IMAGE: KATMANDU JOURNAL/ROBERT NEUBECKER
THE DEPARTURE AT Tribhuvan International Airport in Kathmandu is the clearest guide to Nepal’s economy. Every day about 2,000 young people fly out to the Gulf or South-East Asia, swapping their labour for foreign currency that keeps families afloat back home. In the city they leave behind, the streets are lined with gleaming glass-and-steel bank headquarters. Commercial banks in Nepal have never been safer or more profitable. And yet that is the puzzle at the heart of the country: a financial system that looks like a triumph on paper but has little to do with how the country actually makes a living.
Credit as a share of GDP now rivals that of many middle-income countries, but little of it goes to factories or farms that could create jobs for those boarding planes. Instead money circulates in a tight urban loop, pouring into real estate and into financing the imports that remittances pay for.
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A quick look at the figures is comforting. Total deposits in banks and financial institutions have pierced Rs7.5trn, growing at double-digit rates even as the wider economy struggles. The system is awash with liquidity and well capitalised. It has survived a decade-long civil war, a devastating earthquake in 2015 and a global pandemic. But the strength of bank balance-sheets has become more parasitic than productive. Nepal’s banks are like a powerful engine that is no longer connected to the wheels.
The roots of that problem can be traced to an institutional shock. To understand why a Nepali banker is happier lending for a luxury SUV than for a small factory, one has to go back to the early 2000s. After a wave of bad loans nearly sank state-owned banks, the Nepal Rastra Bank, backed by the World Bank, pushed through sweeping reforms. They embedded a culture of extreme caution. The goal was to stop the system collapsing, and on that score they succeeded. But they also shaped a generation of bankers who see risk not as something to measure and manage, but as something to avoid altogether. Banks were rebuilt for a country in survival mode, where the overriding goal was not to be blamed.
The law turned that caution into paralysis. The Banking Offence and Punishment Act of 2006 hangs over every lending decision. In Nepal a loan that fails is a business loss, true, but it can also become a criminal matter. Senior bankers can face prison or blacklisting if a project they back involves regulatory violations—such as inflated valuations or improper credit practices—even when there is no outright fraud or embezzlement.
The result is what bankers themselves call “collateral fetishism”. If a borrower can offer urban land with road access—the gold standard of security—the loan sails through. If she is a talented software engineer with contracts but no land in Kathmandu, the answer is no.
That obsession with land has produced an “asset-recycling” economy. Bank lending pushes up land prices, which in turn allows for bigger loans, which are then used to buy more land. Bank assets grow but the industrial base does not. Services, boosted by trade and tourism, now make up more than 62% of GDP. Industry meanwhile is stuck at around 12%. Banks are funding asset inflation rather than funding capital formation.
Remittances introduce yet another distortion, creating what might be called a “deposit illusion”. Nepal receives some $12bn a year from workers abroad, roughly a quarter of GDP. This reliable flow of cash has made banks complacent. When deposits arrive easily there is little reason to put in the hard work of finding and backing new firms. Rather banks act as caretakers of remittance-fuelled spending. They earn comfortable margins lending to importers who bring in the food, fuel and electronics that migrant families buy. Banking has become a toll-booth on consumption, sidestepping domestic production.
The regulator, for all its caution, tends to make matters worse. The Nepal Rastra Bank frequently imposes interest-rate caps and rigid loan-to-value limits. Such measures are meant to protect stability but they stop banks from pricing risk properly. When a bank cannot charge more for a riskier but promising venture, money flows to the safest and dullest assets. The fallout is regulatory herding: every bank looks and behaves like the next. They compete on branch numbers and flashy signs, rather than on better products or sharper judgement.
The price of that timidity is clearest in the “missing middle”: small and medium-sized firms that are too big for microfinance and too small or unconnected to attract big loans. These firms usually drive job creation. In Nepal they are locked out. A manufacturer who owns machinery worth a million dollars but rents his factory counts for nothing to a banker. With no proper registry for movable assets such as equipment or inventory, credit is denied to those most likely to build real businesses.
This puts Nepal at odds with its neighbours. In Vietnam banks were used deliberately to support industrialisation. Lending moved beyond land-based security towards cash-flow and transaction-based finance, where loans rest on orders and revenues. That helped Vietnam become an electronics powerhouse, starting from a far weaker financial position than Nepal’s. In Bangladesh trade-finance tools allowed garment exporters to import raw materials against future orders, powering the sector’s rise. Nepal by contrast is stuck with a nineteenth-century model of pawn-broking.
The fallout is economic as well as existential. A lack of productive credit fuels the brain drain. When young entrepreneurs cannot get loans at home they leave for places where finance works as a ladder rather than a wall. Banks end up exporting the country’s future workers to pay for today’s imports. The system is stable in the way a stagnant pond is stable: calm but lifeless.
Nepal’s small but growing technology sector shows the absurdity. Digital service exports are estimated at more than $500m a year. These firms are high-value and fast-growing and they need little physical land. Yet because their main assets are ideas and code, local banks barely see them. Software companies winning contracts from Silicon Valley must fund themselves because no banker knows how to value intellectual property or recurring revenue.
Looking ahead to 2030, the gap between Nepal’s financial system and its needs is becoming dangerous. The shift towards green finance and the country’s huge infrastructure needs require banks that can judge complex risks and supply long-term capital. A system that can only lend against a plot of land in the Kathmandu Valley cannot finance a modern economy. By focusing so narrowly on stability, the regulator has built a “safety trap”: a system too safe to matter.
That can only be fixed by rethinking how risk is handled. The law must clearly separate bad business judgement from crime. Bankers need incentives to learn industries and back business plans, and not just land titles. Regulation should move from micromanagement to clear principles that allow innovation.
If that does not happen, Kathmandu’s gleaming bank towers will be a mark of a lost chance. They will stay safe, profitable and liquid while the real economy shrinks and young people keep queuing at the airport. A banking system that takes no risk eventually becomes a risk itself. Nepal does not need safer banks: it needs useful ones. Until bankers are as ready to back a young person’s ideas as a patch of dirt, the economy will stay where it is: stagnant and looking for a way out. ■
