Nepal’s capital market is an exercise in negative ambition: shrinking in a growing world.
The country’s sole stock exchange, the NEPSE, which opened with much optimism in the 1990s, has today become a curious outlier amongst low- and middle-income countries (LMICs). Whereas its peers collectively raised $4 trillion in capital markets between 1990 and 2022, Nepal’s issuers have barely left the starting line. Liquidity is anaemic. The investor base is narrow. And volatility substitutes for value. The market’s enduring achievement may be its ability to look busy without achieving scale.
Other LMICs have marched to a different beat. From 2000 to 2022 cumulative net issuance in low-income economies quadrupled; middle-income ones grew eightfold. The real engine has been small and mid-sized firms with high returns on capital. In China, which accounts for 88% of that trend, the capital market has become an accelerant of industrial transformation. In Nepal new listings are as rare as economic reform.
Architecture explains much of the divergence. Thriving capital markets are built on two pillars: domestic investor depth and functional regulation. Eight in ten equity offerings in LMICs now occur within national borders, reflecting a shift towards domestic mobilisation over foreign dependence. This is not flag-waving. Local capital tends to be cheaper and more stable. It is also better aligned with operating realities.
Nepal has neither pillar. On the regulatory side, form trumps function. Listing rules mimic global standards but are enforced with the rigour of a theatre production. Relief is scarce and regulatory guidance intermittent. No dedicated SME board exists. No shelf-registration process exists to simplify repeat issuance. No reliable system supports due diligence.
The fallout is an ossified exchange. Of the 249 listed companies, many are illiquid. The largest institutional investors struggle to deploy capital without disrupting prices. New listings tend to involve hydropower firms with minimal float and limited follow-on activity. Retail investors dominate, drawn by rumour rather than research.
The opportunity cost is immense. In countries where capital markets are active, firms report sharp gains in productivity. Sales grow by double digits, capital formation accelerates and employment leaps. These gains are particularly valuable where bank credit is constrained or collateral-dependent. Public markets allow firms to scale without being tethered to property portfolios.
In Nepal scale is rationed. Firms depend on retained earnings or short-term bank loans backed by land. Remittances, which account for over a quarter of GDP, fuel property purchases and stock speculation rather than business expansion. The market does not channel capital; it churns it.
Repairing this means more than digitisation or jargon. Institutional investors must be given a reason to stay. Pension funds, mutual funds and insurers remain marginal players. Chile’s pension reforms, which created a domestic capital base from scratch, offer one model. Brazil’s “Novo Mercado”, which incentivised higher governance standards through market segmentation, is another. South Korea’s liberalisation blended foreign capital with institutional discipline.
Nepali policymakers tend to reach for the regulatory toolkit. Yet more rules are not the answer. When listing costs are uniform but firms are not, smaller players simply opt out. Tiered disclosure requirements and SME-friendly platforms as well as incentives for voluntary transparency can widen participation without lowering standards.
Information asymmetry remains the central problem. Without ratings, research or reliable audits, investors cannot price risk. This leads to overpricing during bubbles and a collapse of trust during corrections. Building the informational plumbing—auditors, analysts, data repositories—is not glamorous, but it is foundational.
New instruments could also nudge behaviour. Green bonds, diaspora bonds and sustainability-linked debt have succeeded in countries as varied as Nigeria and Indonesia. But they rely on credibility. No investor will buy an ESG-linked bond if emissions are unmeasured and covenants unenforced. Branding is not ballast.
Development partners could help, but selectively. Workshops and press releases do little. Underwriting credit guarantees, funding market infrastructure or helping incubate rating agencies would do more. Market trust, once earned, multiplies.
Nepal’s goal should be a capital market that is boring, meaning predictable, rule-bound and dull in the best possible way. At present, the NEPSE is a ground for excitement: shallow rallies, viral tips, speculative frenzies. What it lacks is confidence.
Without reform, the cost will rise. Firms will remain undersized, unable to compete. Entrepreneurs will struggle to scale. Savers will speculate rather than invest. The financial system will become more fragile not less.
Nepal is not short on ideas or ambition. Its entrepreneurs are resourceful; its diaspora is willing; its geography favourable. What it lacks is institutional seriousness. If countries poorer, more fragile and less connected can build credible capital markets, Nepal’s failure begins to look wilful.
Capital does not beg to be deployed. It flows where it is wanted—and where it is respected. Nepal must decide whether it wants to host capital or merely complain about its absence. The window is open. But it may not stay that way for long. ■
