Financial Industry Report of Nepal
Financial
Industry of Nepal
History, Transformation and
Challenges
Industry Report
Acknowledgement
I would like to express the deepest
appreciation to Islington College and my module teacher Dr.Francisca Tej who helped me in every
aspect of this report and convincingly conveyed a spirit of adventure in regard
to research. Without her guidance and persistent help the research would not
have been possible
I would like to thank
my friends, various web and books publisher and Nepal Rastra Bank for their
information and data, without these information I can barely finish my report.
Finally, I wish to
thank my parents for their support and encouragement throughout the study.
Executive
Summary
Financial sector is the backbone of the
economy. Basically, the financial sector has to be competitive, broad based and
within the range of customers outreach and affordability for the general
public. Over the past 20 years Nepal`s financial sector has become more deeper
and the number of financial intermediaries have grown rapidly. There is no
question that this sector has been serving as the major industry for job
employment as well as helped in the economic development of country but there
is still so much to be done for the smooth development of this sector. Though
the financial institutions are increasing day by day, still access to financial
services remains limited for many people in many parts of Nepal. This report
try to examines the condition of banks mainly commercial and offers the
recommendations by doing different analysis such as PEST, SWOT, Force field and
Porters five forces.
The major findings indicate and suggest
that despite government efforts, access to formal financial services is declining.
Financial intermediation is stagnating; the number of banks deposits and loan
account per inhabitant is falling. Access to bank infrastructures mainly in
rural area has also decrease.
Contents
1)
Banking Industry Introduction and
Its History:
1.1) History……………………………………………………………………………Page 5-6
1.2) Industry Overview……………………………………………………………… Page 6
1.3) Periodic Growth of
Industry………………………………………………………Page 7
1.4) Trends of Commercial Bank………….…………………………………………………Page
8-9
2)
INDUSTRY ANALYSIS:
2.1) PEST Analysis……….……………………………………………………………Page
10-11
2.2) Porters Five force Analysis……………………………………………………….Page
12-15
2.3) SWOT
Analysis…………………………………………………………………...Page 16
3)
FINDINGS
3.1) Findings and
Challenges…………………………………………………………..…Page 17
4)
REFERENCES…………………………….……………………………………………. Page
18
5)
ACRONYM………………………………………………………………………………..Page
19
6)
APPENDIX……………………………………………………………………………..Page
20-23
7)
Table of Figures and Tables
Table 1: Growth of Financial
sector over the period…………………………………..Page 7
Table 2: Commercial Banks
Operating in Nepal……………………………………...Page 8-9
Table 3: Commercial Banks Branches in Five
Development Regions………………..Page 23
Figure 1: Different Financial
Institutions percentages cover In Pie Chart……………..Page 7
Figure 2: Deposits and Credit trends
of Commercial Bank………………………….…Page 21
Introduction
on Banking Industry and Its History
Financial sector reforms have been
initiated in several countries including Nepal. Over the past 20 years Nepal`s
financial sector has become deeper and the number and type of financial
intermediaries have grown rapidly. Financial industry mainly includes the
commercial banks and development banks, finance companies, cooperatives,
insurance companies, and some NGO`s and INGO`s.
. Until mid 80`s, the financial sector
of Nepal was not opened up for the private sector and in mid 80`s the financial
liberalization started by opening banking system to the private sector. As
there were only two commercial banks, Nepal Bank Limited (NBB) and Rastryia
Banijya Bank (RBB) under government ownership, the banking sector was first
opened up to the private sector.
Nepal
bank Ltd. is the first modern bank of Nepal. It is taken as the milestone of
modern banking of the country. Nepal bank marks the beginning of a new era in the
history of the modern banking in Nepal. Nepal Bank has been inaugurated by King
Tribhuvan Bir Bikram Shah Dev on 30th Kartik
1994 B.S. Nepal bank was established as a semi government bank with the
authorized capital of Rs.10 million and the paid -up capital of Rs. 892
thousand. Until mid-1940s, only metallic coins were used as medium of exchange.
So the Nepal Government (His Majesty Government on that time) felt the need of
separate institution or body to issue national currencies and promote financial
organization in the country.
Nepal
Bank Ltd. remained the only financial institution of the country until the
foundation of Nepal Rastra Bank is 1956 A.D. Due to the absence of the central
bank, Nepal Bank has to play the role of central bank and operate the function
of central bank. Hence, the Nepal Rastra Bank Act 1955 was formulated, which
was approved by Nepal Government accordingly, the Nepal Rastra Bank was
established in 1956 A.D. as the central bank of Nepal. Nepal Rastra Bank makes
various guidelines for the banking sector of the country. In 1957 A.D.
Industrial Development Bank was established to promote the industrialization in
Nepal, which was later converted into Nepal Industrial Development Corporation
(NIDC) in 1959 A.D. Rastriya Banijya Bank, was established in 1965 A.D. as the
second commercial bank of Nepal. The financial shapes for these two commercial
banks have a tremendous impact on the economy.
As
the agriculture is the basic occupation of major Nepalese, the development of
this sector plays in the prime role in the economy. So, separate Agricultural
Development Bank was established in 1968 A.D. This is the first institution in
agricultural financing.
For
more than two decades, no more banks have been established in the country.
After declaring free economy and privatization policy, the government of Nepal
encouraged the foreign banks for joint venture in Nepal.
Today,
the banking sector is more liberalized and modernized and systematic managed.
There are various types of bank working in modern banking system in Nepal. It
includes central, development, commercial, financial, co-operative and Micro
Credit (Grameen) banks. Technology is changing day by day. And changed
technology affects the traditional method of the service of bank.
Banking
software, ATM, E-banking, Mobile Banking, Debit Card, Credit Card, Prepaid Card
etc. services are available in banking system in Nepal. It helps both customer
and banks to operate and conduct activities more efficiently.
Table-
1
Growth of Financial Institutions in Nepal
Source: Nepal Rastra Bank Statistics Report, 2012
The
above data are presented in Pie Chart as below:
Figure-1 Pie Chart
Trends
of commercial Banks
The Nepal Rastra Bank (NRB) has classified the
institutions into “A” “B” “C” “D” groups on the basis of the minimum paid-up
capital and provides the suitable license to the bank or financial institution.
Group ‘A’ is for commercial bank, ‘B’ for the development bank, ‘C’ for the
financial companies and ‘D’ for the Micro Finance Development Banks. As the
data shows the commercial banks have been gradually increased over the decades.
There are currently 32 commercial banks operating in the country. They are
listed below:
Table- 2
S.N.
|
Name of Commercial
Bank
|
Year of
establishment A.D.
|
Head office
|
Links to Related
bank
|
1
|
Nepal Bank Limited
|
1957
|
Kathmandu
|
|
2
|
Rastriya Banijya
Bank Limited
|
1966
|
Kathmandu
|
|
3
|
Agriculture
Developnment Bank Limited
|
1984
|
Kathmandu
|
www.adbl.gov.np
|
4
|
Nabil Bank Limited
|
1984
|
Kathmandu
|
|
5
|
Nepal Investment
Bank Limited
|
1986
|
Kathmandu
|
|
6
|
Standard Chartered
Bank Limited
|
1987
|
Kathmandu
|
|
7
|
Himalayan Bank
Limited
|
1993
|
Kathmandu
|
|
8
|
Nepal SBI Bank
Limited
|
1993
|
Kathmandu
|
|
9
|
Nepal Bangladesh
Bank Limited
|
1993
|
Kathmandu
|
|
10
|
Everest Bank Limited
|
1994
|
Kathmandu
|
|
11
|
Bank of
KathmanduLimited
|
1995
|
Kathmandu
|
|
12
|
Nepal Credit and
Commerce Bank
|
1996
|
Bhairawa
|
|
13
|
Lumbini Bank Limited
|
1998
|
Narayangrah
|
|
14
|
Nepal Industial and
Commercial Bank
|
1998
|
Biratnagar
|
|
15
|
Machhapuchre Bank
Limited
|
2000
|
Phokara
|
|
16
|
Kumari Bank Limited
|
2001
|
Kathmandu
|
|
17
|
Laxmi Bank Limited
|
2002
|
Birjung
|
|
18
|
Siddharth Bank
Limited
|
2002
|
Kathmandu
|
|
19
|
Global Bank Limited
|
2007
|
Birjung
|
|
20
|
Citizens Bank
International Limited
|
2007
|
Kathmandu
|
|
21
|
Prime Commercial
Bank Limited
|
2007
|
Kathmandu
|
|
22
|
Bank of Asia Nepal
Limited
|
2007
|
Kathmandu
|
|
23
|
Grand Bank Nepal
limited
|
2008
|
Kathmandu
|
|
24
|
NMB Bank Limited
|
2009
|
Kathmandu
|
|
25
|
Kist Bank Limited
|
2009
|
Kathmandu
|
|
26
|
Mega Bank Limited
|
2009
|
Kathmandu
|
|
27
|
Sunrise bank limited
|
2009
|
Kathmandu
|
|
28
|
Janata Bank limited
|
2009
|
Kathmandu
|
|
29
|
Commerz and Trust
bank limited
|
2010
|
Kathmandu
|
|
30
|
Civil Bank limited
|
2010
|
Kathmandu
|
|
31
|
Century commercial Bank
limited
|
2011
|
Kathmandu
|
|
32
|
Sanima Bank limited
|
2011
|
Kathmandu
|
The deposits and credit
trends of commercial banks for the past 10 year is shown in Appendix 1.
Industry
Analysis
There are different
types of business analytical tools to determine the opportunities, challenges
and other various environmental factors which will help the business in
forecasting and to remain in the track of business. For financial industry
analysis, here we mainly use PEST, Porters Five forces and SWOT.
PEST Analysis
The
PEST analysis is the external analysis which includes the external factors to
the industry such as political, environment, social and technology. These
factors and their impact on industry are discussed as below:
Political
factors
1) Regulatory framework: The banking industry is
affected more in compared with other sector due to the poor policy frame work
of Nepal government and central bank NRB.
2) Budget and Budget measures: Due to the political
instability the budget distribution in this sector is inconsistent and banks
are forced for limited transactions with the client.
3) Stricter prudential regulations with respect to
capital and liquidity give advantage to the Banking sector in terms of
credibility over the other industries.
Economic factors
1) Economic Growth: Though the country`s gross
domestic product (GDP) is in increasing trend, there has not been a noticeable
increase in economic growth. The 30% of people still live below the poverty
line and these people are far from the use of any banking products and
services.
2) Interest Rates: Nepal Rastra Bank monitors and
controls regularly the interest rates. Recently Nepal Rastra Bank reduces bank
rate to stimulate the growth of banking industry but in past interest rate was
increased due to the more investment in unproductive sector such as real
estate.
3) Inflation Rates: Nepal is facing big trouble due
to inflation as it has touched up to double figures 10.07%. To curb the
inflation, NRB has lowered the interest rates to increase the demand in banking
industry.
Socio- Cultural factors:
1) Traditional Trends: Nepal is country with
different ethnic groups and people here follow different religions and
customs’. People used to borrow money from “Sahu and Mahajans” in early period
when bank and other financial industry were not in practice and there is still
these trends in rural areas of country.
2) Change in Lifestyle: Life style of people is
changing rapidly. People are demanding high class products and the needs and
wants are increasing day by day. And this has opened the opportunities for
banking sector to tap the change.
3) Population: Increase in population is one of the
important social factors which affect the private sector banks. Banks would
open their branches after looking into the population demographics of the area.
Technological Factors
1) Investment in technology: Technology plays
important role in bank`s control mechanisms as well as services offered by
them. The imports of new technology and investment made for the updates are
important as they increases the standard as well ease in delivering products
and services. The government as well as private investment in technology is
increasing day by day. Now a day’s banks introduce different technology to
deliver the standard services to customers.
2) IT services and online banking: Theses day’s
banks are also using Internet and Mobile as a tool of promotions and give great
utility to customers. These IT services
have changed the face of traditional banking systems.
Porters Five Force
Analysis
The Porter's Five Forces model is a simple and
powerful for understanding where power lies in business situations. This is
useful, because it helps to understand both the strength of our current
competitive position, and the strength of a position we are considering moving
into.
With
a clear understanding of where power lies, we can take fair advantage of a
situation of strength, improve a situation of weakness, and avoid taking wrong
steps.
Five
forces analysis take five important forces into consideration that determine
competitive power in an industry. These are:
1) Bargaining
power of supplier
2) Bargaining
power of buyer
3) Competitive
rivalry
4) Threats
of substitutes
5) Threat
of new entry
Bargaining
Power of Supplier
A
banking industry requires enough capital from shareholder and debt holder, and
working integration from workers and staffs, other components and supplies.
This requirement leads to buyer-supplier relationship between industry and
various parties. Bargaining power of supplier is always high in banking
industry. The following table outlines some factors that determine supplier
power:
Suppliers are powerful if
|
Suppliers are weak if
|
Credible forward integration threat by
suppliers.
|
Many competitive suppliers are – products
and services are standardized.
|
Suppliers concentrated.
|
Credible backwards integration threat
by purchasers.
|
Customers are powerful.
|
Customers weak.
|
Concentrated purchasers.
|
Bargaining
Power of Buyer
The
power of buyers in banking industry is limited. As there are different external
forces which leads this industry towards to the success as well as to the
failure. Here power of buyer is generally indicated by the borrowing rate of
interest and the interest rate is generally influenced by external factors such
as economic conditions, market fluctuations and international trade. Though the
bargaining power of buyer is limited, banks always provide the standard
services to its customers which help them to be superior. The following table
outlines some factors that determine buyer power:
Buyers are powerful if
|
Buyers are weak if
|
Buyers possess a credible backwards
integration threat.
|
Producers are threaten forward
integration.
|
Buyers purchase a significant
proportion of output
|
Buyers are fragmented – no buyer has
any particular influence on industry.
|
Government provides certain right and
authority.
|
Government provides only limited right
on the industry.
|
Competitive
Rivalry
The
competitive rivalry in the banking industry seems to increase as the banks and
other financial institutions are growing year by year. As you can refer to, Table 1 to see the growth in this
industry. As banks increases in numbers the competition among them are also
increased. In pursuing advantage over the rivals, banks started to choose
different competitive moves. Some of them are:
1) Changing
borrowing interest rates and lending rates.
2) Improving
offered product and services, improving feature and implementing innovations
and new strategies.
3) Creatively
using channels of distributions.
The
intensity of rivalry among the banks is influenced by the following industry
characteristics:
1) A
large number of firms
2) Slow
economic growth and market growth
3) High
exit barriers
4) Low
levels of product differentiation.
5) Mergers
and Acquisitions trends
6) Low
switching costs.
Threats
of Substitutes
According
to the Porters, threat of substitutes refers to the ability of the customer to
find a different way of doing what you do. In financial industry the threat of
being substitutes is high as there is a stiff competition among the banks. A
threat of substitutes typically impacts an industry through price competition.
Customers always want the quality product and services and they want in a low
and cheap price.
Threats
of New Entrants
The
possibility of new entrants in the industry is always a prominent threat. As
the commercial banks for the past decades has dramatically grown the NRB has
impose some restrictions. They have increases the amount of authorized capital
required by the bank. NRB has also motivates the banking sector in M&A
policy. These types of barriers are imposed by government to make the sound
economic environment in the financial sector.
SWOT
Analysis
SWOT analysis take into account the strengths, weaknesses, opportunities
and threats facing a business, organization or operation, in terms of serving
customers, stakeholders and their own employees. A SWOT analysis of the banking
industry will list these four components and illustrate how to capture the
opportunity for strengthening the company by diminishing the threats and
weaknesses.
Some
Major areas of Banking are:
1) Retail Banking
2) Corporate banking
3) Corporate
Credit
4) Treasury
5) Capital
Markets
6) Lending
to micro, small and medium enterprises, agriculture and micro finance.
7) International
banking
For
the detail explanations of all SWOT factors, please refer Appendix 2.
Findings
Over
the last decade, the banking sector has become the fastest growing sector. As
we can see the Table 1, number of
financial institutions has grown from 5 in 1985 to 265 in 2012. With this growth and rapid expansion of
branches, total assets of banks and financial institutions have grown from Rs.
699 billion in 2007/2008 to around Rs. 1.4 trillion at present. This exploding
banking sector, however, has failed to deliver quality because of limited supply
of quality human resources, political instability and poor regulating norms
from the regulating bodies and authorities.
For
developing country like Nepal, the numbers of commercial bank is very high.
Most of the commercial banks are located in capital Kathmandu and there is
stiff competition among them. Opening branches and the installation of ATM
machines has led to more idle cash lying around at branches and machines which
is also believed to be the reason for rise in inflation in country. You can
refer to, Appendix 3, for the total
number of bank branches all over the country separated according to the five
region.
Challenges
Banking
industry faces mainly two challenges. They are:
1) Regulation:
Regulation in terms of banking policy which have increase liquidity crisis,
high interest rate, declining deposits, and danger of collapse of different
industrial sectors such as real estate, hydropower etc.
2) Distribution:
Distribution requires more manpower to be deployed in rural area and full
commitment from the deployed manpower to the industry.
I think these challenges can be overcome with
the combine effort of staffs working in banks and the regulating governing
bodies. NRB have to involve more and play more central role. They should
formulate new policies which should eliminates most of the problems banking
industry are facing.
REFERENCES
Hill, T. and Westbrook, R.
(1997) SWOT Analysis: It’s Time for a Product Recall, Long Range Planning, Vol. 30, No. 1, pp. 46–52.
Porter, M. E. (2004) Competitive Strategy: Techniques for Analyzing Industries and
Competitors, New York; London: Free Press
Wagle, K. N., (2001). Financial Industry Analysis and Planning, M. K. Publishers
& Distributors: Kathmandu
HARMA, RUPAK
D(2013),”Banking sector`s does not resonate with growth,” republica,24 April
2013
Financial Sector Reform in
Nepal 2007, Available from < http://saneinetwork.net/Files/08_05.pdf > [April 22, 2013]
Commercial Banks in
Nepal, 2012, Available from < http://imnepal.com/name-list-of-all-the-commercial-banks-in-nepal/
> [May 2, 2013]
Acronym
NRB Nepal Rastra Bank
IT Information Technology
ATM Automated Teller Machine
M&A Merger and Acquisitions
GDP Gross Domestic Product
Appendix 1
Figure - 2
Source: Banking and
Financial Statistics Report (NRB), 2012
Both the deposits and credit are in increasing
trend from 2001 to 2012, with credit of commercial banks are slight more than
the deposits in year 2012.
Appendix 2
Strength
1) Nepalese
banks have compared favorably on growth, asset quality and profitability with
other economies banks over the last few years.
2) Policy
makers have made some notable changes in policy and regulation to help
strengthen the sector. These changes include strengthening prudential norms,
enhancing the payments system and integrating regulations between commercial
and co-operative banks.
3) Bank
lending has been a significant driver of GDP growth and employment.
4) Extensive reach: the vast networking &
growing number of branches & ATMs.
5) Nepalese
banking system started to reach even to the remote corners of the country.
Weakness
1) The
central bank NRB need to fundamentally strengthen institutional skill levels
especially in sales and marketing, service operations, risk management and the
overall organizational performance ethic & strengthen human capital.
2) The cost of intermediation remains high and
bank penetration is limited to only a few customer segments and geographies.
3) Structural weaknesses such as a fragmented
industry structure, restrictions on capital availability and deployment, lack
of institutional support infrastructure, restrictive labor laws, weak corporate
governance and ineffective regulations have been really pain for this sector.
Opportunities
1) The
market is seeing discontinuous growth driven by new products and services that
include opportunities in credit cards, consumer finance and wealth management
on the retail side, and in fee-based income and investment banking on the
wholesale banking side. These require new skills in sales & marketing,
credit and operations.
2) Given
the demographic shifts resulting from changes in age profile and household
income, consumers will increasingly demand enhanced institutional capabilities
and service levels from banks.
3) New private banks could reach the next level
of their growth in the Nepalese banking sector by continuing to innovate and
develop differentiated business models to profitably serve segments like the
rural/low income.
4) Nepal
Rastra Bank (NRB) has approved a proposal from the government to amend the
Banking Regulation Act to permit banks to trade in commodities and commodity
derivatives.
Threats
1)
Threat of stability of the system:
failure of some weak banks has often threatened the stability of the system.
2)
Rise in inflation figures which would lead to
increase in interest rates.
3)
Political instability has threatened the
whole industry as the economy and trade is affecting day by day.
Appendix 3
The
number of commercial bank branches operating in the country has increased to
1425 in mid July 2012 from 1245 in mid July 2011. Among the total bank branches
49.7 percent is concentrated in the central region followed by Western 17.9%,
Eastern 17.8%, Mid Western 8.4% and Far Western 5.9%.
Table-3
Region
|
Number of Commercial Bank branches
|
Eastern region
|
255
|
Central region
|
709
|
Western region
|
256
|
Mid Western region
|
120
|
Far Western region
|
85
|
posted by Bipinsid @ 7:19 PM
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