By Dipesh Ghimire
Margin Trading in Nepal: Analysis, Regional Comparisons, and Implementation Roadmap
Margin trading allows investors to purchase securities by paying a part of the total cost (margin) while borrowing the remaining amount from a broker. Despite being introduced in Nepal nearly a decade ago, it remains largely non-operational due to regulatory, legal, and structural challenges. This article dives deep into the status of margin trading in Nepal, compares it with regional practices, and outlines a roadmap for effective implementation.
2. Why Margin Trading is Important
Benefits | Explanation |
|---|---|
Market Liquidity | Increases volume and depth in the secondary market |
Settlement Efficiency | Facilitates timely trade settlement cycles |
Investment Diversification | Enables investors to diversify with limited upfront capital |
Regulatory Control Tool | Can be used as a tool by regulators to manage volatility |
Broker Business Expansion | Expands operational scope and revenue models for brokers |
Alignment with Global Markets | Adopts international investment mechanisms |
3. Key Terminologies in Margin Trading
Term | Meaning |
Margin Account | Account opened by investors for availing margin trading facility |
Initial Margin | Upfront percentage of stock value investors must deposit (currently 30% in Nepal) |
Maintenance Margin | Minimum equity to be maintained after purchase to avoid forced liquidation (30%) |
Margin Call | Notification from broker to deposit more funds if value falls below maintenance margin |
4. Profit & Loss Illustration
When Share Price Increases by 10%
Criteria | With Margin Trading | Without Margin Trading |
Investor Capital | NPR 50,000 | NPR 50,000 |
Broker Loan | NPR 50,000 | – |
Total Investment | NPR 100,000 | NPR 50,000 |
New Market Value (10% gain) | NPR 110,000 | NPR 55,000 |
Loan Repayment + 12% Interest | NPR 53,000 | – |
Net Profit | NPR 7,000 | NPR 5,000 |
Return % | 14% | 10% |
When Share Price Drops by 10%
Criteria | With Margin Trading | Without Margin Trading |
Market Value After Drop | NPR 90,000 | NPR 45,000 |
Loan Repayment + Interest | NPR 53,000 | – |
Remaining Capital | NPR 37,000 | NPR 45,000 |
Net Loss | NPR 13,000 | NPR 5,000 |
Loss % | 26% | 10% |
5. Nepal’s Legal & Regulatory Framework
Margin Trading Directive issued by SEBON in 2074
Margin Trading Procedure by NEPSE in 2075
34 licensed brokers allowed to offer margin loans
Criteria for eligible stocks:
At least 10,000 shareholders
Positive net worth
10% annual dividend for past two years
Minimum net worth for brokers: NPR 5 crore
Brokers may use own funds or bank loans
Margin loan capped at 2x broker net worth
Single-client exposure capped at 10% of broker net worth
6. Regional Comparison Table
Country | Initial Margin | Maintenance Margin | Max Leverage | Loan Sources | Single Client Limit |
Nepal | 30% | 30% | 2x Net Worth | Broker’s fund, Bank loan | 10% of Net Worth |
India | 50% | 40% | 5x Net Worth | Broker funds, FDs, Bank Guaranty | 10% of total lending |
Bangladesh | Index-based | 150% of margin value | Variable | Cash, Govt & institutional bonds | 25% of Net Worth |
Pakistan | 25% | Not defined | Regulated list only | Broker funds | Stock-specific limit |
Sri Lanka | 50% | 30% | 4x Net Worth | Brokers, Merchant bankers | 15% of total lending |
7. Core Challenges in Nepal
Challenge | Details |
Lack of Capital Source | Brokers cannot easily obtain bank loans using client-held securities as collateral |
Legal Ambiguity | Directive mandates brokers to prepare own procedures needing SEBON approval |
Alternate Trading Modes | 4x cash trading option reduces need for margin loans |
8. Implementation Roadmap for Nepal
Funding Access: Enable broker refinancing via NRB with margin receivables as collateral
Simplify Legal Procedures: Let SEBON issue unified operating procedures for all brokers
Revise Directive: Update the 2074 Directive to reflect modern practices and clarity
Restrict 4x Cash Route: Encourage pure cash or margin-based trading model
Investor Education: Awareness programs to explain risks and benefits
With most legal infrastructure in place and lessons drawn from regional peers, Nepal is closer than ever to fully implementing margin trading. Once launched, it can:
Boost market activity and liquidity
Attract diversified investors
Strengthen broker institutions
Enhance government revenue
However, the success depends on strategic policy updates, easier access to funding, simplified regulation, and enhanced risk awareness among market participants.
Margin trading is not just a tool—it’s a step toward maturing Nepal’s capital market.
