is considered as the backbone or engine for the growth of any economy. It mobilizes and allocates financial resources in a productive and efficient way in order to induce investment, increase employment opportunities and productivity in order to achieve growth targets. Every county has to go for financial reform.
Financial sector reforms (FSR) are the activities or the initiatives taken by the government and central bank in order to make the financial sector more efficient, inclusive, and risk resilient. So, it comprises of a broad policy components to promote financial outreach competitive and stable financial sector.
Financial sector reform is a continuous process implemented in order to improve the quality of financial service and the functioning of the financial system as a whole. The reform or liberalization of financial sector is an ongoing process, which takes several years to finish the proceeding of financial reform. The financial sector reform of Nepal was initiated in mid-1980s and it is still being pursued.
The financial sector reform process in Nepal has been classified in terms of different periods which are as follows:
Financial Sector Reform Before 1990
Before 1990, the financial sector was almost regulated or based on state led protectionist strategy. So, the financial market and instrument were under the control of the state. However, with the adoption of structural adjustment program in the late 1980s, liberalization was initiated as a result, a few joint venture Banks were established.
The major reform action adopted were-
Amendment of Commercial Bank act 1974, and in 1984 it removed the entry barriers for private commercial banks.
Opening of joint venture bank: With the initiation of financial reform, Nepal Arab Bank Limited was established in 1984 as the first joint venture commercial bank of the country which brought foreign investment in the banking industry and modern banking practices and technical skills. Similarly in 1985 and 1987, Nepal Indosuez Bank Limited and Nepal Grindlays Bank Limited were established.
Interest rate de-regulation: Before 1986, all the interest rate of the commercial bank was under the authority of Nepal Rastra Bank. But in the year 1986, interest rate regime was deregulated by NRB and extended its authority to commercial banks completely.
Approval for ADBL to carry out commercial lending activities (1984): Agricultural Development Bank of Nepal (ADB/N) and Nepal Industrial development Corporation (NIDC) were permitted to issue debentures to enlarge their financial resources.
Enactment of finance company act: The Finance Company Act was enacted in 1986 to increase competition in financial markets and especially for the merchant banking and leasing services and to provide loans for hire purchase, term finance and housing construction.
In 1988, reform in the treasury bill issue process and NRB’s introduction of prudential norms were initiated.
In 1989, credit information bureau was established and price and volume control of commercial bank loan was removed.
Financial Sector Reform During 1990 To 2000
After the restoration of multi party system in 1990s, government initiated comprehensive market oriented reform where the financial sector reform was one of the major component. So, to make financial sector more liberal, broad and efficient, different reforms were undertaken which resulted Nepalese Financial sector to increase quickly since 1990s. The numbers of banks and financial institutions has increased in a dramatic manner. The major reforms include:
Establishment of Different funds (1991); Employment Provident Fund, Deposit Insurance and Credit Guarantee Corporation, Citizens Investment Trust, Nepal Stock Exchange Limited, Securities Board, Insurance Board, Credit Information Bureau were established.
In the same phase there has been a massive growth in the volume of financial transactions and financial markets as Himalayan Bank Limited and Nepal SBI Bank Limited were established in 1993 and Nepal Bangladesh Bank Limited and Everest Bank Limited in 1994 established as joint venture commercial banks.
Amendment of security exchange act and establishment of security exchange board in 1992.
Establishment of five regional rural developmental bank in 1993: The rural development banks were established in five development regions to provide microfinance services to the poor and the ultra-poor women.
Enactment of development bank act 1996.
Financial Sector Reform During 2000 To 2010
In 2002, financial sector reform program was initiated with the technical and financial support from the World Bank and IMF. The major focus of the program was to reform state-owned banks, RBB and NBL, re-engineering of NRB, in order to increase financial outreach of the people. Voluntary retirement system (VRS) was implemented in these bank to reduce overstaffing and inefficiency.
From the year 2004, a separate law has been promulgated in order to avoid anti-money laundering. So, KYC policies has been drafted, finalized and implemented from the year 2005.
For the establishment of foreign bank branch in Nepal from 2010, memorandum of association has been prepared from the year 2006.
Financial Sector Reform During 2010 To Present
In the year 2013/14, the merger process has been simplified which encouraged bank and financial institution for merger among banks.
Similarly in the year 2013/14, in order to maintain financial stability, provision of BASEL-III has been implemented.
Rastriya Banijya Bank has been capitalized according to the approved capital plan.
In the same year, Nepal Bank Limited has been transferred to its shareholder after the approved capital plan of the bank.
In the year 2020/21, in order to minimize the cash transaction, GON has encouraged the spirit of the Digital Nepal Framework.
In the same year, additional benefits had been provided to those bank and financial institutions who had undergone the merger and acquisition process.
NRB through monetary policy is implementing financial sector reform initative every year. The monetary policy itself has identified and implemented financial sector reform to make this sector more inclusive, broad-based, efficient and stable.
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