Financial Sector Reform Project

• About Us
• Objectives
• Activities & Achievments
• Financial Updates
• Components
• Staff

Performance Indicators

• Nepal Bank Limited
• Rastriya Banijya Bank Limited

About Us

Nepal began economic liberalization in mid 1980s with a view to enhance efficiency in economic activities. With the advent of liberalization, the financial sector made some progress and prudent regulatory measures have been introduced by the Nepal Rastra Bank (central bank of Nepal). As a result, the number of banks and financial institutions in Nepal has also increased substantially. Though significant growth in the quantity of banks and financial institutions have been observed during the last two decades, their quality and performance are still not satisfactory. There is no doubt that the financial system needs to be structured on the strong base and should be complied with adequate international norms and best international practices. Financial supervisors should be legally strong, professional and responsible for enforcing such best practices. But the scenario is still weak in various developing economies. Financial Sector Assessment Program (FSAP) conducted by the World Bank and the IMF in various developed and underdeveloped financial markets in 1999 highlighted that most of the developing countries were still in the vulnerable situation, as they were not complying with the Basel core principles. The indicators of the financial sector of Nepal as well as the procedures exercised in the system had indicated that the system was weak, vulnerable and risky up to recent past. Therefore, a reform strategy was felt necessary to be launched in the economy. In this way, the Financial Sector Reform (FSR) has been adopted as a strategy aimed at making the financial system well diversified, sound, competitive and supportive to the attainment of development objectives of the economy with the technical assistance of World Bank. The overreaching objective of Financial Sector Reform Program is to support the renewed effort of the Nepal government to improve the sector in order to bring macroeconomic stability and promote private sector-led economic growth. The financial sector reform program is in the form of sequential projects.

The Financial Sector Reform Strategy Paper (FSRSP) of the Government

The clearly identified and addressed agenda of reform in the financial sector has been announced in the Financial Sector Reform Strategy Paper (FSRSP) of the government. This financial sector strategy paper of the government was approved by the cabinet on Oct 3, 2000 and was announced publicly on November 22, 2000.This is also known as the financial sector strategy statement of Government of Nepal. According to the FSRSP, the objectives of initiating the reform are the following:

• Strengthen the central bank,
• Build and maintain strong banking and non-banking sector,
• Improve existing legal and judicial aspects of financial system,
• Improve auditing and accounting standards within the banking sector,
• Promote financial discipline through adequate disclosure and competition,
• Initiate more focused interventions toward the programs for the upliftment of the poor,

Re-orient the activities of Government and Nepal Rastra Bank from being active participant (owner) of the financial institutions to a regulatory body.

The strategy paper of Government of Nepal has assigned an important and enhanced role, responsibility and accountability to the central bank. The government has fully supported the efforts of the NRB in strengthening banking supervision and enforcing the regulations. NRB has been assigned to focus and handle the following reform activities in the financial sector:

• Reforming the Financial Sector Legislation
• Strengthening Bank Supervision and Inspection
• Restructuring and Privatization of NBL and RBB
• Enhancing Competition in the Banking Sector
• Reforming the Auditing and Accounting Capabilities
• Broad Based Banking
• Streamlining Ownership Structure
• Establishment of Banker's Training Institute
• Restructuring of Credit Information Bureau
• Establishment of Asset Reconstruction Company
• Revamping Research and Financial Monitoring Strength of Central Bank
• Broadening and Deepening the Financial System in Nepal
• Meeting Sectoral Financing Requirements
• Establishment of Development Banks at Regional Level
• Strengthening of Rural Development Bank
• Establishment of Credit Rating Agency

For launching the comprehensive financial sector reform program Government of Nepal had requested the World Bank to finance it. In this regard, the World Bank has approved the financing for two phases of the project and the contract agreements have also been signed. Hence, the reform program in Nepal has been launched with the financial assistance of the International Development Association (IDA) of the World Bank group and a grant of DFID. It is worthwhile to mention here that the World Bank has upgraded Nepal as a country eligible to receive financial assistance from ‘low case’ to ‘base case’ level from 2003. It has provided a provision of further enhancements depending on the progress of reforms. The approved two phases of the reform program are

• Phase I -Financial Sector Technical Assistance Project (FSTAP)
• Phase II – Financial Sector Restructuring Project (FSRP)

The Financial Sector Technical Assistance Project (FSTAP)

It is the first phase project of financial sector reform program, which is focused on reengineering of Nepal Rastra Bank (NRB,) reform of two large ailing commercial banks namely Rastriya Banijya Bank (RBB) and Nepal Bank Limited (NBL) and support for capacity building in financial sector. This project agreement was signed on April 30, 2003 with a closing date of June 30, 2007. The total cost of this project is estimated to be US $ 30.1 million. The funding arrangement of the project is allocated as follows:

• IDA Credit : US $ 16 Million,
• DFID Grant : US $ 10 Million
• Government : US $ 4.1 million.

Financial Sector Restructuring Project (FSRP)

Likewise, the Financial Sector Restructuring Project is continuation of financial sector reform program as second phase in Nepal. The main objective of this project is to support the ongoing efforts to develop a healthier financial sector in Nepal, which intermediates funds more efficiently and effectively to the benefit of all segments of the society and in a manner which supports private sector development, increased investment and faster growth. This project is centered around further strengthening of central bank of Nepal, NRB and deepening of reform process within the two large banks, RBB and NBL so that they operate in a more commercially oriented basis. In this regard, the Development Financing Agreement was signed on June 10, 2004, with a closing date of September 30, 2009. The estimated cost of this project is US $ 86.60 million. The funding arrangement of the project is allocated as follows:

• IDA Credit : US $ 68.5 Million,

• IDA Grant : US $ 7.0 Million

• Government and local entities : US$ 9.8 Million.

PROJECT AT A GLANCE

• Financial Sector Technical Assistance Project (FSTAP)-Phase I
• Financial Sector Restructuring Project (FSRP) Phase II

Financial Sector Technical Assistance Project-Phase I

Project ID : P071291
Effective Date : July 01, 2003
Closing Date : June 30, 2007

Team Leader : Mr. Simon C. Bell

Sector Manager/Director : Mr. Joseph Del Mar Pernia
Country Manager/Director : Mr. Kenichi Ohashi

Sector(s) : Banking (100%)

Theme(s): State enterprise/bank restructuring and privatization (P), Corporate governance (S), Regulation and competition policy (S), Standards and financial reporting (S)

Lending Instrument : Technical Assistance Loan (TAL)

Borrower : THE GOVERNMENT OF NEPAL

Responsible/Implementing Agency : NEPAL RASTRA BANK

Address :
Nepal Rastra Bank, Baluwatar
Kathmandu, NEPAL

Contact Person : Governor, Nepal Rastra Bank

Tel: 977-1-410386
Fax: 977-1-410159
Email: nrbgov@mos.co.np
Another email - smpradhan@nrb.org.np

Other Agency(ies):
Ministry of Finance Address:
Ministry of Finance, Sing Durbar, Kathmandu, NEPAL

Contact Person: Secretary, Ministry of Finance

Tel: 977-1-259880
Fax: 977-1-259891
Email: facd_mof@gov.np

Project Financing Data

[ ] Loan [X] Credit [ ] Grant [ ] Guarantee [ ] Other:

For Loans/Credits/Others: Amount (US$m): 16.0

Proposed Terms (IDA): Standard Credit
Grace period (years): 10

Years to maturity: 40

Commitment fee: 0.5

Service charge: 0.75%

Financing Plan (US$m.)

Source		Local			Foreign		Total
Borrower IDA Others Total		4.10 0.00 0.00 4.10			0.00 16.00 10.00 26.00		4.10 16.00 10.00 30.10

Estimated Disbursements (Bank FY/US$m):

FY	2003	2004	2005	2006	2007
Annual	2.50	4.60	4.00	3.37	1.53
Cumulative	2.50	7.10	11.10	14.47	16.00

Financial Sector Restructuring Project-Phase II