Banking in Nepal

The economic growth of Nepal is very low and poor, although it is rich in water resources, Himalayas, low cost manpower etc. The development of an economy of any country requires the productive activity, which in turn, is the result of investment venture in productive enterprises which needs a huge amount of funds and environment to establish these enterprises. The existing enterprises and companies need both the short term and long term capital investment for their existence, smooth growth, operation and development with in the economy to be the productive enterprises. Therefore, the required short term and long term capital for the productive enterprises can be procured mainly from security markets (either primary or secondary) and financial institutions
Dividend policy for business organization is a very important decision, which depends upon the long-term and short-term strategy of a firm. Dividend policy of a firm refers to dividing its net earning into two parts: the retained earnings and dividend (Pandey, I.M.: 1999, 770). Business firms use the retained earnings to provide funds to the firm for long-term growth; we call it as internal financing source also. Dividend is that portion of earning, which is paid to the common stock holders, is a return on their investment. By a dividend policy we mean some kind of consistent approaches to the distribution versus retention decision rather than making the decision on the purely adhoc basis from period to period (Hunt person, Veilliam Charlos and Donaldson, principle of Managerial finance, 1972, p. 405). Likewise, dividend policy must be considered in relation to the overall financing decision. In practice, net earnings always may not be appropriate measure of the ability of the firm to pay dividend, that's why, what and how much it is desirable to pay dividend is always a controversial topic because shareholders expect higher dividend but companies ensure towards setting aside funds for maximizing the shareholders wealth.
When a company pays out a portion of it’s earnings to the shareholders in the form of dividend, the shareholders are directly benefited. If company is hopeful to exploit other growth opportunities, the firm can avoid for paying cash dividends. In this condition, shareholders consider their future growth of their stock instead of getting cash dividend. On the other hand, the firm has to pay enough dividends to satisfy investors. If they are paid higher dividends, the market price of the stock also rises. This means of maximizing the shareholder's wealth. Thus shareholders’ wealth can be increased through either dividends or capital gains. As the division and retention of net profit are considered as dividend policy, all aspects and questions related to the payment of dividends are contained in dividend policy.
Paul A. Samulson has quoted that the concept of the banking has been developed from the ancient history with an effort of ancient goldsmiths who developed the practice of storing people's gold and other valuables. Under such an arrangement, the depositors would leave their gold with goldsmiths for safekeeping. Whenever the receipts were presented, the depositors would get back their gold and other valuables after paying a small amount as interests (fee) for safekeeping and serving. (Paul A Samulson, Economics, 9th edition page-27).
Financial institutions have definitely contributed and played a gigantic role for domestic resource mobilization and economic development to build up the confidence of the businessmen for promoting their business and industrialists for encouraging opening new business venture. It maintains confidence for various segments and extends credit to people.
The banking concepts and activities started in Nepal after the establishment of Nepal Bank Limited in 1937. A central bank (Nepal Rastra Bank) was established to regulate the banking activities and monetary policy of the nation. Than after, it was realized that the commercial bank has its own role and contribution in the economic development. It is the source of economic development; it maintains economic confidence of various segments and extends credit to people. So, another commercial bank, Rastriya Banijya Bank was established in 1966.
Capital market plays an important role in the economics development in nation. But, in Nepal, the capital market is very small and developing slowly with disorganized way. The Nepalese company can't generate profit that are established and operated on public sector. The government is unable to receive dividends from public enterprises for several years.
In the global perspective, joint ventures are the modes of trading through partnership among the nations and also a form of negotiation between various groups of industries and traders to achieve competitive advantages. Nepal's reform efforts in the financial sectors, begun in 1980's, when Nepal Rastra Bank eased entry restrictions and amendment of the Commercial Bank Act 1974. As a result, two banks namely, Nepal Arab Bank Ltd. and Standard Chartered Bank Nepal Ltd came into operation prior to 1990s. In 1992, Nepal Rastra Bank adopted liberal attitude in permitting commercial banks to open. Than after, the financial liberalization really took place.
Finance companies include captive financing subsidiaries of non financial corporation, general finance consumer and business finance companies, leasing companies, factors all of which are non depository financial institutions involved primarily in extending credit to businesses and consumers. (Mark Carey, post Mitch and Steven A Sharpe" Does Corporate lending by banks and finance companies differ? (1998, P -848) The organization set up of financial company is new to Nepal. Finance companies are the effective investments for mobilizing public, private and external financial resources and canalizing them into productive areas of short-term loan and long term loan in different enterprising activities. The newly adopted liberal economic policy of government has given more emphasis to the private sector and institutional investors to invest in Nepal which has been considered as encouraging factor of sustainable growth under these facilities many finance companies have been established. Mainly they collect deposit and provide loans by mobilizing scattered saving of different sectors of the economy for the economic development.
Dividend practice in public corporations is still having problem for taking dividend policy. Thus, here neither corporation are able to generate sufficient earnings for dividend payment nor is the government expecting dividends, since it has been observed that dividend payment is practically a crucial problem of the public corporations. Corporation like Nepal Oil Corporation and Nepal Electricity Authority are not distributing earnings as dividend but total effort is focused on minimization of loss through better utilization of capital. Noticeable matter is that this shifting aim of public corporation is failed to minimize the losses.
The joint venture banks in Nepal have brought new hope for productive mobilization of funds according to their new trends of dividend distribution among foreign joint venture banks. For example, Nepal SBI Bank Ltd. has been able to pay a less dividend as comparing with other two (Standard Chartered Bank Nepal Ltd. and Nepal Arab Bank Ltd.).
Although, twenty three commercial banks are actively working in the nation; only fifteen commercial banks are listed in security board, on the Nepal Stock Exchange Out of which, only three commercial banks were taken as samples. They are as given below:

1. Standard Chartered Bank Nepal Ltd.

2. Nepal SBI Bank Ltd.

3. Nabil Bank Ltd. (Nepal Arab Bank Ltd.)

A Brief Introduction of Sample Commercial Banks and Finance Companies.

1. Standard Chartered Bank Nepal Limited
Standard Chartered Bank Nepal Limited, formerly known as Nepal Grind lays Bank Limited was incorporated in the year 1985 and has been in operation since 1987. On 31st July 2000, Standard Chartered Bank concluded the acquisition of ANZ Grindlays Bank form the Australia and New Zealand Banking Group Limited. With this acquisition, 50% shares of Nepal Grind lays Bank Ltd. (NGBL) previously owned by ANZ Grindlays are now owned by Standard Chartered (Grind lays Bank Ltd) leading to the name change of the Bank to Standard Chartered Bank Nepal Limited with effective from 16th July 2001. The equity composition of Standard Chartered Bank Nepal Ltd. is as follows:
1. Standard Chartered Grind lays Bank – 50%

2. Nepal Bank Limited - 33%

General Public - 17%

The Bank focuses mainly on corporate, consumer and commercial banking. It provides service for international firms, as well as embassies, aid agencies, airlines, hotels and government corporations.
The banking services range including full trade finance capabilities as well as working capital and medium term loan facilities, remittances, deposit services, credit card and ATM. For international firms, Standard Chartered Bank Nepal Limited has specialized in foreign trade, bonding, remittance services and foreign exchange. (http://www.standardchartered.com/np)

2. Nepal SBI Bank Limited
Nepal SBI Bank Ltd. (NSBL) is the first Nepal- Indo joint venture bank in the country. It is sponsored by three institutional promoters. They are State Bank of India, Karmachari Sanchaya Kosh (Employees Provident Fund) and Agricultural Development bank of Nepal (ADB/N). Nepal SBI Bank Limited became operational on the 8th July 1993.
The bank was registered on 2050/ 01/16 (28.04.1993) in the Department of Industry, Nepal Government (NG) under the Company Act 2021 and Commercial Bank Act 2031. The formal inauguration of Nepal SBI Bank Limited took place on 7th July 1993. It commenced its operations on 2050/03/24 (8th July, 1993). The equity composition of the Bank is as follows:
1. State Bank of India – 50%

2. Employee Provident Fund -15%

3. Agricultural Development Bank-5%

4. General Public -30%

The services provided by Nepal SBI Bank Limited include deposits, remittances, various types of loan facilities, letter of credit, bank guarantees, retail financing (house loans, vehicle loans and education loan), ATM facility, 365 days banking etc. (http://www.nsbl.com.np)

3. Nabil Bank Limited (Nepal Arab Bank Limited)
Nabil was incorporated in the year 1984. It commenced its operation on 12th July 1984 as the first joint venture bank in Nepal. It was listed in the Nepal Stock Exchange in the year 1986. (08/09/2042 B.S.). Dubai Bank Ltd. Dubai (Later acquired by Emirates Bank International Ltd. Dubai) was the first joint venture partner to Nabil currently, NB (International) Ltd., and Ireland is the foreign partner. Nabil Bank Limited had the official name Nepal Arab Bank Ltd. till 31st December 2001. The equity composition of Nabil is as follows:
1. NB (International) Ltd, Ireland – 50%

2. Nepal Industrial Development Corporation (NIDC)-10%

3. Rastriya Beema Sansthan -9.67%

4. Nepal Stock Exchange Limited-.33%

5. General Public-30%

NABIL Bank is the pioneer in introducing many innovative banking services and marketing concept in banking sector of Nepal. It operates its activities through 15 branches and 2 counters. It is the only bank having presence in the Tribhuvan International Airport. Some of the services provided by NABIL Bank Limited are accepting deposits, documentary credit, guarantees, collections, credit cards, Tele- banking, safe deposit, fund transfer etc. (http://www.nabilbank.com.np).
Although, there are many finance companies actively running in the country (approx. 79), there are 55 finance companies, which are listed in the securities board as on mid December, and only few companies whose shares are traded actively in stock markets. Only three finance companies have been selected as samples. They are following

1. National Finance Company Ltd.
2. Mahalaxmi Finance Company Ltd
3. Naryani Finance Company Ltd.
A short description of these sample finance companies portray below.

1. National Finance Company Ltd.
It was established in 1972 under the company act 1964, with an objective of mobilizing scattered savings through various schemes and organizes them in different sectors of the economy for the economic development of the country. The company commences its operation on May 1993 in accordance with finance company act, 1985. Besides accepting deposits and providing loans and advance the company undertook the job of market making for listed corporate securities issue management under writing and other capital market activities as a market maker till December 1996. But in January 1997, the security dealers (primary market) gave up the market making functions. As on 2062/063 the total issued and paid up capital was Nrs. 95.04 Millions.

2. Mahalaxmi Finance Company Ltd.
Mahalaxmi Finance Company Ltd. was established in 1990 under the company act 1964. The objective behind the establishment is to collect scattered savings and to deploy it in productive work through various schemes. The company was listed in the securities board in 1998. The head office of this finance company is situated at Birgunj. As on 2062/063 the total issued and paid up capital was Nrs. 60 Millions.

3. Narayani Finance Ltd.
Narayani Finance Co. Ltd. was established in 1995/03/08 under the financial company act 1985. Now it has taken fourth position for developing superior experience of customer services in the field of financial sector. It has satisfied its customers by giving high interest rate and high customer oriented services. The main objective of this company is to collect money from its depositors and to provide low interest level loan to the customer. Its strategy itself replies that customers would not be satisfied unless their economical progresses are raised. This company has issued its share to the public by capitalizing their experiences and efficiencies. As on 2062/063 the total issued and paid up capital was Nrs. 42.17 Millions.
Its total capital has been divided 60 to 40 ratio bearing from founders and general public respectively. For the first starting year, it could success to gain high profit and has maintained same progress but it does not neglect to grab the opportunities of investing to other field. It provides remarkable dividend to its shareholders. Nepal Rastra Bank directly regulates its financial policy, besides this, it regulates itself by taking the crucial advices from its internal auditor and external experts viz Chartered Accountant. It claims itself the only one financial institution outside the valley, which regularly publishes the internal report such as; balance sheet, income statement and profit and loss account to the national details.

Services provided by this company are:
· To give high interest rate to its depositors.
· To provide various loan programs such as home loan, industrial loan, and hair purchase loan, bushiness loan, educational loan, etc.
· To guarantee to the public for govt. bid, performance bid and other type of guarantees.