Financial Market Reforms in Nepal and Its Presence in South Asia

Financial Market Reforms in Nepal and Its Presence in South Asia

Bishnu Prasad Gautam (Nepal Rastra Bank, Nepal)
Copyright: © 2016 |Pages: 29
DOI: 10.4018/978-1-5225-0004-9.ch010
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Financial market is the backbone of the economy, hence is crucial for the economic growth and development of any country. The financial sector also entails the seeds of financial crisis that can spill over across the rest of economy. Though the interaction between various economic sectors is crucial, it requires timely assessment of risks and redressed. This chapter attempts to capture the sequencing and implementation of financial market reforms in Nepal and briefly examine its consequences. The evidence confirms that reforms do not only mean the institutional and policy reforms but also manifests in terms of increase in the number of financial institutions, expansion in the outreach of financial services and products in terms of quality and quantity as well as improvement in the soundness of macroeconomic indicators. Finally, it argues for the continuation of reforms and consolidation in the financial markets to make the system resilient in changing contexts.
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Comparing to its neighboring countries, the history of the modern financial market is relatively short. It starts with the establishment of Nepal Bank Limited (NBL) in 1937. The process gained the momentum with the establishment of Nepal Rastra Bank (NRB), the central bank of Nepal in 1956. It took almost 28 years for the second commercial bank, Rastriya Banijya Bank (RBB) to come into existence. The establishment of the third commercial bank, Nabil Bank Ltd. (previously known as Nepal Arab Bank Limited) took another 20 years. However, during the last 25 years, there has been a moments of growth in the setting up of new banks and financial institutions in Nepal. Consequently, the market nowadays is composed of 30 commercial banks, 84 development banks, 53 finance companies and 37 microcredit development banks (NRB, 2014c). In addition, there are 15 financial cooperatives and 30 financial non-government organizations licensed by the central bank to perform limited banking activities (NRB, 2014d; Gautam, 2014). Likewise, there are some other contractual saving organizations (popularly known as other financial institutions) in Nepal viz., insurance companies (25), employee's provident fund, citizen investment trust and Nepal Stock Exchange Limited (NRB, 2014d).

This chapter is designed to enumerate the pace and speed of financial market reforms in Nepal. Main objective is to discuss the conceptual issues and context of financial market reforms in Nepal. It starts with documenting the rationale of reforms and continues with discussion of status and progresses made in financial sector restructuring and reforms in Nepal. It uses the information received through a review of literature, progress reports and websites pertaining to financial market reforms in Nepal. In addition, it uses the information received from key-informants connected with the project implementation and author's personal experience in the project. Another thrust of this chapter is to account and examine the evolution and imperatives of the financial market in Nepal during the last three decades.

The chapter has been organized in seven sections. After a short description on background of financial market reforms in second section, section three enumerates the reform modalities undertaken in the financial market. Section four provides a brief assessment of achievements and impact of reforms whereas section five deals with the issues and challenges of financial sector reforms in Nepal. Section six opens up the issue on regional context and finally last section concludes the discussion.

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