Banks typically ask you to provide sufficient information to substantiate your identity, home address and source of income. Financial institutions must perform such due diligence to identify their clients and to ascertain other information relevant to doing business with them. [break]
This practice, commonly known as Know Your Customer (KYC) is important in order to safeguard your own interest (for example, to prevent identity theft, financial fraud) and to combat national and global challenges like money laundering and terrorist financing.
Money laundering refers to the process of concealing the source of money acquired through illegal means. It poses a significant concern across the world, and as a result, governments and international bodies have undertaken efforts to deter, prevent and punish money launderers. Financial institutions have likewise set up mechanisms to prevent and detect transactions involving dirty money, both as a result of government requirements and to avoid the reputation damage.
A bank customer needs to go through similar or even escalated levels of screening almost everywhere else in the world. But as a customer, you may find it cumbersome and sometimes frustrating in Nepal primarily because of the inadequacies in our state administration system. Most countries use Social Security or National Identification numbers as primary forms of identification and the data in these systems are kept well and updated, in most cases in electronic form; therefore, easily accessible by authorities and institutions, thereby bringing about uniformity in approach.
In Nepal, a number of identification documents are entertained, including passport, citizenship certificate, driver’s license, etc. These documents don’t necessarily contain all information required by a bank. Furthermore, they are usually not updated to reflect your occupation, current address etc.
Another challenge we face here is verification of residential address. Authorities haven’t numbered the houses nor mapped and marked the streets to facilitate easy identification of a property. When was the last time your courier delivered to your house without the man calling you to ask you to guide him on which turns to take and what color your gate is? To overcome this difficulty, banks here usually ask you to draw a location map of your house, which is later verified physically by a bank employee. In most countries, this isn’t necessary, as the houses are easily identifiable.
Third, and perhaps the most annoying for a bank customer is the disclosure of the source of his income. Transparency is not yet the order of the day in our society. Culturally, many of us don’t believe that we need to let others know how we make our money or whether the money is a gift from parents, in which case, the source of the parent’s income is of interest.
And then there are possibilities that money earned through legitimate but informal sources may not necessarily be within the purview of the formal tax net. I understand there are firms and companies in Nepal who pay salaries to their employees in two parts: taxed and undisclosed. Archaic tax regime in our country discourages and sometimes makes it impossible for otherwise law-abiding businesses – in the private sector or those that aren’t listed – to be fully transparent. Multitude of these issues makes one uncomfortable, without any wrongdoing on your part individually, when you’re asked about the source of your income.
And I guess we’re paying in some ways for the shortcomings in our system. I’m sure you’ve read and heard about how Nepal is likely to be categorized as a “high risk” country by Financial Action Task Force (FATF) for not having adequate laws, regulations and practices in place. KYC and anti-money laundering mechanisms are at the very core of the FATF mandate.
One of the global financial institutions has recently suspended its service to many Asian banks on grounds of difficulty and cost associated with these very issues. If we as a nation fail to rapidly comply with international requirements, cost of doing business or maintaining a bank account in Nepal will increase further as Nepali banks will then face more hurdles. Our banks already pay a higher premium to our international service providers as our country’s risk rating is poor.
So you’ll see that there are a number of reasons why banks have raised and will continue to raise scrutiny of their customers. Viewed from a simplistic perspective at a personal level, it’s important to disclose your source of income to your bank and to ensure that the bank has the current data on your occupation and address in order to protect your own money. You as a customer should be more comfortable with a bank that seeks to conduct meaningful due diligence of its customers as opposed to those who don’t.
A lot of discussions have taken place on merger of banks. Is it really the solution to the current problems?
Let’s first define the current problems: a) there are too many financial institutions relative to the size and growth of our economy; b) corporate governance and risk management standards in many institutions are weak; and c) most importantly, political uncertainty and transitional state of affairs have taken a huge toll on the business environment and socio-economic sphere. The list can be longer but most other problems are the results of the ones stated above.
Is merger the answer? It makes sense only if additional value is created. Merger of weak FIs creates a bigger weaker institution. In my view, consolidation should now happen by way of strong banks acquiring a number of smaller, weaker institutions, rather than FIs randomly selecting partners to merge with. The hub and spoke approach will ensure better stability. The Central Bank must play a proactive, positive role here.
There are two more ingredients which are necessary: a) more capital injection; and b) further capacity enhancement to improve governance and risk management standards. It’s about going back to basics and a more conventional posturing.
Joshi is the ceo of Laxmi Bank.Disclaimer
The opinions expressed herein are those of the author’s and are not held by The Week, unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other forms of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation. Any information you provide may be used on The Week/Moneywise and other Nepal Republic Media Pvt. Ltd sites.
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