Nepal’s Banking Sector: From State-Led Foundations to Consolidated Growth

Kathmandu: Nepal’s formal banking sector has undergone a long and gradual transformation, evolving from a state-dominated system into a more diversified and consolidated financial industry. This evolution reflects changing economic priorities, regulatory reforms, and the country’s broader shift toward liberalization and financial stability.

Nepal’s banking journey formally began in 1937 with the establishment of Nepal Bank Limited, marking the country’s first structured financial institution. The foundation of Nepal Rastra Bank in 1956 further strengthened the system by introducing a central regulatory authority. In the following years, institutions such as the Agricultural Development Bank, Nepal Industrial Development Corporation, and Rastriya Banijya Bank were established to support priority sectors of the economy.

For several decades, banking activities remained limited in scope and reach. The sector primarily served urban centers and state-led development goals, with restricted competition and limited product diversity. This structure began to change in the 1980s, when Nepal adopted economic liberalization policies aimed at integrating the economy with global financial systems.

The entry of joint-venture banks with foreign investment marked a turning point in the banking landscape. These institutions introduced modern banking practices, improved service standards, and competitive products. Their presence accelerated reforms and challenged traditional state-owned banks to improve efficiency and governance.

Financial sector reform gained further momentum through structural adjustment programs supported by multilateral institutions such as the World Bank and the International Monetary Fund. Beginning in the mid-1980s, these programs focused on strengthening regulatory capacity, improving state-owned bank performance, liberalizing interest rates, and granting greater autonomy to Nepal Rastra Bank as an independent central bank.

The impact of these reforms was visible in the rapid expansion of financial institutions. In 1980, Nepal had only four banking and financial institutions. By 2000, following liberalization, the number had risen sharply to 74. This expansion continued over the next decade, and by 2010, the total number of banks and financial institutions had reached 203, reflecting aggressive growth and diversification.

However, the rapid increase in numbers also raised concerns about systemic risk, weak governance, and unhealthy competition. In response, regulators shifted focus from expansion to consolidation. Policies restricting new licenses, increasing minimum capital requirements, and encouraging mergers and acquisitions were introduced to strengthen financial stability.

As a result of these consolidation measures, the number of banking and financial institutions began to decline. By 2020, the total had fallen to 155, and further mergers reduced the figure to 108 by 2024. Regulators argue that this consolidation has created stronger, better-capitalized institutions capable of withstanding economic shocks.

Nepal Rastra Bank has played a central role in guiding this transition. Through continuous regulatory reforms and adoption of international prudential standards, the central bank has sought to enhance resilience, promote financial inclusion, and protect depositors’ interests. Strengthening risk management and governance has remained a priority amid changing economic conditions.

Despite these structural improvements, challenges remain. Expanding credit access to underserved regions, ensuring responsible lending, and balancing profitability with financial inclusion continue to test the sector. The legacy of rapid expansion followed by consolidation has also left banks under pressure to improve efficiency and rebuild public trust.

Experts note that Nepal’s banking evolution mirrors broader economic transitions—from state control to liberalization and now toward regulated consolidation. While the reduction in numbers may suggest contraction, regulators view it as a necessary step toward a healthier and more sustainable financial system.

As Nepal navigates economic uncertainty and rising development needs, the banking sector’s ability to support growth, manage risk, and extend services beyond urban centers will be critical. The success of past reforms now depends on consistent regulation, technological innovation, and a continued focus on stability rather than unchecked expansion.