MoF finalising draft of financial sector development strategy

Kathmandu, March 27

The Ministry of Finance (MoF) has started finalising the draft of the five-year Financial Sector Development Strategy (FSDS), which aims to further consolidate banking institutions, reduce the interest spread, introduce provisions on credit insurance and raise the banking sector’s contribution to the gross domestic product (GDP) to eight per cent.

“The country’s financial sector has grown by leaps and bounds since the economy was liberalised in 1990s. Yet, financial services have not become effective till date. Also, the growth of this sector has remained lopsided, as many still do not have access to finance due to low financial literacy rate. The FSDS aims to address these issues,” Surya Prasad Acharya, head of the Financial Sector Management Division at the MoF, told The Himalayan Times.

“Once finalised by the MoF, the strategy paper will be forwarded to the Cabinet for approval.”

The MoF plans to introduce the strategy paper this fiscal year. The action plans incorporated in the paper will be rolled out till fiscal year 2019-2020.

The FSDS basically aims to diversify and deepen the financial sector, which includes banking and insurance sectors, capital market, non-banking financial institutions and financial cooperatives.

The FSDS will also focus on framing appropriate legal frameworks to support growth of the sector, making payments systems more efficient and safe, introducing international-standard accounting and auditing systems to ensure transparency, and reducing the number of state-owned institutions in the financial sector.

“Among others, the FSDS will aim to reduce the interest spread — the difference between lending and deposit rates — which currently stands at five per cent, raise the portion of agricultural loans in total lending, reduce the time

required for liquidation of troubled banks and financial institutions, promote mobile banking service and improve financial literacy of consumers,” Acharya said.

Although the history of the country’s financial sector dates back to 1937, when the first commercial bank — Nepal Bank Ltd — was established, development in the financial sector remained stagnant for a long time after that.

Until 1975, the number of commercial and development banks in the country stood at two each — all state-owned. And till the 1980s, the financial sector was governed by repressive rules, such as controls on interest and exchange rates,

directed lending, and complex regulations for money and capital markets.

Things, however, changed in mid-1980s with the adoption of financial liberalisation policy. Since then, the number of

banks and financial institutions has grown.

Today, the financial sector is much stronger and healthier than in the mid-1980s, and even better news is that there is plenty of room for growth.

“Yet, progress in this sector has not been praiseworthy. Even today, only around 40 per cent of the population has access to formal banking channel. Insurance sector is still in its infancy. And capital market has not grown outside the Capital,” Acharya said, adding, “We hope the FSDS will help in generating awareness about the financial sector by launching financial literacy programmes.”

In this regard, the FSDS aims to encourage banking and insurance sectors, capital market, non-banking financial institutions and cooperatives to diversify their product range. “At the same time, risk management capacity and internal control systems will be strengthened, so that people do not lose money due to careless attitude,” Acharya said. “We hope all these measures would increase the share of banking sector in GDP to eight per cent by 2020 from around four per cent of present.”

The government had formally initiated the process of framing the FSDS in December 2014. However, it could not be introduced earlier due to devastating earthquakes of April and May.