FAR WESTERN UNIVERSITY

Faculty of Management
Course Title: Management of Financial Institution
Unit- One: Introduction…………….
1.1. Meaning and Concept of financial institution
A financial institution is an organization that provides financial services to its customers or members.
These institutions play a crucial role in the economy by facilitating the flow of funds between savers and
borrowers and by providing various financial products and services to individuals, businesses, and
governments.

The concept of a financial institution encompasses a wide range of entities, including banks, credit unions,
insurance companies, investment firms, pension funds, and more. Each type of financial institution
typically specializes in certain types of financial services, such as deposit-taking, lending, investment
management, insurance, or wealth management.

Financial institutions serve several key functions:

 Intermediation: They act as intermediaries between savers (those with surplus funds) and
borrowers (those in need of funds). Financial institutions accept deposits from savers and then
lend these funds to borrowers, earning a profit through the interest rate spread.
 Risk Management: Financial institutions help individuals and businesses manage various financial
risks, such as credit risk, market risk, and insurance risk. They provide products like loans,
insurance policies, and investment options to help mitigate these risks.
 Payment Services: Financial institutions facilitate transactions and payments between
individuals, businesses, and governments through services like checking accounts, electronic
funds transfers, credit cards, and mobile payment apps.
 Capital Formation: They play a crucial role in channeling savings into productive investments,
thereby promoting economic growth and development. Financial institutions provide funding for
businesses to expand operations, invest in new projects, and create jobs.

Financial Advice and Planning: Many financial institutions offer advisory services to help individuals and
businesses make informed financial decisions. This includes services such as investment advice,
retirement planning, estate planning, and risk management strategies.

1.2 Function of financial institution

Financial institutions serve a variety of functions within the economy, contributing to the efficient
allocation of resources, risk management, and overall economic stability. Here are some key functions of
financial institutions:
 Intermediation: Financial institutions act as intermediaries between savers and borrowers. They
accept deposits from individuals and businesses looking to save or invest their money and then
lend these funds to borrowers who need capital for various purposes, such as starting or
expanding a business, buying a home, or funding education.

 Mobilization of Savings: Financial institutions help mobilize savings from individuals and channel
them into productive investments. By offering various deposit products such as savings accounts,
certificates of deposit (CDs), and money market accounts, financial institutions encourage people
to save money, which can then be used to fund loans and investments.

 Credit Allocation: Financial institutions play a crucial role in allocating credit efficiently within the
economy. They assess the creditworthiness of borrowers and allocate funds to those with viable
projects or investment opportunities. This process helps direct capital to its most productive uses
and supports economic growth.

 Risk Management: Financial institutions provide a range of products and services to help
individuals and businesses manage financial risks. These include insurance policies to protect
against unexpected events such as accidents, illnesses, or natural disasters, as well as financial
derivatives and hedging strategies to manage market risks associated with fluctuations in interest
rates, exchange rates, or commodity prices.

 Payment Services: Financial institutions facilitate the exchange of goods and services by providing
payment and transaction services. These include checking accounts, debit cards, credit cards,
electronic funds transfers, and online payment platforms. By offering secure and efficient
payment systems, financial institutions enable businesses and consumers to conduct transactions
seamlessly.

 Capital Formation: Financial institutions contribute to capital formation by providing funding for
investment projects and infrastructure development. They offer loans and capital-raising services
to businesses seeking to expand operations, innovate, or undertake new projects. This capital
formation process is essential for promoting economic growth and productivity.

 Financial Market Facilitation: Financial institutions facilitate trading and investment activities in
financial markets by providing brokerage, trading, and investment banking services. They help
connect buyers and sellers of financial assets, provide liquidity to markets, and underwrite new
securities offerings. These activities contribute to the efficient functioning of financial markets
and promote capital formation.

 Wealth Management and Financial Advisory: Financial institutions offer wealth management
and advisory services to help individuals and families achieve their financial goals. This includes
investment management, retirement planning, estate planning, tax optimization, and other
personalized financial services. By providing expert advice and guidance, financial institutions help
clients make informed decisions about managing and growing their wealth.
1.3 Type of financial Institution
Financial institutions come in various types, each serving different purposes and catering to specific
financial needs. Here are some common types of financial institutions:

 Commercial Banks: Commercial banks are perhaps the most well-known type of financial
institution. They accept deposits from customers and provide loans, mortgages, and other
financial services to individuals, businesses, and governments. Commercial banks also offer
services such as checking accounts, savings accounts, credit cards, and investment products.

 Credit Unions: Credit unions are member-owned financial cooperatives that offer similar services
to commercial banks, including savings and checking accounts, loans, and mortgages. However,
they are owned and operated by their members, who often share a common bond such as a
workplace, community, or organization. Credit unions typically offer competitive interest rates
and may provide personalized service to their members.

 Investment Banks: Investment banks specialize in providing financial advisory, underwriting, and
capital-raising services to corporations, governments, and other institutions. They assist with
mergers and acquisitions, initial public offerings (IPOs), debt and equity offerings, and other
corporate finance activities. Investment banks also engage in trading securities and derivatives on
behalf of their clients.

 Insurance Companies: Insurance companies offer various types of insurance products to

individuals and businesses to protect against financial losses due to unforeseen events such as
accidents, illnesses, natural disasters, or death. These products include life insurance, health
insurance, property and casualty insurance, and annuities. Insurance companies collect premiums
from policyholders and pay out claims when covered events occur.

 Pension Funds: Pension funds manage retirement savings on behalf of individuals, employers, or
governments. They invest contributions from participants in a diversified portfolio of assets such
as stocks, bonds, real estate, and alternative investments with the goal of generating returns to
fund future pension obligations. Pension funds may be sponsored by employers (e.g., corporate
pension plans) or by governments (e.g., public pension funds).

 Mutual Funds and Asset Management Firms: Mutual funds and asset management firms pool
funds from individual investors and invest them in a diversified portfolio of securities such as
stocks, bonds, and money market instruments. These firms provide professional investment
management services and offer a variety of mutual funds, exchange-traded funds (ETFs), and
other investment products to investors seeking to achieve specific financial goals or risk profiles.

 Hedge Funds and Private Equity Firms: Hedge funds and private equity firms are alternative
investment vehicles that cater to institutional and high-net-worth investors. They employ
sophisticated investment strategies and may invest in a wide range of assets, including publicly
traded securities, private companies, real estate, and derivatives. Hedge funds focus on
 generating absolute returns while private equity firms specialize in acquiring and restructuring
private companies.

 Microfinance Institutions: Microfinance institutions (MFIs) provide financial services such as

small loans, savings accounts, and insurance products to low-income individuals and micro-
entrepreneurs who lack access to traditional banking services. MFIs aim to alleviate poverty and
promote economic development by empowering underserved populations to build assets, start
businesses, and improve their livelihoods.

1.4 Role of financial institution in socio- economic development of country

Financial institutions play a crucial role in the socio-economic development of a country by providing
essential financial services, facilitating investment and capital formation, promoting economic growth,
and reducing poverty. Here are some key ways in which financial institutions contribute to socio-economic
development:

 Access to Finance: Financial institutions help improve access to financial services for individuals
and businesses, especially those in underserved or marginalized communities. By offering savings
accounts, loans, insurance products, and payment services, financial institutions empower people
to manage their finances, invest in education and healthcare, start or expand businesses, and
build assets.

 Investment and Capital Formation: Financial institutions mobilize savings from households and
channel them into productive investments in the economy. Through lending and investment
activities, financial institutions provide funding for businesses to expand operations, invest in new
technologies, and create jobs. This capital formation process contributes to increased
productivity, innovation, and economic growth.

 Risk Management: Financial institutions help individuals and businesses manage various financial
risks, including credit risk, market risk, and insurance risk. By providing insurance products,
hedging services, and risk management advice, financial institutions protect against unexpected
events such as accidents, illnesses, natural disasters, or economic downturns. This risk mitigation
function promotes stability and resilience in the economy.

 Infrastructure Development: Financial institutions play a critical role in financing infrastructure

projects such as roads, bridges, airports, power plants, and telecommunications networks. By
providing long-term funding for infrastructure development, financial institutions contribute to
improved transportation, communication, energy supply, and other essential services that
support economic activity and enhance quality of life.

 Entrepreneurship and Innovation: Financial institutions support entrepreneurship and

innovation by providing funding and advisory services to startups, small and medium-sized
enterprises (SMEs), and innovative ventures. Access to capital enables entrepreneurs to develop
new products, enter new markets, and scale their businesses, driving job creation, economic
diversification, and technological advancement.
  Financial Inclusion: Financial institutions promote financial inclusion by expanding access to
financial services to previously excluded or underserved populations, including low-income
individuals, women, rural communities, and smallholder farmers. By offering tailored products
and delivery channels, such as mobile banking, microfinance, and agent banking, financial
institutions empower marginalized groups to participate in the formal financial system, build
assets, and improve their livelihoods.

 Poverty Reduction: Financial institutions contribute to poverty reduction by providing

opportunities for income generation, asset accumulation, and economic empowerment. Access
to finance enables poor households to invest in education, healthcare, housing, and small
businesses, breaking the cycle of poverty and promoting social mobility. By fostering inclusive
economic growth and expanding opportunities for all segments of society, financial institutions
help reduce inequality and improve overall welfare.

1.5 Growth of Financial Institution in Nepal

The growth of financial institutions in Nepal has been significant over the past few decades, with the
sector expanding and diversifying to meet the evolving needs of the economy and the population. Here
are some key factors contributing to the growth of financial institutions in Nepal:

 Liberalization and Reform: Nepal has undergone significant financial sector liberalization and
reform measures aimed at promoting competition, improving efficiency, and expanding access to
financial services. Reforms such as the liberalization of interest rates, the introduction of
prudential regulations, and the establishment of a regulatory framework conducive to financial
stability have created a more enabling environment for the growth of financial institutions.

 Banking Sector Expansion: The banking sector in Nepal has witnessed substantial growth in terms
of the number of banks, branches, and services offered. Both domestic and foreign banks have
expanded their presence across the country, reaching previously underserved areas and segments
of the population. This expansion has increased access to banking services, including savings
accounts, loans, remittances, and payment services.

 Microfinance Development: Microfinance institutions (MFIs) have played a crucial role in

expanding access to finance for low-income individuals and rural communities in Nepal. MFIs
provide small loans, savings accounts, and other financial services tailored to the needs of micro-
entrepreneurs, farmers, and women entrepreneurs. The growth of the microfinance sector has
helped reduce poverty, promote financial inclusion, and stimulate economic activity in rural areas.

 Remittance Inflows: Nepal has experienced a significant inflow of remittances from Nepali
migrant workers abroad, particularly from countries like India, Malaysia, Qatar, and the United
Arab Emirates. Remittances constitute a substantial portion of Nepal's GDP and have contributed
to the growth of the financial sector by increasing deposits in banks, expanding demand for
financial services, and fueling investment in housing, education, and entrepreneurship.
  Technological Innovation: Financial institutions in Nepal have embraced technological innovation
to enhance the delivery of financial services and improve efficiency. The adoption of digital
banking, mobile banking, and electronic payment systems has facilitated convenient access to
financial services, reduced transaction costs, and increased financial inclusion, particularly in
remote areas where physical branches are limited.

 Regulatory Framework: The regulatory framework governing financial institutions in Nepal has
evolved to promote stability, transparency, and consumer protection. The Nepal Rastra Bank
(NRB), the central bank of Nepal, has implemented prudential regulations, capital adequacy
requirements, and risk management standards to safeguard the stability and integrity of the
financial system while fostering innovation and competition.

 Infrastructure Development: Infrastructure development, including the expansion of road

networks, telecommunications, and electricity supply, has facilitated the growth of financial
institutions by improving accessibility and connectivity across the country. Better infrastructure
has enabled banks and MFIs to reach remote and rural areas, expand their customer base, and
deliver financial services more efficiently.

1.6 Classification of financial institution in Nepal

Financial institutions in Nepal can be classified into various categories based on their functions,
ownership, regulatory status, and target clientele. Here are the main classifications of financial institutions
in Nepal:

 Commercial Banks: Commercial banks in Nepal are regulated by the Nepal Rastra Bank (NRB) and
offer a wide range of banking services, including deposit-taking, lending, remittances, and foreign
exchange services. They serve individuals, businesses, and government entities and play a crucial
role in mobilizing savings, providing credit, and facilitating economic activity.

 Development Banks: Development banks in Nepal focus on providing long-term financing for
infrastructure projects, industrial development, and SMEs. They are regulated by the NRB and
offer specialized lending and advisory services to support economic growth and development
initiatives.

 Finance Companies: Finance companies in Nepal provide various financial services, including
consumer finance, hire purchase financing, leasing, and microfinance. They cater to individuals,
small businesses, and rural communities and play a vital role in expanding access to finance,
particularly for underserved populations.

 Microfinance Institutions (MFIs): MFIs in Nepal specialize in providing financial services to low-
income individuals, micro-entrepreneurs, and rural communities. They offer small loans, savings
accounts, and other financial products tailored to the needs of the poor and marginalized groups,
promoting financial inclusion and poverty reduction.
  Cooperative Financial Institutions: Cooperative financial institutions, including cooperative banks
and credit unions, are member-owned and operated organizations that provide banking and
financial services to their members. They serve individuals, farmers, cooperatives, and small
businesses, emphasizing principles of mutual cooperation and community development.

 Insurance Companies: Insurance companies in Nepal offer various insurance products, including
life insurance, health insurance, property and casualty insurance, and agricultural insurance. They
provide risk protection and financial security to individuals, businesses, and agricultural
producers, contributing to resilience and stability in the economy.

 Capital Market Institutions: Capital market institutions in Nepal include stock exchanges,
securities brokers, investment banks, and asset management companies. They facilitate trading
and investment activities in the capital markets, raise capital for businesses through initial public
offerings (IPOs) and debt issuances, and provide investment advisory and brokerage services to
investors.

 Non-Banking Financial Institutions (NBFIs): NBFIs in Nepal encompass a diverse range of financial
institutions that are not licensed as banks but provide financial services similar to banks. They
include leasing companies, investment companies, remittance companies, and pension funds,
among others, and play a complementary role in the financial system.

1.7 Licensing policy for bank and financial

n Nepal, the licensing policy for banks and financial institutions is governed by the Nepal Rastra Bank
(NRB), which is the central regulatory authority responsible for overseeing the country's banking and
financial sector. The NRB regulates and supervises banks, financial institutions, and other financial
intermediaries to ensure the stability, integrity, and efficiency of the financial system. Here's an overview
of the licensing policy for banks and financial institutions in Nepal:

I. Prerequisites for Licensing:

Before applying for a banking or financial institution license, applicants must meet certain prerequisites
set by the NRB. These prerequisites typically include minimum capital requirements, organizational
structure, governance standards, fit and proper criteria for directors and key management personnel, and
compliance with regulatory guidelines and policies.

II. Application Process:

Prospective applicants must submit an application to the NRB along with the required documentation and
information specified in the licensing guidelines. The application should include details about the
proposed institution's ownership structure, business plan, financial projections, risk management
framework, compliance procedures, and other relevant information.

III. Due Diligence and Assessment:

The NRB conducts a thorough due diligence process to assess the suitability of the applicant and the
viability of the proposed institution. This includes reviewing the applicant's financial strength,
management expertise, operational capacity, risk management capabilities, compliance with legal and
regulatory requirements, and adherence to prudential standards.

IV. Approval and Licensing:

Upon completion of the due diligence process and satisfactory evaluation of the application, the NRB
grants approval and issues a license to operate as a bank or financial institution. The license specifies the
scope of permitted activities, geographic coverage, capital requirements, reporting obligations, and other
regulatory conditions that the institution must comply with.

V. Ongoing Supervision and Compliance:

Once licensed, banks and financial institutions are subject to ongoing supervision and regulation by the
NRB to ensure compliance with applicable laws, regulations, and prudential standards. This includes
regular reporting requirements, on-site inspections, off-site monitoring, and enforcement actions to
address any deficiencies or violations identified.

VI. Expansion and Branch Licensing:

Banks and financial institutions may seek approval from the NRB to expand their operations or establish
additional branches beyond their initial license scope. The NRB evaluates such expansion proposals based
on factors such as financial soundness, market demand, geographic coverage, and regulatory
considerations.

VII. Revocation and Suspension:

The NRB has the authority to revoke or suspend the license of a bank or financial institution if it fails to
comply with regulatory requirements, engages in unsafe or unsound practices, poses a risk to financial
stability, or violates applicable laws or regulations. Revocation or suspension may occur following an
investigation, regulatory intervention, or enforcement action.

1.8 Capital requirement

Capital requirements refer to the minimum amount of capital that banks and financial institutions are
required to maintain to ensure their financial stability, solvency, and ability to absorb potential losses.
These requirements are established by regulatory authorities such as central banks or banking regulators
to safeguard the integrity of the financial system, protect depositors and investors, and mitigate systemic
risks. Capital requirements typically apply to both banks and other financial institutions and serve as a key
component of prudential regulation. Here's an overview of capital requirements and their significance:

I. Types of Capital: Capital requirements distinguish between different types of capital based
on their quality and ability to absorb losses. Commonly recognized types of capital include:
 Tier 1 Capital: This consists of the highest quality capital, primarily comprised of common equity
Tier 1 capital (CET1), which represents shareholders' equity and retained earnings.
 Tier 2 Capital: This includes supplementary capital such as subordinated debt, hybrid instruments,
and other forms of financial support that provide additional loss-absorbing capacity.
II. Minimum Capital Ratios: Regulatory authorities specify minimum capital ratios that banks
and financial institutions must maintain to ensure adequate capitalization. These ratios are
expressed as percentages of risk-weighted assets (RWAs) and typically include:
 Common Equity Tier 1 (CET1) Ratio: This ratio measures CET1 capital as a percentage of RWAs
and serves as the primary indicator of a bank's financial strength and resilience.
 Tier 1 Capital Ratio: This ratio assesses the adequacy of Tier 1 capital relative to RWAs and
reflects the bank's ability to absorb losses without impairing its core functions.
 Total Capital Ratio: This ratio combines Tier 1 and Tier 2 capital to assess the overall capital
adequacy of the institution relative to its risk exposures.

III. Risk-Weighted Assets: Capital requirements are based on the risk profile of an institution's
assets and off-balance sheet exposures. Risk-weighted assets are calculated by assigning
specific risk weights to different categories of assets and exposures based on their credit risk,
market risk, and operational risk. Higher-risk assets require higher capital allocations to
ensure adequate coverage of potential losses.

IV. Capital Adequacy Standards: Regulatory authorities establish capital adequacy standards and
guidelines to ensure that banks and financial institutions maintain sufficient capital buffers to
withstand adverse economic conditions and financial shocks. These standards aim to promote
financial stability, prevent insolvency, and enhance investor confidence in the banking
system.
V. Supervisory Review and Assessment Process (SRAP): In addition to minimum capital
requirements, regulatory authorities conduct a supervisory review and assessment process
to evaluate an institution's overall risk profile, capital adequacy, risk management practices,
and compliance with regulatory requirements. This process involves regular examinations,
stress testing, and qualitative assessments to identify and address potential vulnerabilities.

1.9. Function Of bank and Financial institution as per BAFIA 2063

BAFIA (Bank and Financial Institution Act) 2063 is the primary legislation governing banks and financial
institutions in Nepal. It outlines various functions and responsibilities for these entities to ensure their
proper functioning and adherence to regulatory standards. Here are some of the key functions of
banks and financial institutions as per BAFIA 2063:

 Deposit-Taking: Banks and financial institutions are authorized to accept deposits from
individuals, businesses, and other entities. They offer various types of deposit accounts, including
savings accounts, current accounts, fixed deposits, and recurring deposits, and provide depositors
with a safe place to hold their funds.

 Lending and Credit Provision: Banks and financial institutions provide loans and credit facilities
to borrowers for various purposes, including business expansion, investment, consumption, and
housing. They evaluate the creditworthiness of borrowers, assess the risk of lending, and offer
appropriate loan products with terms and conditions tailored to the needs of the borrower.

 Investment and Asset Management: Banks and financial institutions invest in a diverse range of
assets, including government securities, corporate bonds, equities, real estate, and other financial
 instruments. They manage investment portfolios on behalf of clients, optimize returns, and
mitigate risks through prudent asset allocation and diversification strategies.

 Payment Services: Banks and financial institutions offer payment and transaction services to
facilitate the transfer of funds between individuals, businesses, and institutions. These services
include electronic funds transfers, wire transfers, check clearing, payment cards (debit cards and
credit cards), and online banking platforms.

 Foreign Exchange Services: Banks and financial institutions provide foreign exchange services to
facilitate international trade, travel, and remittances. They buy and sell foreign currencies, offer
foreign exchange hedging products, and provide advisory services on currency markets and
exchange rate fluctuations.

 Financial Advisory and Wealth Management: Banks and financial institutions offer financial
advisory and wealth management services to assist individuals and businesses in managing their
finances, achieving their financial goals, and maximizing returns on investments. This includes
retirement planning, estate planning, tax optimization, and portfolio management.

 Risk Management: Banks and financial institutions implement risk management policies and
procedures to identify, assess, and mitigate various types of risks, including credit risk, market
risk, liquidity risk, operational risk, and compliance risk. They establish risk management
frameworks, conduct risk assessments, and implement controls to safeguard against potential
losses and ensure regulatory compliance.

 Compliance and Reporting: Banks and financial institutions comply with regulatory requirements
and reporting obligations prescribed by BAFIA 2063 and other regulatory authorities. They
maintain accurate records, prepare financial statements, and submit regulatory reports on a
regular basis to demonstrate compliance with prudential standards, capital adequacy
requirements, and other regulatory guidelines.

1.10. Major provisions of Act (BAFIA) 2063

The Bank and Financial Institution Act (BAFIA) 2063 is the primary legislation governing banks and financial
institutions in Nepal. Enacted in 2006 (2063 in the Nepali calendar), BAFIA aims to regulate and supervise
the operations of banks, financial institutions, and other financial intermediaries to ensure the stability,
integrity, and efficiency of the financial system. Here are some of the major provisions of BAFIA 2063:

 Licensing and Regulation: BAFIA establishes the framework for licensing, regulation, and
supervision of banks, financial institutions, and other financial intermediaries operating in Nepal.
It sets out the eligibility criteria, application process, and regulatory requirements for obtaining
and maintaining a license to conduct banking and financial activities.

 Capital Requirements: BAFIA prescribes minimum capital requirements that banks and financial
institutions must maintain to ensure their financial soundness and stability. It specifies the types
 of capital (Tier 1 and Tier 2) and minimum capital ratios (CET1 ratio, Tier 1 ratio, and Total capital
ratio) that institutions must adhere to, based on their risk exposures and asset quality.

 Corporate Governance: BAFIA lays down principles of corporate governance and governance
standards that banks and financial institutions must follow to ensure effective oversight,
transparency, accountability, and integrity in their operations. It outlines the roles and
responsibilities of directors, management, and shareholders and mandates the establishment of
governance structures, committees, and policies.

 Risk Management: BAFIA requires banks and financial institutions to establish robust risk
management frameworks and practices to identify, assess, monitor, and mitigate various types of
risks, including credit risk, market risk, liquidity risk, operational risk, and compliance risk. It
emphasizes the importance of prudent risk management in safeguarding the financial health and
stability of institutions.

 Prudential Regulations: BAFIA empowers the Nepal Rastra Bank (NRB), the central regulatory
authority, to issue prudential regulations, guidelines, and directives to govern the operations of
banks and financial institutions. These regulations cover areas such as capital adequacy, asset
quality, liquidity management, lending standards, provisioning requirements, and disclosure and
reporting obligations.

 Consumer Protection: BAFIA includes provisions aimed at protecting the interests of depositors,
borrowers, investors, and consumers of financial services. It establishes mechanisms for resolving
disputes, complaints, and grievances related to banking and financial transactions and mandates
the disclosure of information and terms and conditions to ensure transparency and fair treatment.

 Supervision and Enforcement: BAFIA authorizes the NRB to supervise and regulate banks and
financial institutions to ensure compliance with regulatory requirements and prudential
standards. It grants the NRB powers to conduct on-site inspections, off-site monitoring, and
examinations of institutions' financial condition, risk management practices, and compliance with
laws and regulations. BAFIA also provides for enforcement actions, penalties, and sanctions for
non-compliance with regulatory requirements.

 Offenses and Penalties: BAFIA specifies offenses, violations, and prohibited activities related to
banking and financial operations, such as fraud, insider trading, money laundering, and non-
compliance with regulatory directives. It prescribes penalties, fines, and sanctions for individuals
and institutions found guilty of committing offenses or breaching regulatory standards.

1.11. Financial sector reforms in Nepal: (context, need and objectives, major reform)
Financial sector reforms in Nepal have been initiated to address the challenges faced by the country's
banking and financial system and to promote financial stability, inclusivity, efficiency, and
competitiveness. These reforms have been driven by various factors, including changes in the global and
domestic economic landscape, technological advancements, evolving regulatory standards, and the need
to support sustainable economic growth and development. The major objectives of financial sector
reforms in Nepal include:

 Enhancing Financial Stability: Strengthening the resilience and stability of the banking and
financial system to mitigate systemic risks, ensure depositor and investor confidence, and
safeguard financial stability in the face of domestic and external shocks.

 Promoting Financial Inclusion: Expanding access to financial services and increasing financial
literacy among underserved and marginalized populations, including rural communities, women,
youth, and low-income individuals, to promote inclusive economic growth and poverty reduction.

 Improving Governance and Regulation: Enhancing corporate governance standards, regulatory

oversight, and supervision of banks and financial institutions to ensure transparency,
accountability, and integrity in the financial sector and to prevent fraud, misconduct, and abuses.

 Strengthening Risk Management: Enhancing risk management frameworks, practices, and

capabilities within banks and financial institutions to identify, assess, and mitigate various types
of risks, including credit risk, market risk, liquidity risk, operational risk, and compliance risk.

 Encouraging Innovation and Technology Adoption: Promoting innovation, digitalization, and

technology adoption in the delivery of financial services to improve efficiency, accessibility, and
affordability, and to meet the evolving needs and preferences of customers in the digital age.

 Fostering Competition and Market Development: Encouraging competition, market entry, and
diversification in the banking and financial sector to stimulate innovation, improve service quality,
and lower costs for consumers. This includes promoting the establishment of new banks, financial
institutions, and fintech startups.

 Enhancing Infrastructure and Market Infrastructure: Upgrading financial infrastructure, including

payment systems, credit information systems, securities exchanges, and regulatory frameworks,
to support efficient and integrated financial markets, enhance liquidity, and facilitate capital
formation and investment.

 Aligning with International Standards: Harmonizing regulatory and supervisory frameworks with
international best practices, standards, and principles, including those established by the Basel
Committee on Banking Supervision (BCBS), the International Organization of Securities
Commissions (IOSCO), and other international standard-setting bodies.

Some of the major financial sector reforms implemented or proposed in Nepal include:

 Bank and Financial Institution Act (BAFIA) Revisions: Amendments to BAFIA to strengthen
prudential regulations, corporate governance standards, capital adequacy requirements, risk
management practices, and consumer protection provisions.
 Financial Inclusion Strategy: Development and implementation of a National Financial Inclusion
Strategy (NFIS) to expand access to financial services, promote financial literacy and education,
and improve the delivery of financial services to underserved populations.

 Digital Financial Services: Promotion of digital financial services, mobile banking, and branchless
banking initiatives to increase financial access, reduce transaction costs, and improve
convenience for customers, especially in remote and rural areas.

 Credit Information Bureau (CIB): Establishment of a Credit Information Bureau (CIB) to collect,
analyze, and disseminate credit information and facilitate informed lending decisions by banks
and financial institutions, thereby reducing credit risk and improving credit access.

 Securities Market Development: Strengthening the regulatory framework and infrastructure for
securities markets, including the establishment of a Securities Exchange Board of Nepal (SEBON)
and the introduction of new financial instruments and trading platforms to deepen capital
markets and enhance investor protection.

 Microfinance Regulation: Review and revision of regulations governing microfinance institutions

(MFIs) to enhance oversight, governance, and consumer protection in the microfinance sector
while promoting sustainable growth and social impact.

 Financial Sector Stability Fund: Establishment of a Financial Sector Stability Fund (FSSF) or deposit
insurance scheme to protect depositors' funds, enhance confidence in the banking system, and
provide a safety net during periods of financial distress or crisis.