NepalMONEY AND BANKING, NEPAL
Newari architecture in Durbar Square, Patan
Courtesy Harvey Follender
Bustling Bhotahiti Square, Kathmandu
Courtesy Harvey Follender
Nepal's first commercial bank, the Nepal Bank Limited,
was
established in 1937. The government owned 51 percent of
the shares
in the bank and controlled its operations to a large
extent. Nepal
Bank Limited was headquartered in Kathmandu and had
branches in
other parts of the country.
There were other government banking institutions.
Rastriya
Banijya Bank (National Commercial Bank), a state-owned
commercial
bank, was established in 1966. The Land Reform Savings
Corporation
was established in 1966 to deal with finances related to
land
reforms.
There were two other specialized financial
institutions. Nepal
Industrial Development Corporation, a state-owned
development
finance organization headquartered in Kathmandu, was
established in
1959 with United States assistance to offer financial and
technical
assistance to private industry. Although the government
invested in
the corporation, representatives from the private business
sector
also sat on the board of directors. The Co-operative Bank,
which
became the Agricultural Development Bank in 1967, was the
main
source of financing for small agribusinesses and
cooperatives.
Almost 75 percent of the bank was state-owned; 21 percent
was owned
by the Nepal Rastra Bank, and 5 percent by cooperatives
and private
individuals. The Agricultural Development Bank also served
as the
government's implementing agency for small farmers' group
development projects assisted by the
Asian Development Bank (see Glossary)
and financed by the United Nations Development
Programme.
The Ministry of Finance reported in 1990 that the
Agricultural
Development Bank, which is vested with the leading role in
agricultural loan investment, had granted loans to only 9
percent
of the total number of farming families since 1965.
Since the 1960s, both commercial and specialized banks
have
expanded. More businesses and households had better access
to the
credit market although the credit market had not expanded.
In the mid-1980s, three foreign commercial banks opened
branches in Nepal. The Nepal Arab Bank was co-owned by the
Emirates
Bank International Limited (Dubai), the Nepalese
government, and
the Nepalese public. The Nepal Indosuez Bank was jointly
owned by
the French Banque Indosuez, Rastriya Banijya Bank,
Rastriya Beema
Sansthan (National Insurance Corporation), and the
Nepalese public.
Nepal Grindlays Bank was co-owned by a British firm called
Grindlays Bank, local financial interests, and the
Nepalese public.
Nepal Rastra Bank was created in 1956 as the central
bank. Its
function was to supervise commercial banks and to guide
the basic
monetary policy of the nation. Its major aims were to
regulate the
issue of paper money; secure countrywide circulation of
Nepalese
currency and achieve stability in its exchange rates;
mobilize
capital for economic development and for trade and
industry growth;
develop the banking system in the country, thereby
ensuring the
existence of banking facilities; and maintain the economic
interests of the general public. Nepal Rastra Bank also
was to
oversee foreign exchange rates and foreign exchange
reserves.
Prior to the establishment of Nepal Rastra Bank,
Kathmandu had
little control over its foreign currency holdings. Indian
rupees
were the prevalent medium of exchange in most parts of the
country.
Nepalese currency was used mostly in the Kathmandu Valley
and the
surrounding hill areas. The existence of a dual currency
system
made it hard for the government to know the status of
Indian
currency holdings in Nepal. The exchange rates between
Indian and
Nepalese rupees were determined in the marketplace.
Between 1932
and 1955, the value of 100 Indian rupees varied between
Rs71 and
Rs177. The government entered the currency market with a
form of
fixed exchange rate between the two currencies in 1958. An
act
passed in 1960 sought to regulate foreign exchange
transactions.
Beginning in the 1960s, the government made special
efforts to use
Nepalese currency inside the country as a medium of
exchange.
It was only after the signing of the 1960 Trade and
Transit
Treaty with India that Nepal had full access to foreign
currencies
other than the Indian rupee. Prior to the treaty, all
foreign
exchange earnings went to the Central Bank of India, and
all
foreign currency needs were provided by the Indian
government.
After 1960 Nepal had full access to all foreign currency
transactions and directly controlled its exports and
imports with
countries other than India.
As a result of the treaty, the government had to
separate
Indian currency (convertible currency because of free
convertibility) from other currencies (nonconvertible
currency
because it was directly controlled by Nepal Rastra Bank).
In 1991
government statistics still separated trade with India
from trade
with other countries. Tables showing international
reserves listed
convertible and nonconvertible foreign exchange reserves
separately.
Data as of September 1991
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