How about a provincial bank?

With the enactment of the 2015 law Constitution, Nepal became a federal republic. Although seven years have passed since then, the provinces have not been able to fully implement their rights and privileges. Nevertheless, a few institutions have come under their authority. The Provincial Civil Service Commission started working. In order to manage the relations of the central units, the Interprovincial Council, National Concern and Coordinating Committee and Provincial Coordinating Committee were established to safeguard the essence of federalism. The federal government has already entrusted some of the projects to the provinces, while others are in the pipeline.

Province of Lumbini plans to create its own provincial bank which will be called Lumbini Provincial Bank. If this bank becomes a reality, it will become the first province to exercise its financial rights as permitted by the Constitution. Article 59 under the title “Use of fiscal power” states in clause 1, “Federal, provincial and local entities shall enact laws, prepare an annual budget, make necessary decisions, formulate policies and plans and implement them implemented with respect to matters related to the tax jurisdiction mentioned in their respective list of jurisdictions.”

Article 4 states that “The federation, the province and the entity at the local level shall make arrangements for an equitable distribution of the benefits of the development of natural resources. A certain part of these benefits, royalties, services or objects shall be distributed to areas affected by the projects and to local communities as provided by law.” Clause 5 states that “When federal, provincial and local entities use natural resources, they shall give priority to local communities to make a certain percentage of investment if they wish to do so given the nature and percentage of the investment. “

Pilot project

Through numerous studies, research and discussions with stakeholders, it has been established that banks and financial institutions are beyond the reach of poor people. Even the public banks have not been able to meet the expectations of the poor because they deviate from their objectives. It is obvious that the creation of a bank involves many challenges. A pilot project of Lumbini Province Bank started in 2021. All findings support its establishment as it can contribute to the development of economic activities in the province. It was proposed that the bank’s starting capital would be Rs 5 billion, with 51% of the shares to be owned by the province and the remaining 49% to be issued in an initial public offering.

The bank will mainly focus on physical infrastructure development, food security, sustainable development and loan disbursement at the local level, with due emphasis on small and medium enterprises. All government related budgets and social security payments can be disbursed through the bank.

The concept of provincial or regional banks has flourished in India and China. In China, public banks and joint-stock banks retain the advantage over other banks. China did well in The Asian Banker Strongest Banks in 2021. The results can be attributed to the strong performance of provincial banks, as they took half the share of the top 10 strongest banks in China. In India, there are 57 regional rural banks operating in various rural areas of the country. They were created with the aim of providing rural populations with banking information and facilities.

In Nepal, the poor do not have access to banks and financial institutions. Therefore, it is believed that provincial banks can reach out to this population to accelerate financial access for poverty reduction, which will ultimately lead to economic transformation and revival of the provinces. To do this, special emphasis will be placed on import substitution to promote exports in order to reduce the trade deficit by making the province self-sufficient in food products through the promotion of agriculture-based enterprises. If the provincial bank comes into operation, it can provide many opportunities because it can spread its wings at the local level to provide knowledge and financial opportunities and people will be prevented from falling into the trap of loan sharks.

Nevertheless, challenges loom on the horizon. Being a new regime in the country, it is not yet clear which category the bank is likely to fall into. Will it take on a totally new dimension since it will have to adhere to the policies set by Nepal Rastra Bank or can it operate without central bank approval? Its actions would be against its current policies if Nepal Rastra Bank provided a license to open a new bank as it focused on reducing the number of banks by asking them to opt for acquisition or merger. Moreover, with a plethora of banks already in operation, the stiff competition can be a setback for such a newcomer.

Strengthen federalism

It is hard to believe that a provincial bank will be immune to political interference. Being a provincial bank, political parties can abuse their influence by forcing it to recruit incompetent staff, such as some government banks are already discovering.

With the election dates announced, it is likely that the bank’s pilot study will yield no results. If the government formed after the elections is reluctant to create such a bank, the investment made in its feasibility study will be in vain. Also, the final verdict remains in the hands of the Nepal Rastra Bank, because it is she who will grant a letter of intent only if she judges that the creation of the bank is appropriate.

Nevertheless, if the provincial bank starts its operations and fulfills its mission to achieve the desired result, it will strengthen federalism in financial and monetary practices. It is likely to benefit people locally as it will focus on service more than profit. He could become a pioneer of federalism. Although there are a lot of challenges, it also comes with some positive aspects. Therefore, the benefit of the doubt must be given to its establishment.

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