Tuesday, September 1, 2009

Evolution of Banking Sector in Nepal

Banking service is the oldest service industry in Nepal. It has gone through the various stages of evolution and development since the Vedic times (200 to 1400 B.C.) Though the modern banking institution has a very recent origin in Nepal, some crude bank operations were in practice even in the ancient time In the Nepalese Chronicle, it was recorded that the new era known as Nepal Sambat was introduced by Shankhadhar, a sudra merchant of Kantipur in 879 or 880 A.D; after having paid all the outstanding debts in the country. This shows the basis of money lending practice in ancient Nepal. Towards the end of 8th century, Gunkam Dev had borrowed money to rebuild the Kathmandu Valley. In 11th century, during Malla regime there was an evidence of professional moneylenders and bankers. It is further believed that money-lending business, particularly for financing the foreign trade with Tibet, became quite popular during regime of Mallas. However, in the absence of any regulatory measures, the unscrupulous moneylenders were known to have charged exorbitant rates of interest and other extra dues on loans advanced.

These inconveniences led the Prime Minister Ranodeep (1877-1885) to establish Tejarath Addaha in Kathmandu, which was a government financial institution supplying credit to the people at 5% rate of interest against security of gold, silver and ornaments. The government servants were also entitled to take loans from Tejarath, repayable from their salary at the source. During the time of Chandra Shamsher (1901-1929), credit facilities of Tejarath were extended to some other parts of the country by opening its branches. It is believed that the so-called well-to-do persons used to take loans from private money lenders even at a higher rate of interest than those from the government institution, for they were not prepared to disclose in public anything that was likely to affect their prestige. When they were approached by this type of clients, the professional money lenders used to raise loans in their own names from Tejarath at 5% rate of interest against gold and ornaments, which were not their own but brought to them by their clients as security for the loans to be financed from the funds raised from Tejarath itself. Thus, without any resources of their own and without any risks on their own part, the money lenders could manage very well to exploit their special type of clients just playing the role of middleman between their clients and the government institution. To control spurious rates of interest and also to curb unfair practice on the part of the unscrupulous moneylenders, legislative measures were also taken.

Later, with the growing necessity of the commercial banks in the world, Nepal Bank Limited, the first commercial bank of Nepal, came into being in 1937 A.D. replacing the older system of banking. In the present scenario different types of banks are being practiced in Nepal, but among them commercial banks play a vital role in the economic development of the country.

As mentioned above, with the motive to develop the trade and industry in the country commercial bank called Nepal Bank Limited was established in 1937 A.D. It was established under the Nepal Bank Act of 1936 A.D. and the late King Tribhuvan Bir Bikram Shah Dev inaugurated this bank. At that time the authorized capital of Nepal Bank Limited (NBL) was Rs. 10 millions, divided into 1,00,000 shares of Rs. 100.00 each. Nepal Bank Limited had a responsibility of attracting people towards banking sector from predominant sahu-mahajan's transaction and introducing other banking services as well. Being a commercial bank, it was natural that Nepal Bank Limited paid more attention to profit generating business. But it is the duty of the government to look into the neglected sectors. Therefore Nepal Bank Limited was established with 51% ownership of His Majesty Government (HMG) (Now Nepal Government) and 49% of the equity participation from private sector. With the development of banking sector and to help the government, formulate monetary policies, Nepal Rastra Bank was set up in 1956 A.D. (14th Baisakh 2013 B.S), the central bank of the country. Since then it has contributed to the growth of financial sector.

The growth and development of the country is possible only when competitive banking services reach each and every corner of the country. However, as the central bank, Nepal Rastra Bank had its own limitations and as a commercial bank it was not logical for Nepal Bank Limited to go to unprofitable sectors. So, to catch up with these problems, the government established Rastriya Banijaya Bank is 2022 B.S. (1965 A.D), under Banijya Bank Act 1965 A.D. as a fully state owned commercial bank (Dahal, 2002:11). Then the establishment of Nepal Industrial Development Corporation, Employee Provided Fund, Agriculture Development Bank etc, followed the formation of financial institutions.

With the aim to provide quality-banking service, enhance the efficiency and healthy competition, foreign investment and new technology in banking sector was introduced. Nepal Arab Bank, the first joint venture bank of Nepal was established in 1984 A.D. (2041 B.S). The bank was the outcome of joint venture with Dubai Bank Limited of United Arab Emirates. The footstep of this bank was followed by Nepal Indosuez Bank a joint venture bank with a Bank of Paris in 1986 A.D. (2041 B.S) and later other joint venture banks are established in Nepal.