Banking in Nepal: A History of Banking System in Nepal
This post is about banking in Nepal, a history of the banking system in Nepal. In the context of Nepal, it is very difficult to trace the correct chronological history of the Banking systems in Nepal because there are no sufficient historical records and data about Banking in Nepal.
A bank, also known as a credit institution or deposit entity is a financial company that is responsible for raising funds in the form of deposits, and lending money, as well as the provision of financial services. Banking, or the banking system, is the set of entities or institutions that, within a given economy, provide bank services.
Internationalization and globalization promote the creation of a universal Banking. In a financial context, such as the work of the money changers, it refers to the counter for the money transaction.
There are existing records of loans in Babylon during the eighteenth century BC. made by temple priests to merchants. The trapezitas were the bankers in Ancient Greece.
Trapeze was the table behind which they were in stores, sometimes destined to another type of commercial activity, but very often to banking transactions. However, the most important banks continued to be the great temples, where the priests made the money they received on deposit in accordance with the loans granted to individuals and cities.
Pythius of Lydia, in Asia Minor, early from the 5th century BC was the first individual banker of which there are records. Many of the bankers of the Greek city-states were “metecos” or foreign residents. Around 371 B. C., Passion, a slave, became the richest and most famous banker in Greece.
There is proof that this type of operation was possibly carried out in Abraham’s time. As the ancient Sumerians of the Sinar plains had “a singularly complex system of lending and receiving loans, keeping money in deposit and providing letters of credit.” In Babylon, as later in Greece, banking activity centered around religious temples, whose sacrosanct nature meant security against thieves.
Banks in Roman times did not work like modern ones. The majority of banking activities were carried out by individuals and not by institutions. The enormous investments were financed by the generators, while those who worked professionally in the business of money and credit were known by various names, such as argentarii (banker), nummular (money changer), and coactors (collectors).
Medieval trade fairs, such as Hamburg, contributed to the growth of banking in a curious way. Moneychangers issued available documents with other fairs, in exchange for foreign exchange.
These documents could be collected at another fair in a different country or at a future fair in the same place. They were redeemable at a future date, they were often discounted by an amount comparable to an interest rate.
Let’s talk about Banking in Nepal. Nepal Bank Ltd. is the first modern bank of Nepal. It is taken as the milestone of modern banking of the country. Nepal bank marks the beginning of a new era in the history of modern banking in Nepal. This was established in 1937 A.D.
Nepal Bank has been inaugurated by King Tribhuvan Bir Bikram Shah Dev on 30th Kartik 1994 B.S. Nepal bank was established as a semi-government bank with the authorized capital of Rs.10 million and the paid -up capital of Rs. 892 thousand. Until the mid-1940s, only metallic coins were used as a medium of exchange.
So the Nepal Government (His Majesty Government on that time) felt the need of separate institution or body to issue national currencies and promote the financial organization in the country.
Nepal Bank Ltd. remained the only financial institution of the country until the foundation of Nepal Rastra Bank is 1956 A.D. Due to the absence of the central bank, Nepal Bank has to play the role of the central bank and operate the function of the central bank.
Hence, the Nepal Rastra Bank Act 1955 was formulated, which was approved by the Nepal Government accordingly, the Nepal Rastra Bank was established in 1956 A.D. as the central bank of Nepal. Nepal Rastra Bank makes various guidelines for the banking sector of the country.
A sound banking system is important for the smooth development of the banking system. It can play a key role in the economy. It gathers savings from all over the country and provides liquidity for industry and trade. In 1957 A.D. Industrial Development Bank was established to promote the industrialization in Nepal, which was later converted into Nepal Industrial Development Corporation (NIDC) in 1959 A.D.
Rastriya Banijya Bank was established in 1965 A.D. as the second commercial bank of Nepal. The financial shapes for these two commercial banks have a tremendous impact on the economy. That is the reason why these banks still exist in spite of their bad position.
As agriculture is the basic occupation of major Nepalese, the development of this sector plays in the prime role in the economy. So, separate Agricultural Development Bank was established in 1968 A.D. This is the first institution in agricultural financing.
For more than two decades, no more banks have been established in the country. After declaring free economy and privatization policy, the government of Nepal encouraged the foreign banks for a joint venture in Nepal.
Today, the banking sector is more liberalized and modernized and systematic managed. There are various types of the bank working in the modern banking system in Nepal. It includes central, development, commercial, financial, co-operative and Micro Credit (Grameen) banks. Technology is changing day by day. And changing technology affects the traditional method of the service of a bank.
Banking software, ATM, E-banking, Mobile Banking, Debit Card, Credit Card, Prepaid Card, etc. services are available in the banking system in Nepal. It helps both customer and banks to operate and conduct activities more efficiently and effectively.
For the development of banking system in Nepal, NRB refresh and change in financial sector policies, regulations and institutional developments in 1980 A.D. Government emphasized the role of the private sector for the investment in the financial sector. These policies opened the doors for foreigners to enter into the banking sector in Nepal under the joint venture.
Some foreign ventures are also established in Nepal such as Nepal Bangladesh Bank, Standard Chartered Bank, Nepal Arab Bank, State Bank of India, ICICI Bank, Everest Bank, Himalayan Bank, Bank of Kathmandu, Nepal Indo-Suez Bank and Nepal Sri Lanka Merchant Bank, etc.
The NRB will classify the institutions into “A” “B” “C” “D” groups on the basis of the minimum paid-up capital and provide the suitable license to the bank or financial institution. Group ‘A’ is for the commercial bank, ‘B’ for the development bank, ‘C’ for the financial institution and ‘D’ for the Micro Finance Development Banks.
Generally, banks in Nepal are opened from 9 am to 3 pm Sunday to Thursday and 9 am to 1 am on Friday. But nowadays most of the banks in Kathmandu are opened throughout the week.
There are 28 commercial banks, 79 development banks, 79 financial companies, 18 microcredit (Grameen) development banks, and 16 saving and credit co-operation(licensed by Nepal Rastra Bank) are established so far in Nepal. The bank with the largest network in Nepal is The Nepal Bank Ltd. These commercial banks and financial institutions have played significant roles in creating banking habit among the people, widening the area and business communities and the government in various ways.
Formation of the banking system in Nepal
The history of banking in Nepal can be described as a component of the gradual and organized development in the financial and economic sphere of Nepalese life. Even now, the country’s financial system is still at an early stage.
The existence of an unorganized market consisting of owners or wealthy merchants, shop owners and other local lenders acted as a barrier to institutionalized credit. These institutions, although underdeveloped, could still mobilize capital. For many years, local farmers, owners, traders carried out some banking functions.
The population depended to a large extent on agriculture, because there was no organized financial institution to support agriculture and other needs. People resorted to the help of unscrupulous lenders who set high percentages. There was a pledge of land, houses and precious metals. People kept their savings in precious metals, gold or silver.
In 1877, during the period of the rule of King Ranodip (Ranoddip), many economic and financial reforms were carried out. One of the first banking institutions “Tejarat Adz” was organized by the government in the Valley of Kathmandu.
The banking institution Tejarat Adtsa provided loans to the public, taking gold and silver as a pledge. Government officials also had the right to receive loans from this institution. Loans were paid from their salary. The introduction of this financial institution was the first step in the development of the country’s banking system.
In 1880, during the activities of Prime Minister Chandra Shamsher, the banking institution Tejarat Adtsa expanded its powers. And some financial departments were established in other cities in Nepal, including the Terai region. For several decades, after the establishment of Tejarat Adz, no measures were taken to expand its functions.
The above institution was created with the sole purpose: to provide loans to the population, it did not accept deposits. In the absence of mobilizing savings, the banking institution faced financial problems. It could not provide all the needs of the population, so local moneylenders continued to thrive as the only loan providers to the general public.
As for trade finance during this period, although the level of trade was not high (trade with India and Tibet flourished). Trade payments in most cases passed through various local money lenders, as it was believed that the transfer of money through them was safe, reliable profitable.
Government officials had accounts in foreign banks, mainly in banks in India. 1923 was an important year for the country, as the Peace Treaty of Friendship between the Government of Nepal and the Government of Great Britain was concluded. Under this treaty, Nepal could continue trade, free from duties with India and other countries. This agreement became a reference point for Nepal in its search for diversity in foreign trade.
Under the new conditions, the establishment of a modern bank became more and more necessary. The devastating earthquake of 1934 and the need for financing the construction may have precipitated it. In 1936, the Industrial Board (Udyog Parishad) was created, which had the following objectives:
- Promote and protect trade, industries;
- Consider and discuss issues related to trade and industry;
- Register joint-stock companies in accordance with the Nepal company law, as well as to investigate and control their work.
- Help and inform the government of Nepal about economic and financial matters.
In 1955, a draft law on the Central Bank (Nepal Rastra Bank) was developed, which was approved in April 1956. In accordance with this law, the Central Bank of Nepal was established with a capital of 10 million rupees fully provided by the government. The objectives of the Central Bank of Nepal are defined in the preamble of the law of 1956.
The main objectives of the Central Bank of Nepal are:
- to guarantee the release of the Nepalese currency,
- spread the circulation of the Nepalese currency throughout the kingdom
- stabilize the exchange rates of the Nepalese currency,
- support the country’s economic growth,
- encourage trade and industry in the kingdom,
- develop the banking system in Nepal
According to the 1956 law on the central bank, the functions of the Central Bank were to exercise control over financial institutions in the country. It also assumed the responsibilities of the government treasury and began to issue currency in 1959.
An important step in this direction was the creation of the Nepal Currency Exchange Act of 1958 and the opening of additional banking offices in different parts of the country. Up until 1957, the Indian currency prevailed in the economy of Nepal.
The national currency, the Nepalese rupees, was a vassal currency pegged to the British pound sterling. Acute crises in the sphere of money circulation and international payments have repeatedly caused heavy damage to its economic development. Thus, the main goal of the central bank of Nepal was to increase the circulation of the Nepalese currency and the elimination of the dual currency system.
The central bank conducted a series of activities aimed at creating a nationwide monetary system and flexible money circulation. Trying to unify and “modernize” monetary circulation, it made an exemption from the circulation of old-style banknotes and coins of different times and merits.
Replaced the monetary scale inconvenient for settlements with a decimal, introduced a system of non-cash settlements. At the same time, the issue of banknotes produced by the bank began to be used by the government as the most affordable means of financing.
Significantly increased government spending, which increased the volatility of monetary circulation and undermined the foundations of the monetary and credit regulation by the Central Bank. Accelerated growth of monetary circulation, accompanied by inflationary phenomena of different strengths, is one of the most characteristic features of the independence period in this area.
Thus, within five years from the date of establishment of the Central Bank, the dual currency system was abolished, and the Nepalese currency acquired legal status. At the same time, the exchange rate stabilized and reserves in foreign currency were controlled by the Central Bank.
The next steps of the Central Bank were measures to stabilize the exchange rate of the Nepalese currency against the Indian. And establish the Nepalese currency as the legal currency in the country. For this purpose, the Currency Law on Regulations of 1963 was passed.
After the creation of the Central Bank, there was a tendency to create the necessary financial institutions for the development of trade, industry, and agriculture. Their creation was actively supported by the Central Bank. Before the introduction of the Central Bank, the Commercial Bank of Nepal (Nepal Bank Limited) functioned, whose work was not significant.
As in the absence of a central bank, a commercial bank, in addition to commercial functions, performed certain functions of the central bank. But with the introduction of the Central Bank, all activities regarding the currency were entrusted to it.
In 1966, the National Commercial Bank was established, whose offices were opened throughout the country. Due to the fact that the Commercial Bank of Nepal was the only authorized agent of the Central Bank.
With the creation of another commercial bank, it could focus its attention on important aspects of economic, monetary and financial development. Currently, the 2002 Law on the Central Bank of Nepal, which was officially signed by the King on January 30, 2002, is in force.
The functions of the Central Bank are very diverse, they are defined in the preamble of this law. The Bank has special competence in the field of the banking system. It has the monopoly right to issue banknotes and regulates the country’s money circulation.
As a “bank of banks,” it is the lender of last resort for listed commercial banks. It also serves as a government banker. It is entrusted with the functions of the cash execution of the budget. The bank keeps funds of state institutions and enterprises, cash balances of the budget, receives and makes payments on behalf of the government, provides loans to it.
An important part of its activities is the regulation of public debt. It is also responsible for maintaining the official exchange rate of the rupee, storing the country’s currency reserves and representing Nepal in international monetary organizations.
To maintain the established official exchange rate of the rupee, it conducts operations for the sale and purchase of pounds sterling. And monitors the foreign exchange transactions that are performed in Nepal by specially authorized banks, including foreign ones.
One of the most important aspects of the activity of the Central Bank is the regulation of the credit and banking system, carried out by it in accordance with the law on the Central Bank.
The objectives, functions, powers, and responsibilities of the Central Bank of Nepal are defined in Chapter 2 of the 2002 Law. The relationship between the Central Bank and commercial banks is defined in paragraph 5 of Ch. 2. They are built on the basis of its functions as a conductor of public policy in this area. The bank controls and regulates the scale and nature of bank operations in order to “ensure the stability of money circulation in the interests of economic progress”
In the long term, the bank’s activities are based on the tasks of expanding monetary circulation and modern forms of lending to meet the needs of a growing economy. In the near term, it is reduced to bringing the scale of monetary circulation in accordance with the level determined by the current needs of the supply of goods.
And services to regulate the distribution of generally insufficient credit resources, taking into account the primary needs of the developing economy.
Since in Nepal, commercial bank credit to the private sector is an important factor in expanding monetary circulation. The Central Bank used credit restrictions to counteract the inflationary effects of credit expansion. It applied general quantitative restrictions and selective regulation measures.
In this regard, the Central Bank had, on the one hand, to provide adequate opportunities for production growth. And on the other – to control inflation generated by the scarce financing it carries out. As a result, monetary policy became ambivalent in nature, and the Central Bank acted as a “promoter” and a “limited” at the same time.
The establishment of the central bank of Nepal was the most important step for the country’s economy, for the development of banking, as well as for the further development of financial institutions. The banking system and the whole economy as a whole began to develop only after the introduction of the central bank, which is currently held to play a leading role.
Nepal Rastra Bank as the first central bank of Nepal
On June 1, 1945, the first Nepalese paper banknotes were issued – tickets of the Nepalese government. Since September 1945, their release continued the Central Treasury.
In 1955, the State Bank Act was adopted. On April 26, 1956, the Nepal Rastra Bank began operations, and in 1960 – the issue of banknotes. A new law of 2002 confirmed its role as a central bank. On March 22, 2010, Yuba Raj Khatiwada became president of the bank.
The main tasks of the central bank are to maintain price stability in support of economic development, provide liquidity to the banking sector and supervise and promote the banking sector. It has offices in seven cities: Biratnagar, Janakpur, Birganj, Pokhara, Siddharthanagar, Nepalganj, and Dhangadhi. On July 15, 2008, the bank had a balance sheet of 211 billion Nepalese rupees.
This central bank oversees commercial banks in Nepal and guides monetary policy. Rastra bank Nepal also oversees foreign exchange rates and foreign exchange reserves. This bank is one of the main owners of the Nepal Stock Exchange. To reflect this dynamic environment, the functions and objectives of the Bank have been restated by the new Law of 2002, whose preamble establishes the Bank’s main functions as:
- Formulate the necessary monetary and exchange policies to maintain price stability. And consolidate the balance of payments for the sustainable development of Nepal’s economy.
- Develop a safe, healthy and efficient payment system.
- To adequately supervise the banking and financial system to maintain its stability and promote its healthy development.
- Further, improve public confidence in Nepal’s entire banking and financial system.
- Promote the entire banking and financial system of the country.
- The issue, manage and preserve the value of the currency of the countries.
- Serve as a banker and local lender of last resort.
- Design necessary monetary and foreign exchange policies to maintain price stability, the balance of payments and sustainable development in Nepal’s economy
- Develop a secure, healthy and efficient payment system
- Monitor the banking and finance industry to maintain stability and promote healthy development
- Further, strengthen people’s confidence in Nepal’s banking and finance industry
As of November 2014, Yuba Raj Khatiwada was the central bank governor. He took over after Bijaya Nath Bhattarai in March 2010. Bhattarai had then held the position since January 2005, except for a six-month period in 2009, when Deependra Bahadur Kshetry was acting central banker.
Bhattarai was set aside in January 2009, after allegations of corruption, but was reinstated in July after Nepal’s Supreme Court freed him. The central bank has two central bank governors; Gopal Prasad Kaphle and Maha Prasad Adhikari. Dr. Chiranjive Nepal has been appointed as the new governor from March 19, 2015. Chintamani Siwakoti and Shiba Raj Shrestha are the new deputy governors of the Nepal Rastra Bank.
Nepal Rastra Bank began issuing nominal denomination banknotes of 500 Nepalese rupees from the 2016 new series. They differ from the previous ones with a modified design and new elements of anti-counterfeiting protection. On the obverse of the bill, an optically variable ink (OVI) print is used.
The design and reverse of a banknote of the given nominal have been changed. Instead of two tigers, now only one will adorn the reverse. Primary colors, the material from which the banknote of 500 rupees is made has been changed but its dimensions have not changed. It is worth recalling that Nepal Rastra Bank began issuing banknotes of a new series in 2016.
Nepal Bank limited as the first commercial Bank of Nepal
This bank, which was established in 1994 B. S. Kartik 30. It was established before the establishment of Nepal Rastra Bank. The Bank has developed the culture of saving Nepalese rupees by displacing the trend of using Indian Rupees in Nepal. As well as the culture of saving people’s money and institutionalizing facilities.
The role of the bank has been praised as the first bank in the country to promote and develop industrialization, trade expansion, the arrangement of import-export and development of Nepalese economy. This bank, which started banking business from Kathmandu Juddhha road, has opened its branches in the cities, business centers. And in the remote areas of the country, providing a banking service from about 133 branches.
Nepal Bank Limited is a commercial bank which obtained ‘A’ class from Nepal Rastra Bank. Nepal Bank Limited is the first bank established in Nepal. It has been established in joint logistics of Nepal government and private entrepreneurs.
The Nepal Bank was inaugurated by King Tribhuwan institutionalizing banking services in Nepal. Until the bank was established, all monetary trades were performed from private dealers and business centers. The bank was started with 12 employees and the sole office.
Speaking at that occasion, the then Prime Minister Juddhha Shamsher Rana, said that this task was a great opportunity for him to “keep the command of King Tribhuwan according to the wishes of the whole country.” The purpose of this bank is to provide service to all the rich and poor people.
At that time, the concept of formal banking was trusted by very few and the very few were justified by the new concept. The number of equitable shares was not easy, it was difficult to operate the deposit. As a result, the bank had issued Rs. 25,00,000 of entitled shares. Only 8,42,000 was able to raise.
The law has been issued for the establishment and operation of this bank when there was no objective in the country due to lack of bank in the economic prosperity of the country. And with the objective of providing public service to the people and eliminating the inconveniences of the people.
Since the establishment of Nepal Bank Limited, it is the joint investment bank of the government and private sector. At the beginning of its operations, only 10 shareholders were present. The authorized capital was Rs. 1 million during the establishment of a government-owned bank, the issuance was Rs. 25 lakhs and the paid capital was 8 lakh 82 thousand rupees. The current bank’s capital has been Rs.88 billion.
Similarly, 9.39 billion rupees have been collected and has invested more than 74 billion rupees.
For the convenience of customers, ATM machines have been installed in 54 locations. And the bank plans to increase the number of branches and ATM machines in the coming days. Similarly, the bank has also provided save deposit vaults, trade finance, SMS banking, branch-free banking services, internet service. In the current fiscal year, the bank has planned to open new branches in 20 places and rehabilitate the displaced branches in 10 places during the conflict period.