Banks and financial institutions are the institutions that transact money in the language of the people. These institutions act as intermediaries between the saver and the user of the savings. Therefore, banks and financial institutions are also called financial intermediaries. These organizations raise money in the form of savings from unions, the general public and the government and invest the accumulated capital in the form of loans in various sectors of the economy such as trade, business, construction, manufacturing, consumption and other service sectors. Savings are a major part of capital mobilization. The condition of public savings determines the investment capital.
And according to the principles of general economics, savings and investments are affected by market interest rates. If the market interest rate goes up, the savings increase and with the savings, the investable capital also increases. However, as the interest rate (cost) of investment increases with the increase in interest rate on savings, the demand for investment decreases due to increase in interest rate and interest rate remains at a balanced point of savings and investment. Therefore, market interest rate is the monetary tool to balance savings and investment. However, savings and investments are basically dependent on income. If the national income goes up, both savings and investment will go up and this will widen the volume of the overall economy.
So how to increase income is the main subject of economics? That is to say. This principle has worked in the development, expansion and shaping of the economy. And, this is the basic global socio-political issue. This is of particular interest to low-income countries. Different economic and monetary policies are adopted in the development and expansion of the economy according to the principles, ideologies and approaches carried by the political parties. The same policy depends on the success and failure of the government.
Savings are a means of measuring the success and failure of various economic policies, fiscal policies and the use of various financial instruments introduced by the government. If there is a regular increase in the savings of the general public, we can say that the economy is expanding. Employment is increasing. Production is increasing. Income is increasing. The ratio of consumption to savings is also increasing. If those savings continue to shrink, then the country’s economic and financial policy is failing.
Financial intermediaries invest the portion of the public’s income that is saved from consumption as savings. Due to the consumer-oriented structure and culture of Nepali society, the proportion of consumption of the general public seems to be very high. Statistics show that almost 90 percent of income is spent on consumption. When the savings rate declines, it contracts the flow of credit into the market and ultimately narrows the process of capital formation.
When it comes to savings, a proper solution must be found to the question of how to increase the average income of the common man. Just teaching to save doesn’t do anything. In order to strengthen the economic condition of the individual, it is necessary to increase the average income of the individual by creating adequate employment opportunities.
Status of financial access
Looking at the banking history of Nepal, it is seen that modern banking started with the establishment of Nepal Bank Limited in 1994 BS. With the establishment of Biratnagar Jute Mill and Juddha Match Factory, which were established by issuing share capital for the first time at that time, the involvement of private sector (especially Indian investors) in Nepal’s economic sector for the first time in history. At that time it was almost the second half of the Rana rule and the Rana in particular had started some limited economic reforms and controlled development.
Nepal Rastra Bank was established as the central bank, followed by another commercial bank and the Agriculture Development Bank with the objective of regulating and overseeing the increasing economic activities in the changed situation with the political changes of 2007. Then B.Sc. With the onset of the 2040s, the country embraced a liberal economy. The political changes of 2046 BS also encouraged the same economy and with the liberalization of the country, the opening of banks and financial institutions from the private sector has been increasing. The numerical presence of banks and financial institutions has been significant since the early 1960’s. After the political changes of 2062/63, the number of financial institutions became more and more chaotic. By 2067/68, the number of financial institutions had reached more than 200.
Of the total branches of banks and financial institutions in 2077/78, the highest (34 percent) was in Bagmati and the lowest (4 percent) was in Karnali. Therefore, despite the numerical presence of banks and financial institutions, the financial services they provide have not been decentralized
Lately, the central bank has been reducing the number through mergers and acquisitions in line with the policy of reducing the number of banks and financial institutions with the objective of increasing the quality and reliability of financial services by reducing the numerical presence. The total number of banks and financial institutions including A, B, C, D category and one infrastructure development bank till mid-July 2078 BS is 133 and their number of branches is 10 thousand 683. In terms of financial access, out of a total of 753 local levels, the central bank’s data shows that the branches of financial institutions have reached 750 local levels. Now the branches of the financial institution have to reach three local levels.
Even in the current geographical situation, the numerical presence of banks and financial institutions seems to be strong. However, based on the financial access of the citizens, the financial services provided by the existing banks and financial institutions in Nepal are only centered in the city market. Financial services have not reached the rural areas. According to a recent study by the central bank, more than half of the country’s financial transactions take place in Bagmati.
Therefore, with the implementation of federalism, decentralization in financial transactions has been expected but it has not happened in practice. According to the report made public in the second week of October, 2078 BS, out of the total branches of banks and financial institutions in 2077/78 BS, the highest number (34 percent) was in Bagmati and the lowest (4 percent) was in Karnali. Therefore, despite the numerical presence of banks and financial institutions, the financial services they provide have not been decentralized.
Looking at the data of credit flow from banks and financial institutions, it is seen that most of the credit expansion is concentrated in Bagmati province. According to the NRB’s study report, out of the total loan disbursement of 36.6 trillion rupees, only 56.6 percent loan has been disbursed in Bagmati and the lowest is 1.2 percent in Karnali. There is no sense of financial federalism when banks and financial institutions are centered in the city market. (H. Percentage of State Debt Flow Details)
State Debt Flow Details
|Provinces||Debt flow (in percent)|
Source: Nepal Rastra Bank
Why financial federalism?
There are two main reasons for the need for federalism in Nepal. First, the existing unitary centralized system of governance in the country has not led to balanced and regional development of the country. This created a paradox that Kathmandu was running out of resources but the people in remote areas always had to face shortages. Therefore, federalism was adopted as the highest practice of decentralization, in which available resources are used according to local needs. The first access to the utility of the resource is the local natives. At the same time, voices have been raised that the country should be taken to federalism to end the discrimination done by the unitary state system.
Similarly, federalism has been raised to ensure equal representation and empowerment of the citizens of backward classes, regions, genders, castes, languages, cultures and religions in the organs of the state. And, of course, this is a genuine issue. This issue will continue to arise until those oppressed communities have equal political and economic opportunities. What is happening now in the implementation of federalism is to restructure the state without addressing the historical realization of the need for state restructuring. The way we have defined federalism is based on the discretion of some parties and their leaders, rather than on principle. It has diluted the very essence and spirit of federalism. As a result, federalism is now in shambles.
In terms of financial service delivery, Nepal’s financial system is still largely urban-centric. On the other hand, the performance style of banks and financial institutions is completely centralized
According to the essence of federalism, financial federalism is necessary to provide economic and financial access to the people. As we are trying to transform the country politically, economically, socially and culturally through the federal system of government. Similarly, it is important to understand that financial federalism is indispensable for the equitable development, prosperity and progress of the people. Fiscal federalism solves the question of division and sharing of financial resources at different levels of the state. How can this make the financial resources collected by the state organs and its operations more people-oriented? How to balance the mobilization and mobilization of financial resources? Determines issues such as
Therefore, financial federalism is indispensable for the successful implementation of politically achieved federalism and the successful practice of federalism in accordance with its essence and spirit. Of course, in the process of implementing federalism, not only the restructuring of the state comes to the fore, but also the issue of distribution of financial resources and means comes to the fore. Moreover, the distribution of resources is its central issue. Therefore, only a successful practice of financial federalism can establish a federal system.
Financial federalism that banks do not understand
Banks and financial institutions in Nepal have not practiced financial federalism. The government’s initiative to expand the bank’s branches to every local level in the primary phase has been almost successful. Now only three local levels are out of financial reach. However, this presence is only formal. Because in terms of financial service flow, Nepal’s financial system is still basically city-centric.
On the other hand, the performance style of banks and financial institutions is completely centralized. According to various studies, out of the total investment of financial institutions, more than two thirds of the investment comes from the capital Kathmandu. Similarly, large loan investments are approved only by the central office of these institutions. At present, the branches of financial institutions have to approach the central office for approval of even small and medium loans. That is, the operating style of financial institutions is completely centralized.
While we are arguing that political resources should be mobilized wherever they are created politically, financial institutions are concentrating their financial resources across the country in Kathmandu. Does such a practice establish federalism? Is egalitarian economic development possible with such centralized thinking of financial institutions? Why don’t financial institutions understand fiscal federalism? Why doesn’t the government emphasize the practice of fiscal federalism?
Looking at the current practice of banks and financial institutions, they have limited themselves to a limited number of urban and market-oriented areas. And, they are only taking those areas as centers of financial resource mobilization. In this sense, there is no basis for the fact that a bank operating a branch in a remote place of Nepal mobilizes financial resources locally as their centralized campaign has limited the remote to a mere deposit collection center. Therefore, it is necessary to have adequate debate and discussion about financial federalism by stopping this reverse practice of federalism. The goal of development, prosperity and progress cannot be achieved by centralization of financial resources.