Concept of Banking
The word Bank is believed to have originated from the Italian word Banco, Latin word Bancus, and French word Banque etc. which literally means sitting on a bench and trading money.
Institutional or modern concept of banking started in the world after the establishment of the first Bank “Bank of Venice” in Venice. Italy in 1115 and in Nepal, after the establishment of Tejarath Adda in B.S. 1933 (1877 A.D.) which was later replaced by First commercial Bank of Nepal. Nepal Bank Limited on B.S. 30th Kartik 1994.
Banks are the licensed financial institutions that are incorporates in order to carry on financial transactions or proving several financial services to general public such as accepting deposits, advancing loans, and offering various investment products.
Banks offer several saving accounts to keep safe or store extra cash and equivalent or credits. Received cash i.e. deposits, a bank use such deposited amount to make a loan on various productive sectors of the country.
A bank makes profit by charging higher interest rate on loan as compared to interest rate charge on deposit. Difference between the interest rate on Loans and Deposits is called spread rate which actually determine the profit of banks.
A bank’s primary source of capital is deposited money of general public. Deposits are the sums of the fund transferred by the customers to banks for the safeguarding of the fund or enjoying interest on such amount.
Since the customers deposited their hard-earned money in banks for the future needs or uses, they will gradually withdraw some proportion of deposited fund therefore the banks need to keep certain percentage of liquidity in hand as reserve to meets its short-term financial obligations.
Banks are the leading buyers of the bonds and notes issued by the government to finance in public sectors such as building schools, roads, hospitals, and other infrastructural development projects.
At present context, banks are engaged in providing several financial services such as remittance, exchange currencies, joint venture, underwriting, bank guarantee, and discount bill etc.
Moreover, it provides valuable and reliable information to the government to form necessary economic policies to tackle economic crisis and act as a channel for the government to implement such economic policies to stabilize the economy.
Banking institutions are one of the key drivers of the economy of every country all over the world. It provides liquidity needed for the purpose of personal and professional use to conduct financial transactions and several financial services to increase financial literacy.
Therefore, banks or financial institutions are regulated by the laws and central bank of the particular countries to maintain financial stability or health to boost an economy of the country.
Development of Banks and Financial Institutions
Development of Banks can be categorized on the following stages or era which is as follows;
Primitive Era
Business transactions conducted by the SahuMahajans are considered as the major base of primitive banking history.
Issuances of Mananka, Gunanka Etc were used as a coin for the first time in Nepal.
King Gunakamdev settled Kathmandu valley by taking loans and Sankhadhara Sakh paid off the loans of the people in Kathmandu and Bhaktapur.
Use of Gold and Silver coins by Sadashiv Dev and Malla kings and use of Mohar by King Prithivi Narayan Shah.
King Ram Shah of Gorkha fixed the annual interest 10 % on cash and 20% on commodities.
Institutional banking concept started after the establishment of Tejarath Adda in B.S. 1933 (1877A.D.) and Taskar Khana in B.S. 1989.
Based on the policy arrangements taken for the development of BFIs are categorized as follows;
First Stage (B.S. 1994 to 2040)
Establishment of Nepal Bank Limited on 30th Kartik 1994 B.S. (15 November 1937) as a first commercial semi government bank with the authorized capital of Rs.10 million and the paid-up capital of Rs. 892 thousand.
As a central bank of Nepal, Nepal Rastra Bank was established on 14th Baishakh 2013 (April 26, 1956) under Nepal Rastra Bank Act, 2012, Himalayan Samser JBR as first Governor to issue bank notes and coins.
To promote the industrialization in Nepal, in 2016 (July 1959) Nepal Industrial Development Corporation (NIDC) was established.
To develop cooperative system and provide specialization services in banking sectors. Cooperative Bank was established in B.S.2020.
As financial transactions got complex, Rastriya Banijya Bank was established on 10th Magh 2022 (23 January 1966) under the Rastriya Banijya Bank Act, 2021 as the Second commercial Bank of Nepal.
To support the agriculture sector of Nepal, in 7th Magh 2024 (21 January 1968) under ADBN Act, 1967 as a successor to the cooperative bank. Later in B.S. 2030, it was merged with Land and Reform Saving Corporation.
To operate banks under one act smoothly Commercial Bank Act, 2031 was issued.
Second Stage (B.S. 2041 to 2048)
After the adaptation of economic liberalization policy, the government of Nepal encouraged the foreign banks for joint venture in Nepal.
As a result, first joint venture bank, Nabil Bank limited was established in B.S. 2041/ 03/ 29.
Establishment of Investment Bank Limited in 2042/ 11/ 26.
Establishment of Standard Charter Bank Limited in 2043/ 10/ 16
Third Stage (B.S. 2049 to 2058)
Implementation of Commercial banks Act, Development Bank Act, and Finance Company Act were implemented.
Total number of commercial banks, development banks and finance companies were 11, 19 and 52 respectively.
In 2058, Nepal Rastra Bank Act, 2058 was issued that established Rastra Bank as the regulatory body of all BFIs and Supreme monetary authority.
Financial Reform Program was started in this stage.
Since the finance companies were established at large number, this stage is also called a period of finance company.
Fourth Stage (B.S. 2059 to 2068)
Issuance of Bank and Financial institution ordinance, 2059 as an umbrella law by consolidating Nepal Bank Act, Nepal Industrial Development Corporation Act, Commercial Bank Act, Agriculture Development Act, Finance company Act, Development Bank Act.
Incorporation of Banks as a public limited company according to Company Act, 2063.
Nepal Rastra Bank (NRB), as mandated by the NRB Act, 2058, has been issuing monetary policy publicly since 2002/03 (2059/60). In addition, it has been releasing half-yearly review of the policy since 2004/05 (2061/62) and quarterly review since 2016/17 (2073/74).
Fifth Stage (B.S. 2068 to Present)
NRB increased the amount of paid-up capital.
Financial institutions were declared problematic by NRB.
Establishment of Infrastructure Development Bank in B.S. 2074.
NRB initiated strategic steps with the objectives of adopting merger strategy.
NRB is in work in progress to introduce “Work from Home” program to fight against Covid-19 pandemic.
Currently 27 commercial banks, 19 development banks, 21 financial companies, 81 micro finance companies, and 1 infrastructure banks or 149 BFIs with its 9851 branches are providing financial services all over the country.
