Forecasting the potential of any sector in Nepal is relatively challenging given the low policy predictability and continuing political fluidity. For the financial sector to take off it is essential to have an enabling environment in terms of a strong policy and legal framework governing the sector, as well as a sizeable and sustainable economic growth. If our Gross Domestic Product (GDP) grows at 6-7% a year which, I believe is within our grasp, the size of our GDP will grow to 2.5 times the current level to approximately USD 50 billion which will be a sizeable economy. For this to occur, certain reforms must be put in place especially in regard to the company act, bankruptcy and insolvency laws, property rights as well as laws regulating foreign direct investment (FDI), capital market, foreign exchange, public private partnership, secured transactions and labor. It is also essential to establish accountability in government and bureaucracy; and ensure rule of law as well as enforcement.
Since the current banking landscape is highly unsustainable due to the presence of a large number of small banking and financial institutions (BFIs), going forward one can expect significant consolidation in this sector to a smaller number of large banks (approximately 20) which will be in a stronger position in terms of financial strength and capability.
Likewise, one can expect more people to invest in financial assets, rather than the current trend of investing in physical assets such as gold and land. We can also expect to move from traditional brick and mortar branches to more digital and innovative e-banking models. While Nepal has been a bit behind in adapting to the potential of digitization, the banking sector in Nepal is at the forefront of this digitization relative to other industries.
By 2030, the banking sector will potentially be more professionally managed with adherence to better corporate governance than currently where certain business families tend to control banks. More diverse and institutional shareholding should be encouraged; moving away from the view that bank owners need to sit on the board. Subsequently provision for more professional and full time executive directors should be introduced which is a regular practice internationally. In terms of business growth, besides traditional banking services, there is also significant opportunity for involvement in investment banking and partnerships supporting private equity.
However, for all of the envisioned things to happen it is essential for the above mentioned changes in reforms be put in motion. This will lead to an improvement in the general business climate leading to increased interest from international banks in entering the Nepali market; which holds the potential of scaling up of resources, transfer of technology, introduction of new products & services and up skilling local talent. It could also lead to increased capability in terms of getting into infrastructure financing, cash flow based lending and greater access to finance.