Concept of Financial System in Nepal

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Many financial institutions like Nepal Bank Ltd., Bank of Kathmandu Limited, Annapurna Finance Company, Universal Finance Ltd., Nepal Insurance Company Ltd., Rastriya Beema Sansthan and so on are being operated in Nepal. These institutions basically fall into two categories. Institutions falling in first categories such as banks and finance companies, trade in money and others such insurance companies, trade in risk.

First category of institutions collects deposits from surplus units and lends to the deficit units. Surplus units may be individuals, business firms, government and non-government office and similarly some of the individuals, business firms, government and non-governmental offices may   be deficit units. Thus, these institutions- banks and finance companies, transfer the resources from surplus units to deficit units. In addition to these institutions facilitate the trade in transfer of money and making payment Second category of institutions trade in risk and protect individuals, and business firms from various types of risk.

You must have noted that different types of securities/ financial assets such as shares and debentures of different companies and government bonds are traded in Nepal Stock Exchange Ltd. This is an example of trading of primary financial instruments. Similarly, another type of financial instrument, derivative securities, trade in derivative market. Nepal Derivative Exchange (NDEX) and Mercantile Exchange Nepal Ltd. (MEX) are examples of derivative markets in Nepal.


In addition, different regulatory institutions and regulations are necessary to regulate financial institutions, financial markets and instruments. Nepal Rastra Bank (NRB) is the regulatory body of financial institutions and Security Board of Nepal (SEBON) is regulator of financial markets and instruments. These regulators (NRB and SEBON) regulate the operations of financial institutions and markets, and issuance of financial instruments under different Acts and Byelaws. 

For example, NRB monitors and supervises financial institutions under Nepal Rastra Bank Act, and SEBON monitors and supervises securities markets under Securities Act Here we see a set of arrangements such as financial institutions, financial instruments, financial markets, regulations and regulatory institutions through which funds are transferred from surplus units to deficit units in the economy. This arrangement is known as financial system. Thus, we can define the financial system as a set of arrangement of financial institutions, markets and instruments through which funds are transferred from surplus units to deficit units of the economy.

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