Rethinking Role Of BFIs In Nepal

Recently, the government of Nepal has appointed former vice-chair of the National Planning Commission, Prof. Dr. Bishwo Nath Poudel, as Governor of Nepal Rastra Bank. As the newly appointed Governor, Dr. Poudel has the responsibility of strengthening Nepal’s international credibility, removing Nepal from the Financial Action Task Force's (FATF) grey list while ensuring accessible, qualitative and inclusive financial services of Bank and Financial Institutions (BFIs). In this connection, Dr. Poudel has emphasised the need for effective supervision rather than mere regulation.

Over the past decades, ICT and advanced digital technologies have transformed the financial products and services profoundly, particularly embracing digital banking, mobile banking, and online banking platforms alike. Undoubtedly, digital banking has significantly expanded access to financial products and services even in rural parts of Nepal, bridging the geographical remoteness gaps. Indeed, the advent of e-banking offered a revolutionary change, especially in remote service delivery, reduced infrastructure costs, and broader customer outreach through mobile and internet platforms. However, a critical concern arises: whether digital financial systems are truly demand-side driven (customer-friendly) or merely convenient for service providers (BFIs) themselves (supply-side oriented)?

New risks

Two decades ago, economist Rupa Rege Nitsure, in her seminal research work “E-Banking: Challenges and Opportunities” (2003), conceptualized electronic banking as a tool to surpass geographical boundaries, enhance strategic behaviour, and align banking with neoclassical economic theories characterized by perfect competition and rational decision making. She envisioned that e-banking could foster transparency and reduce transaction costs. This meant banks would be more efficient, and people could easily compare and choose between services because “competitors are only one click away.” Services would be faster, cheaper, and more accessible.

However, Nitsure also suggested that without proper regulating mechanisms and ethical governance, e-banking could exacerbate inequalities and introduce new risks. Today, Nepal is grappling with these very issues. Nepal does have comprehensive legal frameworks, governing everything from online transactions to customer rights. Some of these legal instruments include Nepal Rastra Bank Act, 2002, Bank & Financial Institution Act, 2017, Electronic Transaction Act, 2006, Banking Offence and punishment Act, 2008, Customer Protection Act, 2018, recently amended Cooperative Act, 2017, among others, but enforcement remains weak.

As a result, BFIs' working cultures have systematically shifted from client-oriented service to aggressive sales-driven paradigms, propelled by internal performance metrics that prioritise expansion and profitability over ethical banking practices. That merely focuses on the supply side, completely ignoring the demand side complexities faced by customers, reinforcing the “digital divide” further. According to the Nepal Rastra Bank's Financial Inclusion Dashboard, as of mid-2024, there are approximately 11,590 branches of BFIs across the country. While this expansion suggests increased access, the reality is quite different. A significant portion of these branches is concentrated in urban and semi-urban areas, leaving rural regions underrepresented.

Except for a few good practice of BFIs, in Nepal, banking documents—including account opening forms, loan agreements, and mobile banking terms—are predominantly in English, overloaded with jargons, and often presented in fine print. Essential clauses, such as those about interest rate changes or service fees, are frequently buried under vague statements like “conditions apply”, "subject to change", etc. This lack of transparency undermines informed consent. When customers with little financial literacy sign these documents, they don't understand what they're agreeing to. This problem exists across all types of financial institutions. Furthermore, BFIs' employees, driven by sales targets linked to incentives, perpetuate these practices, transforming banking interactions into transactional engagements.

Despite being registered for digital services, customers frequently need to visit branches for services such as resetting forgotten passwords, collecting cheque books, updating Know Your Customer (KYC) documents, closing accounts, or resolving failed online transactions. Notably, Customer Helplines often go unanswered, leading frustrated customers to be frequently advised to “visit your nearest branch,” nullifying the very purpose of e-banking. These contradictions highlight a system that appears digital on the surface but remains fundamentally manual and profit-oriented behind the scenes.

These challenges point to a broader identity crisis within Nepal's banking sector. Over time, banks have shifted from being public service institutions to entities primarily focused on profit maximization. The neoliberal transformation of financial institutions into product vendors has marginalised what Nitsure referred to as “value-maximizing services.” Currently, most of the BFIs are evaluated based on revenue per customer rather than the quality of relationships or trust. From entry-level employees to branch managers, the incentive system prioritises sales volume over service quality, speed over substance, and targets over transparency.

This paradigm must change. As Nitsure emphasised, technology is not merely a facilitator—it shapes the entire business model. To retain public trust, banks must leverage technology to promote fair access, informed participation, and meaningful service. This necessitates a fundamental reorientation towards relationship-driven, trust-based, and transparent banking.

Digital justice

Nepal's transition to digital finance is inevitable. However, without a critical examination of who benefits, who understands, and who consents, this transition risks perpetuating the very exclusions it aims to eliminate. As Nitsure suggests, e-banking without adequate governance can entrench inequality rather than alleviate it.

Banking and financial institutions must transcend their role as mere profit-makers and recommit to being service providers, especially for the most vulnerable: the rural poor, the elderly, the semi-literate, and the digitally marginalised. Only then can e-banking evolve from a broken promise into a genuine pathway towards inclusion and digital justice. Until that transformation occurs, it will remain not a bridge—but a barrier. Apart from other responsibilities, if the newly appointed Governor also focuses on this aspect, it will help establish a quality and customer-friendly demand-driven culture in the banking and financial sector, ensuring financial inclusion in Nepal.

(The author is an advocate.)