Financial Sector Reform and The History of Banking and Financial Sector Development in Nepal From 18th Century

The banking sector is the backbone of the economy of every country. They are responsible for contributing a large portion to the wealth generation of a nation. Banking and financial institutions mainly deal with collecting deposits and distributing for mobilization of that fund.

The history of banking and financial sector development in Nepal refers to all those activities which gave birth to the concept of banking and every single step made in the banking and financial institutions sector. The history of banking and financial sector development in Nepal can be studied in two major parts. The preliminary phase or the earlier history of banking and financial sector development in Nepal and the era of the modern banking system in Nepal.

Preliminary History of Banking and Financial Sector Development in Nepal

There is a long history that shows the use of the different currencies in Nepal. But non of them were properly regulated by a formally established body for the same purpose. The currencies issued in the earlier stage were controlled, managed, and denominated by the ruler or the King.

Establishment of Kaushi Tosha Khana

We have a known history of banking and financial sector development in Nepal from the tenure of King Prithvi Narayan Shah. After the unification of different fragmented kingdoms into a unified country, Nepal, King Prithvi Narayan shah established Kaushi Tosha Khana. The Kaushi Tosha Khana was established as the treasury of Government which was also used to manage the currencies of that time.

The establishment of Kaushi Tosha Khana as an agency for managing the currencies and treasury was the initial step in the history of banking and financial sector development in Nepal

Note: The Kaushi Tosha Khana was later converted into an office under the Ministry of Finance for the management of the pension of retired government employees and renamed as Pension Management Office located in Tripureshwor, Kathmandu.

Establishment of Tejarath Adda

After the establishment of Kaushi Tosha Khana, there is no sign seen in progress in the history of banking and financial sector development in Nepal until Tejarath Adda was established. Tejarath Adda was established in BS 1938 (1880 AD) during the tenure of prime minister Ranaddip Singh.

Tejarath Adda used to provide loans to the general public at the 5% interest rate per annum against the security of gold, silver, and other ornaments. The interest rate was very concessional but it was not established to accept the deposits and mobilize them. So, it failed to provide the most basic feature of a general-purpose bank or financial institution.

Establishment of the Taksar Department 

Taksar Department was established in BS 1989 to mint coins in Nepal. It was the first separate institution to issue coins in Nepal. Taksar Department was an independent agency at the time of establishment. But, as of now, it is a  department under the central bank of Nepal working for coin minting.

History of Modern Banking and Financial Sector Development in Nepal

The modern banking system is regarded as the period after the enactment of the Nepal Bank Act, 1994 to establish the very first formally established commercial bank of Nepal which is Nepal Bank Limited.

The modern banking system can be separated into three main phases. They are 

  • Establishment of Organized Government Banking Business
  • The period after economic liberalization and
  • Open Banking System

Establishment of Organized Government Banking Business (BS 1994-2040)

During this period, the first banking law established the first commercial bank in Nepal. And paper currencies were also issued and circulated. The following is the detailed progress made in the banking and financial sector development in Nepal during this period.

Establishment of Nepal Bank Limited

Nepal Bank was established on November 15, 1937 (Bikram Sambat 1994 Kartik 30) under Nepal Bank Act, 1994. Nepal Bank Act, 1994 was the first Nepalese law related to banking. And Nepal Bank Limited was the first commercial bank established in Nepal. It was officially inaugurated by King Tribhuvan on 1994 Kartik 30, during the tenure of prime minister Juddha Sumsher, JBR.

It was established under the principle of a joint venture between the government of Nepal and the general public with the ownership of 60% and 40% ratio. respectively. The authorized capital of Nepal Bank Limited was Rs. 10 million, out of which 2.5 million worth of shares were issued. Only Rs. 0.842 million worth of shares were paid up at that time.

Because it was the first practice in the whole nation collecting deposits and mobilizing them was even more difficult. Initially making people aware of the principle of commercial banking and creating trust among them was a difficult job.

Establishment of Sadar Muluki Khana and Issuance of Paper Currency Notes 

Sadar Muluki khana was established in 1945 AD (Bikram Sambat 2002) as the local treasury of the Government of Nepal. The primary objective of the formation of Sadar Muluki Khana was to manage government accounts and issue Nepalese paper currency notes.

Janak Raj Pandey was appointed as the head of the Sadar Muluki Khana. A title was given to the head of Sadar Muluki Khana called ‘Khajanchees’ which means cashier. At that time Prime minister Juddha Sumsher, JBR, and  King Tribhuvan were in tenure.

In Bikram Sambat 2002/06/01, Sadar Muluki Khana introduced the first paper currency notes in Nepal. The first paper currencies of Nepal were of denominations Rs. 5, Rs. 10, and Rs. 100. These notes denomination was called Moru which was replaced by Neru later. The first paper notes of Nepal were guaranteed by “Shree Panch Ko Sarkar” and signed by Khajanchees Janak Raj Pandey.

On the first issuance of currency notes 5000 pieces notes of Rs. 100 denomination, 100,000 pieces notes of Rs. 10 denomination, and 200,000 pieces notes of Rs. 5 were issued which was equal to 2.5 million Nepalese Rupees. The Sadar Muluki Khana also issued Rs.1 notes in BS 2009 which was signed by cashier Narendraj Pandey.

Establishment of Nepal Rastra Bank

After the establishment of Nepal Bank Limited, there was complexity in managing and regulating paper notes, coins, and the bank under different laws and regulations. Therefore, a need for a regulatory body was felt. Also, there was a concept of the central bank in every nation which forced to establish the central bank in Nepal.

Therefore, in 2013, Baisakh 14, Nepal Rastra Bank was established under Nepal Rastra Bank Act, 2012. This was a strong move towards the overall development of the banking and financial sector. The head of Nepal Rastra Bank was called the governor and Himalayan Sumsher, JBR was appointed as the first governor of the Nepal Rastra Bank.

Nepal Rastra Bank issued paper currency for the first time in Bikram Sambat 2016 Falgun 7. The denominations of paper notes were Rs.1, Rs. 5, Rs. 10, and Rs. 100. The notes were called Neru by replacing the existing name Moru. The first paper notes issued by Nepal Rastra Bank were also guaranteed by the ‘Shree Panch Ko Sarkar’ and signed by the first governor Himalayan Sumsher, JBR.

Establishment of other Government-owned Banks and Financial Institutions

After the establishment of the regulatory body, it became easier to establish other banks and financial institutions.

  • In  BS 2016/03/01, the government of Nepal established Nepal Industrial Development Cooperation by enacting Nepal Industrial Development Act, 2016. Nepal Industrial Development Cooperation was the first development bank in Nepal established under the concept of the development bank. Its focus was the development of the industrial sector of Nepal.
  • In B.S. 2020/05/28, Cooperative Bank was established under the Cooperative Act, 2019 with a paid-up capital of Rs. 5 million.

Establishment of Rastriya Banijya Bank

In Bikram Sambat 2021, Rastriya Banijya Bank Act, 2021 was enacted. This act was enacted to establish a fully government-owned commercial bank. This act established Rastriya Banijya Bank in 2022 Magh 10. The authorized capital of Rastriya Banijya Bank was Rs 10 million. Rastriya Banijya Bank, therefore, is a second commercial bank established in Nepal. And it is the first bank to be fully owned by the government of Nepal.

Establishment of Agriculture Development Bank

The Agriculture Development Bank was established by Replacing the Cooperative bank established in 2020. The Agriculture Development bank was established in BS 2024/10/07 with the objective of developing the agriculture sector of Nepal under the development banking concept. It was upgraded to A-class commercial institution only after 2062/12/03. After the establishment of the Agriculture Development Bank in 2024, no other banks were established until B.S. 2041.

Other Practices for Betterment in the history of banking and financial sector development in Nepal

  • The banking Promotion Board was established in 2025 in order to promote the banking sector.
  • In BS 2031, Commercial Banks Act, 2031 established operating all commercial banks under law single for uniformity replacing the old corresponding acts related to the commercial banks.

Till the late 30s, every bank was subscribed by the government of Nepal fully or partially with majority ownership. Then a new trend was established where banks and financial institutions were also established by the private sector without giving ownership control to the Government of Nepal. That’s where the third phase of banking and financial sector development in Nepal started.

After Economic Liberalization (2041-2058)

During this period and onwards most of the banks and financial institutions were established by the non-government sector.

Primarily banks were established by a joint venture with foreign banks and later, Nepali investors were also able to establish banks and financial institutions with their own investment.

During this period, 11 commercial banks, 8 development banks, 52 finance companies and 11 microfinance companies were established.

Establishment of Joint Venture Banks in the Banking and Financial Sector Development in Nepal

On BS 2041/03/29 Nepal Arab Bank (Now: NABIL) was established. It was formed by Nepalese investors and the Dubai Bank of Saudi Arabia under a joint venture. With that, Nepal Arab Bank (now: Nabil) became the first bank established under the joint venture. It was also the first bank to establish in Nepal without the investment of the Government of Nepal.

The authorized capital of the bank was 30 million. In 2042/12/16 Another joint venture bank was established in Nepal. The second joint venture bank was Nepal Indosuez Bank (now: Nepal Investment Bank) which was again a joint venture between Nepali Investors and French Indosuez Bank.

Similarly, Everest Bank Ltd. (joint venture with Punjab National Bank of India), and Nepal Bangladesh Bank Ltd. (joint venture with IFIC Bank of Bangladesh), were established in 1994. Bank of Kathmandu Ltd. (joint venture with SIAM Commercial Bank of Thailand) was established in 1995 AD. NCC Bank Ltd. (joint venture with Ceylon Bank of Sri Lanka) was established in 1997 AD.

Establishment of the Other Financial Institutions

  • Nepal Housing Development Finance Company Ltd. was established on 2049/04/11. The Nepal Housing Development Finance Company was the first finance company established in Nepal.
  • Similarly, in Bs 2049/11/17, Nepal’s first Rural Development Bank named Gramin Bikas Bank was established.
  • In BS 2049/12/01 Nirdhan Institute was established first which was the microfinance company in Nepal. It was established in Sikat, Rupandehi to provide loans without any security.

Establishment of Lumbini Bank

Lumbini Bank was the first commercial Bank established by private Nepali Investors. It was established in BS 2055/04/01. The Bank was established without the joint investment of the Government of Nepal and other foreign banks.

Restructure of Rashtriya Banijya Bank and Nepal Bank Limited

In the late 90s, both banks (NBL&RBBL) were in a Critical situation due to improper management. Therefore, under the financial sector reform, a program to restructure RBBL and NBL was introduced. This removed the existing board and give responsibility to the foreign management team. This restructure revived Nepal Bank Limited and Rastriya Banijya Bank Limited.

Open Banking System (2058-Now)

During this period, a large number of banks and financial institutions were established as Nepal Rastra Bank as per the new Nepal Rastra Bank Act, 2058 relaxed the policy to open bank and financial institutions.

Nepal Rastra Bank Act, 2058

Enactment of Nepal Rastra Bank Act, 2058 Nepal Rastra Bank Act, 2058 was enacted to provide more regulatory power to the Central Bank.

It classified the banks and financial institutions into A, B, C and D classes and defined A class as banks and other as financial institutions.

It replaced Nepal Rastra Bank Act, 2012, and Nepal Currencies Act, 2040.

Agriculture Development Bank: Reform

Agriculture Development Bank was working under the principle of development banking with the major development focused on agriculture. Agriculture Development Bank registered a Company in BS 2062/03/31 and obtained a license for the operation of an A-class commercial bank in BS 2062/12/03. It has 51%. Ownership in the name of the Government of Nepal and the rest of the shares are issued to the general public.

Bank and Financial Institutions Acts

Bank and Financial Institution Act, 2063 Bank and Financial Institution Act, 2063 was enacted replacing the commercial bank’s act, 2031. This act was also replaced by Bank and Financial Institution Act, 2073. This act provides provisions for the establishment of banks and financial institutions and operations. The bank and financial institution act was a remarkable turning point to operate the banking business.

Introduction of Technology in the Banking and Financial Sector Development in Nepal

  • Nabil Bank Limited first introduced Credit cards for the first time in Nepal in 1990 AD.
  • Himalayan Bank first introduced Debit cards and ATM machines in 1995 AD.
  • Kumari Bank first introduced internet banking in 2002 AD
  • Laxmi Bank started the first SMS mobile banking in Nepal in 2004.
  • The first mobile wallet eSewa was started in 2009 AD.
  • Multi-Currency Card was introduced in Nepal first by Century Commercial Bank on November 15, 2017.
  • Nepal SBI Bank made use of a robot named “‘Pari’ for the first time in the Nepali Banking Service in 2017.
  • Nabil Bank started making use of QR codes for the first time in Nepal in 2020 AD.

And this was all about the progressive development of the Banking sector in Nepal. The informal stage, prior to the establishment of Nepal Bank Limited did not make any drastic changes in banking and financial institutions. The establishment of Nepal Bank made a formal start in the Banking development sector. And the establishment of non-government-owned banking after 2041 brought drastic changes in this sector.

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