Nepal Financial Sector Study

This document provides an overview of the financial sector in Nepal. It argues that the Nepalese people have not reaped the gains of the government's efforts to liberalize the financial sector for the following reasons:

• Excessive government ownership;
• A weak Central Bank;
• Poor banking environment;
• Inadequate banking services for the poor.

The paper finds deficiencies in the Central Bank of Nepal and calls for restructuring and reform in banking supervision. It also identifies the following deficiencies in the two largest commercial banks in Nepal:

• Political interference;
• Un-sound banking practices;
• Poor accounting systems;
• Lack of strategic planning;
• Poor incentive system and wage structure;
• Weak staff and management discipline.

The paper discusses the microfinance scenario in Nepal and states that:

• The Grameen Model of microcredit is unsuitable for Nepal;
• There is a need for capacity building, subsidization of operations and transparency in microfinance institutions (MFIs);
• Delivery of credit through public agencies has been unsatisfactory;
• The hard-core poor have been excluded.

The paper concludes by identifying five principles around which financial sector reform in Nepal should take place:

• Withdrawing the government from ownership of financial institutions;
• Strengthening the Central Bank to make it a fully professional institution;
• Restructuring the two largest commercial banks;
• Creating an appropriate environment for establishing a sound financial sector;
• Developing an improved system of microfinance.