Financial sector reforms Non-banking sector should not be ignored
Madhukar SJB Rana
Much has been said and written about the financial sector reforms targeted at improving the performance of Nepal Bank Ltd, Rastriya Banijy Bank Ltd and the Nepal Rastra Bank through the support of the World Bank. Similarly, the Asian Development Bank is spearheading the restructuring and re-engineering of the two development banks, namely the Agricultural Development Bank and Nepal Industrial Development Corporation.
What is conspicuous by its absence, however, is the neglect for financial sector reforms targeted at the financial intermediaries like finance companies, insurance companies, stock exchange, investment trusts, cooperatives, provident fund etc. One of the main reasons for this neglect is the erroneous legislation that existed prior to the promulgation of the so-called “umbrella act” where separate acts governed separate financial intermediaries even though they were integrally a part of the same market for savings and investments and in competition with one another. Segmentation of markets through these kinds of legislation is wrong for any country that subscribes to the spirit of fair competition.
Time is now appropriate to tackle the problems that ail these financial intermediaries, which are vital for the supply of long-term capital to the private and household sectors. Generally speaking, the acts governing all these financial intermediaries have to be reviewed and brought up to international standards. Then, of course, the regulatory boards that oversee the acts should be reorganised, re-engineered and strengthened significantly with highly qualified professionals. Those serving on the boards, as well as the CEOs and senior executives, must be qualified and provided training on international standards. This is a task that the NRB’s Bankers Training Centre should be engaged in on a priority basis: build up its human resources for a dynamic banking and financial intermediary sectors.
The stock market is notoriously famous for insider trading that goes unpunished. The majority of the over 100 listed companies do not send their financial statements on time and get away with it without being debarred from trading. Clearly, the rule of law has given way to the rule of the mediocre, if not worse, where the good are sadly sidelined by the bad or non-performers. Some companies listed are technically insolvent and are not debarred from trading. Transparency is fundamentally compromised.
The Company Act needs, first and foremost, to be modernised. It is suggested that the Office of Registrar be transferred to the Ministry of Finance (MoF) from the Ministry of Industry and Commerce for more effective regulation and better coordination between financial and corporate regulators. Far more regulations need to be framed to improve auditing and accounting styles to suit the particular industrial and business characteristics and requirements. Since the corpus of accounting and auditing rests with the MoF, moving this office here will find them in the company of similar professionals, with all its attendant career benefits, which is not the case now.
Ways and means must be found to promote new and varied instruments for long-term capital, specially mutual funds, corporate bonds, municipal bonds and mobilising foreign portfolio investments as a two way process to take advantage of globalisation of the stock markets. Another issue is to what extent there should be central regulation as opposed to self-regulation? For example, self-regulation principle is applied in the case of the Employee Provident Fund or the Citizens’ Investment Trust with little or no supervision by the MoF. Where HMG owns and controls, this may be acceptable but certainly a rethink is necessary when the private sector can also be involved. All regulatory boards must be required to bring out for public consumption their Annual Progress Reports showing their aims, mid-term and annual objectives, as well as providing a statement of the annual audited accounts, and the challenges met and likely to be faced in the future.
The insurance sector is a bright spot in the financial environment of Nepal showing rapid growth. With the advent of greater competition upon entry of foreign companies it is expected to be more diversified and efficient. However, many outstanding challenges need to be addressed by HMG to develop this sector. Studies should be done on market size and as a matter of priority to see how many should be licensed in future. Actuaries should be trained on a grand scale to mobilise household savings and to re-channel those moving to India to buy life and medical insurance.
It is high time that HMG embarked on a policy for leasing operations that is outstanding. It is a sad state of affairs when finance companies set up primarily for leasing have to undertake secondary activities for want of policy clarity on cost and benefits from leasing as opposed to costs and benefits to the MoF. At a time when unemployment is so rampant, especially among youth who are suffering from a psychosis of alienation and unrest, jobs need to be created on a grand scale. Where better can this be done other than through self-employment schemes and schemes to promote the small and medium businesses through lease finance to improve their technology, productivity and profitability. Rana is senior economic adviser, Ministry of Finance.