Rewiring Nepal’s Financial Architecture

The government has unveiled an ambitious Second Financial Sector Development Strategy, a five-year roadmap designed to deepen financial intermediation, expand access, and fortify institutional resilience. Prepared by the Ministry of Finance, the plan targets an increase in the financial sector’s contribution to GDP from 6.65% in FY 2024/25 to 7.5% by FY 2029/30.

Running from FY 2025/26 through 2029/30, the strategy spans banking, insurance, capital markets, and cooperatives, combining regulatory reform with digital innovation and governance upgrades. Structured around four policy pillars and six flagship initiatives, it seeks to mobilize long-term capital, improve liquidity management, direct credit toward productive sectors, and promote inclusive, sustainable growth.

Banking: Digital Acceleration and Structural Reset

The blueprint calls for banks to raise lending to agriculture from 12.84% of total credit to 15%, while directed-lending programs in priority sectors—including energy, tourism, and SMEs—will be reviewed and recalibrated. Concessional loan policies will also be updated to reflect current economic realities.

Digital finance is central to the plan. Transactions via mobile and internet banking, digital wallets, and QR systems are projected to triple within five years, supported by a modern electronic payments ecosystem, a National Payment Switch, and full digitization of government transactions.

To strengthen liquidity management, authorities intend to tighten implementation of the interest-rate corridor system, enhance online open-market operations, and channel credit more efficiently into productive sectors.

A structural review of banks and financial institutions will reassess classifications, regulatory frameworks, and operational mandates. The strategy emphasizes specialized banking models, stronger risk management, and improved governance. Planned reforms also include the introduction of neo-banks, expansion of service networks, and a gradual shift from collateral-based lending toward project-based financing supported by a comprehensive credit-scoring system.

The Credit Information Bureau will see expanded data coverage and upgraded analytics, while the Deposit and Credit Guarantee Fund is set to adopt risk-based capital standards aligned with global best practice. With non-performing loans rising amid a sluggish economy, the government also plans policy provisions for establishing an asset-management company to handle distressed assets.

Green Finance and SME Access

Sustainability features prominently. The strategy outlines four core initiatives: a national green-finance roadmap, a standardized taxonomy, a comprehensive green-finance data system, and institutionalized environmental audits for qualifying investments. Authorities also plan to promote green and social bonds to finance environmentally sustainable projects and major infrastructure. For micro, cottage, small, and medium enterprises, reforms aim to simplify services, introduce targeted credit instruments, and widen access to finance. A national financial-inclusion strategy and a dedicated index will measure progress, while AI-enabled platforms and open-banking frameworks are expected to broaden reach. Financial literacy and consumer-protection measures will accompany the expansion to ensure new users can safely participate in the formal system.

Insurance: Expanding the Safety Net

Insurance coverage is targeted to reach 60% of the population, up from roughly 48% life-insurance penetration today. Affordable, simplified products for low-income households will be rolled out in partnership with local governments, cooperatives, and community institutions.

The government also intends to promote property insurance to safeguard assets against disasters, while strengthening domestic reinsurance capacity so more risk can be retained within national borders. Oversight by the Nepal Insurance Authority will be tightened through stricter solvency enforcement and improved risk-management standards, particularly in microinsurance and agricultural coverage.

Insurance pools will be mobilized as long-term capital for infrastructure and high-yield projects. Planned measures include an Insurance Development Fund, alternative distribution channels, and streamlined, policyholder-friendly claims systems.

Capital Markets: Broadening the Toolkit

Capital-market reforms aim to diversify instruments and deepen liquidity. The strategy envisions a derivatives market, a stronger bond segment, expanded collective investment schemes, and the introduction of REITs, index funds, and green bonds.

All public and private financial instruments are slated for dematerialization to enable automated secondary trading. An integrated data-management platform covering securities and commodity markets will be developed to improve transparency and widen participation. Legislative changes are also planned to modernize laws governing exchanges and financial-sector trusts.

Cooperatives and Institutional Investors

Amid governance concerns in savings and credit cooperatives, the plan proposes stricter regulatory standards and clearer criteria for new registrations. Strengthening governance and financial foundations is a priority as authorities seek to rebuild confidence and stabilize recovery.

Large institutional funds—including the Employees Provident Fund, Citizen Investment Trust, and Social Security Fund—are expected to assume a larger role as anchors of long-term investment and social protection. The Deposit and Credit Guarantee Fund will further refine premium rates, introduce reinsurance for guaranteed deposits, and pursue legislative amendments to strengthen its mandate.

Strategic Outlook

Across all segments, the strategy underscores loan-recovery improvements, tighter supervision, better coordination among regulators, environmentally responsible banking, and expanded access for underserved populations.

With reforms ranging from neo-bank licensing and green-finance standards to capital-market diversification and cooperative oversight, the Second Financial Sector Development Strategy signals a decisive push to modernize the financial architecture. If implemented effectively, it could reposition the sector as a stronger engine of growth, resilience, and inclusion over the coming decade.

(This report was originally published in March 2026 issue of New Business Age magazine.)