Financial institutions are mushrooming. With a view to monetizing every sector, the government came up with a liberal policy that allowed financial institution to be set up with few hassles. As a result, a large number of financial institutions from small finance companies to huge commercial banks are established, and the number is increasing every year. It seems as though there are more than one financial institution for the same target community. It is still unknown whether Nepal’s economy needs such a large number of institutions largely motivated by speculation and hedging with the expectation of making profit by gambling with people’s money. They tend to serve relatively wealthy customers. It follows that they are established on the principle of heads-i-win-tails-you-lose.in case of liquidation, the promoters do not lose. The losers are the shareholders and depositors. The promoters are on the safe side what ever happens and they always win. This is what we call capitalism.
During hard times, as has been seen during the current financial crisis, large banks become unstable in both developing and developed economies. When a huge bank goes bankrupt, the shareholder bears the brunt. However, Nepal’s economy is said to have remained untouched from the negative effect of financial crisis. But there are other risk involved that could have equivalent or even worse results in future. For instance, the recent action taken by Nepal Rastra Bank against some banks and financial institution is evidence of their instability. There are in liquidation for various other reasons rather than the current financial crisis alone.
Big banks always have the same pie to share. Like sheep following the one before, banks always seem to target the same people that other banks are already serving. Kathmandu being the major focus, banks open branches in the same paces where there are already hundred of others. Banepa, Birgunj, Biratnagar, Nepalgunj and such cities are the only other places where banks wish to operate. The sustainability of the banks can be questioned because of their intent of sharing the same pie over and over again trying to capitalize on the same segment of the economy.
In Nepal, however, the economy is mostly dominated by the small scale manufacturing, farming and services firms. They need small loan because of their small business orientation. Small local banks are the best entities for providing financial services to these enterprises and households. Small local level financial institution is best suited to provide finance to the small business that dominates the manufacturing, farming and services sectors. Evidence suggest that the impact on economic activity at the local level is high in terms of markets share, financing for small scale enterprises and uplifting the living standard of the poor. These local institutions are more likely to be stable. They can be sustained by the provision of small capital at times of crisis. In the developed countries, local level banks and financial institution have not been affected by the current financial crisis as they have continued to deal with the small local clients that they have had for years.
Nepal should understand the importance of establishing small scale, local level financial institution to mobilize the scattered capital through saving either voluntary or forced to provide finance for small scale businesses. However, scattered financial institution requires good monitoring mechanism. They need short and long term training in operating the banking business. The basis for issuing loans needs to be developed so that possible delinquency can be prevented. Transparent and efficient court procedures allow lender to seize the collateral in the event of a default. A strong body vested with power to intervene and dispose of the assets of banks in liquidation need to be performed. A reward and punishment policy will provide incentives and enhance competition. Nepal is endeavoring to eradicate poverty that has been lot of most of its people. For this to happen, it needs to make its financial institution small and simple .
