Economics

Introducing Non-Banking Financial Institutions

Non-Banking Financial Institutions (NBFIs) are financial institutions that provide banking-like financial services — such as loans, deposits (in some cases), insurance, provident funds, and investment services — but do not hold a full banking licence and cannot create credit in the way commercial banks do. In Nepal, NBFIs are regulated mainly by Nepal Rastra Bank (NRB) under the Nepal Rastra Bank Act, 2058 and the Financial Sector Regulation and Supervision framework.

Main types of NBFIs in Nepal:

Key features: they mobilise savings from the public, channel funds into productive sectors, provide specialised financial services (insurance, pension, remittance, capital market), and supplement the role of commercial banks — especially in rural and semi-urban areas.

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Role of Employees Provident Fund (EPF) in the Nepalese Economy

The Employees Provident Fund (EPF), established in 1962 A.D. (2019 B.S.) under the Employees Provident Fund Act, 2019 B.S., is Nepal's largest semi-government retirement savings institution. It collects compulsory monthly contributions from employees and employers and returns them with interest at retirement. Its role in the economy is as follows:

1. Mobilisation of national savings EPF collects mandatory contributions (10% employee + 10% employer in most cases) from salaried workers of government, public enterprises and private organisations. This converts scattered small savings into a large national fund, raising the gross domestic saving rate.

2. Source of long-term investment capital EPF invests its accumulated fund in government securities, development bonds, fixed deposits in banks, shares, debentures and infrastructure projects. It thus supplies long-term capital that commercial banks are often unwilling to provide.

3. Financing government deficit A large part of EPF's fund is invested in government bonds and treasury bills, which helps the government finance its budget deficit without excessive foreign borrowing.

4. Social security and retirement protection EPF provides old-age security to employees through pension, gratuity, provident fund withdrawal and medical/education loans. This reduces poverty among retired workers and lessens the burden on the state.

5. Capital market development EPF invests in shares and debentures of companies and in mutual funds, adding depth and liquidity to the Nepal Stock Exchange and encouraging institutional investment.

6. Infrastructure financing Through investment in hydro-power, roads and other infrastructure bonds, EPF contributes to capital formation and long-term economic growth.

7. Employment and labour welfare By guaranteeing retirement benefits, EPF makes formal employment more attractive, supports labour stability, and indirectly promotes industrial peace.

8. Financial discipline and inclusion Compulsory contribution develops saving habits among workers, brings informal-sector workers into the formal financial system, and expands financial inclusion.

9. Fiscal stability By providing retirement income, EPF reduces the government's future liability for social security and old-age allowances, supporting fiscal sustainability.

10. Economic stabilisation As a large institutional investor, EPF's investment policy influences interest rates, credit availability and overall macroeconomic stability.

Conclusion: The Employees Provident Fund is not merely a retirement scheme; it is a major institutional saver and investor that mobilises national savings, finances the government and infrastructure, develops the capital market, and provides social security — making it a pillar of Nepal's financial system and economic development.

Major causes of Nepal's high foreign trade deficit

1. Narrow export base and low export volume. Exports are dominated by a few low-value items (carpets, readymade garments, pashmina, cardamom, tea, lentils, handicrafts). A single disruption in one or two items badly hits total exports.
2. Heavy dependence on imports. Nepal imports almost everything — petroleum products, machinery, vehicles, electronics, medicines, fertiliser, raw materials, and even food items. Import demand is inelastic and rising with remittance income.
3. Rising import of petroleum products and consumer goods. Petroleum alone absorbs a very large share of foreign exchange. Growing urban consumption, fuelled by remittances, pulls in luxury and semi-luxury goods.
4. Weak industrial and productive base. Low investment, load-shedding legacy, labour unrest, high cost of doing business, and small-scale, low-productivity industries mean Nepal cannot produce import substitutes or competitive exports.
5. Landlocked position and high trade costs. Transit dependence on India, poor roads, inadequate warehouses and cold chains, and high freight and insurance costs make Nepali goods costly and uncompetitive.
6. Structural and policy weaknesses. Prolonged political instability, weak implementation of trade policy, poor quality standards and certification, limited export financing and export insurance, and inadequate market diversification (over-dependence on India).
7. Remittance-driven consumption and real exchange rate effects. Large remittance inflows raise purchasing power and the price of non-tradables, making exports less competitive and imports cheaper in relative terms.
8. Trade liberalisation without supply-side readiness. Low tariffs and open borders under WTO/SAFTA/BIMSTEC commitments increased import competition before domestic producers were ready.
9. Weak trade facilitation and informal trade. Customs delays, multiple checkpoints, and leakage through informal channels distort recorded trade.

Practical measures to reduce the trade deficit

Export promotion

• Identify and promote a few high-potential products (processed agro-goods, IT services, tourism, hydropower, herbal products) with a time-bound export strategy.
• Provide export credit at concessional rates, export insurance, duty drawback, and cash incentives tied to value addition.
• Strengthen Nepal Bureau of Standards and Metrology and quality certification so Nepali goods meet destination-market standards.
• Diversify markets beyond India — China, Bangladesh, Gulf countries, and the EU — through trade fairs, embassies, and digital marketing.

Import substitution

• Promote domestic production of cement, steel, processed food, garments, footwear, and medicines through targeted investment incentives.
• Encourage backward linkage industries so that imported raw materials are progressively replaced.
• Rationalise tariffs to protect genuine domestic production without hurting essential inputs.

Trade facilitation and infrastructure

• Reduce transit costs through better roads, dry ports, integrated checkpoints, and electronic customs (single-window clearance).
• Develop cold chains, warehouses, and export processing zones near borders and airports.

Macro and structural measures

• Maintain a stable and competitive exchange rate and prudent monetary policy.
• Channel remittances into productive investment rather than consumption, through attractive deposit and bond schemes.
• Ensure reliable power supply and industrial security to lower production costs.
• Strengthen trade diplomacy for better transit rights and market access, and curb informal trade through stricter border monitoring.

Institutional

• Make the Trade Policy and Nepal Trade Integration Strategy effectively implemented with clear monitoring indicators, and coordinate among ministries, the private sector, and export promotion bodies.

A combination of export diversification, selective import substitution, lower trade costs, and productive use of remittances is the realistic path to narrowing the deficit.

Citizen Investment Trust — Investment Instruments of Deposited Funds

The Citizen Investment Trust (CIT) collects savings from its members and invests the deposited funds in a diversified portfolio so that returns are both profitable and secure. Its major investment instruments are:

1. Government Securities (Treasury Bills and Development Bonds) — The safest instrument. CIT invests in Treasury Bills and government bonds issued by Nepal Rastra Bank, which carry virtually no default risk and provide assured returns.

2. Fixed Deposits in Commercial Banks and Financial Institutions — Funds are placed as fixed deposits in licensed commercial banks and other financial institutions, earning interest income with low risk.

3. Loans and Advances to Members — CIT provides loans against its own deposits (e.g., against retirement savings) and housing loans to members, earning interest income.

4. Investment in Shares and Debentures of Companies — CIT invests in shares and debentures of profit-making companies and government-owned corporations, earning dividends and interest. Such investment is made after proper evaluation of the company's financial position.

5. Investment in Development Bonds and Special Bonds — CIT also subscribes to development bonds floated by the Government of Nepal for infrastructure development.

6. Real Estate and Other Productive Sectors — A limited portion may be invested in productive sectors such as housing and infrastructure projects, which yield long-term returns.

Basis of Investment: CIT follows the principle of safety first, then profitability and liquidity. The investment is spread across different instruments (diversification) so that risk is minimized while ensuring a reasonable return to the depositors. The investment policy is guided by the CIT Act and the directions of the Government of Nepal.

In short, CIT invests mainly in government securities, bank fixed deposits, member loans, shares and debentures, and development bonds to keep the funds both profitable and secure.

A government bond is a long-term debt security issued by the government to borrow money from the public, banks and institutions to meet budget deficits and finance development projects. The government promises to repay the principal on maturity and to pay interest (coupon) periodically. As it is backed by the government's guarantee, it is regarded as a very safe investment. In Nepal, government securities are issued by Nepal Rastra Bank on behalf of the Government of Nepal under the Development Bonds / Public Debt management provisions.

Government securities issued in Nepal

1. Treasury Bills (T-Bills) — short-term money market instruments with maturities of 28, 91, 182 and 364 days. They are sold at a discount and redeemed at face value. Strictly they are not bonds, but they are counted among government securities.
2. Development Bonds — medium to long-term bonds (usually 3 to 10 years or more) with a fixed interest rate, issued through auction to finance development projects and the budget deficit.
3. National Savings Bonds — issued to the general public, with a fixed interest rate, to encourage savings and to raise domestic funds.
4. Citizen Savings Bonds — issued only to Nepali citizens to mobilise small domestic savings.
5. Foreign Employment Savings Bonds — issued to attract savings and remittances of Nepali workers abroad.
6. Special Bonds — issued by the government for special purposes, for example to settle obligations to public enterprises or financial institutions.

A mutual fund is a collective investment scheme in which many investors pool their savings, which is then invested in a diversified portfolio of shares, debentures, government securities and other assets by a professional fund manager. Each investor receives units proportionate to their investment, and gains or losses are shared in the same proportion. In Nepal, mutual funds are regulated by the Securities Board of Nepal (SEBON) under the Securities Act, 2063 and the Mutual Fund Regulation, 2067.

Features of a mutual fund

1. Pooling of savings — small and large investors contribute to a common corpus.
2. Professional management — a licensed fund manager (e.g. NIMB Ace Capital, Nabil Investment) takes investment decisions.
3. Diversification — the fund invests across many companies and sectors, reducing risk.
4. Unit-based ownership — investors hold units, each with a Net Asset Value (NAV).
5. Liquidity — open-end schemes allow redemption at NAV; closed-end schemes are traded on NEPSE.
6. Economies of scale — transaction costs and research costs are spread over many investors.
7. Regulated and transparent — SEBON supervision, mandatory disclosure of NAV and portfolio.
8. Low entry barrier — one can start with a small amount (as low as Rs 100 per unit in some schemes).

Importance of a mutual fund

• For investors: provides access to a diversified, professionally managed portfolio even with small savings; reduces risk; offers better returns than idle deposits; saves time and effort of research.
• For the capital market: channels household savings into productive sectors; increases demand for shares and debentures; improves market depth and liquidity; encourages good corporate governance through institutional monitoring.
• For the economy: mobilises domestic capital for infrastructure and industry; reduces dependence on foreign borrowing; promotes financial inclusion.

Status of mutual fund practice in Nepal

• The first mutual fund in Nepal was NCM Mutual Fund (2050 BS), launched by NCM Merchant Banking.
• Modern practice began with Nabil Balanced Fund–1 (2067 BS), followed by schemes such as Siddhartha Investment Growth Scheme–1, NIBL Samriddhi Fund–1, Nabil Equity Fund, Sanima Growth Fund and others.
• Citizen Investment Trust (CIT) itself runs the Citizen Unit Scheme (Nagrik Unit Yojana) — a closed-end scheme of Rs 1 arba — and the Citizen Dividend Scheme, mainly for government employees and the general public.
• Both closed-end (traded on NEPSE) and open-end (redeemable at NAV) schemes now operate.
• SEBON has licensed several mutual fund managers and depository companies (e.g. NIBL S Capital, NMB Capital, Nabil Investment, Siddhartha Capital).
• Growth has been steady but modest: the total Assets Under Management (AUM) is still small relative to bank deposits, the investor base is concentrated in urban areas, and secondary-market trading of closed-end units is often thin and traded below NAV.
• Recent reforms — SEBON's Mutual Fund Regulation, tax exemptions on mutual fund income, and permission for open-end schemes — have improved the environment.

Conclusion: Mutual funds are an effective instrument for mobilising small savings and developing Nepal's capital market. Although the practice is still in a growing stage with limited size and liquidity, regulatory support and rising investor awareness indicate good future potential.