Banking

Money Laundering

Money laundering is the process of disguising the true source and ownership of money obtained from illegal activities (such as corruption, smuggling, drug trafficking, tax evasion or fraud) so that the money appears to have come from a lawful source. It generally involves three stages:

1. Placement – introducing illegal cash into the financial system (e.g. depositing it in a bank).
2. Layering – moving the money through many transactions, accounts or countries to hide its origin.
3. Integration – bringing the "cleaned" money back into the economy as apparently legal income, property or investment.

Its purpose is to let criminals enjoy the proceeds of crime without being detected, and it damages the economy, weakens financial institutions and encourages further crime.

Activities prohibited under the Money Laundering Prevention Act, 2064

The Act (with its amendments) treats the following as offences and prohibits them:

1. Concealing or disguising the source, location, ownership, control or movement of property earned from an offence.
2. Acquiring, possessing, holding or using such property, or helping another person to do so.
3. Converting, transferring or remitting illegal property within Nepal or abroad with the intention of hiding its illegal source.
4. Investing or reinvesting money earned from an offence in business, shares, land, buildings or any other property.
5. Bringing into Nepal money or property earned from an offence committed abroad, or sending such money out of Nepal.
6. Making false statements or giving false information, or concealing or destroying facts and documents, in matters relating to money laundering.
7. Attempting, abetting, assisting or conspiring to commit any of the above acts, or being a partner in such an act.
8. Not complying with the duties imposed on banks, financial institutions and other reporting entities — e.g. failure to maintain records, to identify customers (KYC), or to report suspicious transactions to the Financial Information Unit (FIU).

Punishment: A person convicted of money laundering may be punished with imprisonment and a fine, and the property involved may be confiscated. Under the Act the punishment may extend up to imprisonment as prescribed (with heavier punishment where the amount involved is large), along with confiscation of the laundered property.

Challenges and Future Prospects of Banks and Financial Institutions in Nepal

Introduction Banks and financial institutions (BFIs) form the backbone of Nepal's economy, mobilising deposits and channelising credit for trade, industry, agriculture and infrastructure. After decades of expansion — including mergers and acquisitions that reduced the number of BFIs sharply — the sector now faces both serious challenges and promising opportunities.

Challenges

1. Low financial literacy and banking habit: A large section of the population, especially in rural and remote areas, still prefers cash transactions and informal saving (dhukuti, gold, land) over the formal banking system.
2. Limited access and geographical difficulty: Hilly and Himalayan terrain makes branch expansion, cash movement and ATM/network connectivity costly and difficult.
3. Non-performing loans (NPLs) and credit risk: Directed and weak lending, loan diversion, poor recovery and wilful default have pushed NPLs upward, weakening profitability and capital.
4. Liquidity crunch and interest rate volatility: Periodic shortages of loanable funds, heavy dependence on remittance deposits, and wide swings in interest rates disturb stable lending.
5. Excess competition and shrinking spread: A large number of BFIs competing for a small market compresses interest spreads and increases operating costs.
6. Weak corporate governance: Political interference in appointments, insider lending, and weak risk management and internal control in some institutions.
7. Technological and cyber-security risk: Rising digital transactions bring risks of hacking, fraud, system failure and inadequate IT infrastructure in smaller institutions.
8. Dependence on remittance: A large share of deposits comes from remittances; any external shock to remittance inflow directly hits liquidity.
9. Regulatory and compliance burden: Frequent changes in directives, Basel norms and reporting requirements strain the capacity of smaller institutions.
10. Impact of COVID-19 and economic slowdown: Business closures, reduced repayment capacity and rising bad loans.

Future Prospects

1. Digital banking and fintech: Mobile banking, internet banking, QR payments, digital wallets and branchless banking can rapidly expand access at low cost.
2. Financial inclusion: Under the NRB's financial inclusion policy, extending services to the unbanked rural population offers a large untapped market.
3. Agriculture and SME financing: With concessional credit and priority-sector lending, agriculture, small and medium enterprises and tourism can become major credit markets.
4. Infrastructure financing: Hydropower, roads and urban infrastructure need long-term finance; consortium and blended financing open new avenues.
5. Remittance and diaspora investment: Channelising remittance into productive sectors and attracting NRN deposits and foreign investment.
6. Mergers and consolidation: Stronger, better-capitalised institutions capable of competing and of meeting Basel III standards.
7. Digital payment ecosystem: Integration with international payment gateways, cards and mobile platforms, and expansion of agent banking.
8. Green and sustainable finance: Financing renewable energy and climate-friendly projects, with access to international green funds.
9. Improved supervision and governance: Strengthened NRB supervision, risk-based supervision and better board practices will raise depositor confidence.
10. Regional and global linkage: Cross-border banking, remittance corridors and possible international banking relationships.

Conclusion The challenges of low access, rising NPLs, liquidity pressure, weak governance and cyber risk are real, but the prospects of digital banking, financial inclusion, SME and infrastructure financing, and remittance mobilisation are equally strong. If BFIs strengthen governance, invest in technology and innovate in products, they can become efficient, inclusive and stable pillars of Nepal's economic development.