Nepal’s ongoing crisis in the financial co-operative sector has exposed vulnerabilities within the country’s financial system. Thousands of members are facing the loss of deposits due to mismanagement, fraud, and regulatory shortcomings, which have significantly eroded public confidence in non-bank financial institutions.
On the other hand, a silent global revolution is unfolding: the rapid growth of private credit markets in various economies, including Africa, where institutional investors are increasingly filling the void left by cautious banks.
This global trend presents a timely opportunity for Nepal to reimagine its financial architecture. By opening up the private credit market—underpinned by robust regulation and supported by institutional capital—Nepal can diversify its financing sources, restore public trust, and foster long-term economic resilience.
Diversifying the Supply of Credit
Currently, the only loans that Nepali businesses can formally access are those from their own shareholders or licensed banks and financial institutions (BFIs). Consequently, Nepal’s financial system is excessively reliant on BFIs and under-regulated co-operatives. This concentration has resulted in structural bottlenecks in credit flow, particularly for small and medium enterprises (SMEs) and infrastructure projects. While commercial banks have limited risk appetites and generally do not lend to SMEs without additional collateral, financial co-operatives are either unable or unwilling to address governance failures, making them unreliable partners. Despite the proliferation of licensed financial institutions, SMEs are therefore compelled to seek support from family and friends for their financial and/or additional collateral needs.
A regulated private credit market that encompasses private debt funds, asset managers, and institutional lenders can serve as a parallel, professionalized channel to expand access to credit while reducing systemic dependence on vulnerable segments.
Closing Oversight Gaps
Infomerics Credit Rating Nepal receives operating license as co...
The co-operative crisis underscores how regulatory blind spots and a lack of accountability can lead to widespread financial instability. Therefore, robust regulatory oversight is paramount.
A formal private credit ecosystem can thrive in Nepal if we establish a regulatory framework specifically tailored for private credit intermediaries, distinct from the regulations governing commercial banks or co-operatives.
It is, however, important to note that since private credit providers do not mobilize public deposits, regulations should not be excessively elaborate and should not hinder innovation and forward-thinking. Such an ecosystem would foster investor confidence while encouraging responsible risk-taking.
Promoting Formalization
Nepal’s informal credit market is widely acknowledged to be substantial and frequently characterized by predatory practices. By legalizing and regulating private credit instruments, such as invoice discounting, mezzanine loans, buy now pay later schemes, and purchase order financing, Nepal can gradually integrate more economic activity into the formal sector. This expansion would contribute to the widening of the tax base and reduce reliance on informal, high-interest borrowing.
Utilizing Domestic Institutional Capital
Nepal’s institutional investors, including the Employees Provident Fund, Citizen Investment Trust, and insurance companies, are constrained by limited investment avenues. They often park funds in low-yield government securities and fixed deposits. Unlike equity funds, which exhibit a J-curve in terms of returns and a higher risk profile, an appropriately regulated private credit market presents them with a risk-mitigated asset class that can deliver consistent, higher returns while simultaneously contributing to economic growth.
Attracting Foreign and Diaspora Investment
Globally, private credit is experiencing significant growth, with major funds actively seeking opportunities in emerging markets characterized by high demand for alternative credit sources and low competition from local players. With appropriate legal safeguards and a transparent regulatory framework, Nepal could attract foreign private debt funds, development finance institutions (DFIs), and impact investors, including the diaspora, who are interested in stable, long-term returns. These actors can also provide technical expertise to enhance credit underwriting and risk management practices.
Bridging a Limited Private Equity/Venture Capital (PEVC) Market
Despite the increasing number of fund managers actively building equity portfolios, Nepal’s PEVC landscape remains shallow. Most deals are oriented toward short-term exits through stock market listings rather than a focus on growth of the underlying business. This transactional approach has limited the transformative potential of private capital.
In contrast, private credit instruments offer lower risk and greater predictability, making them ideal for companies that are not yet mature enough for equity investment or initial public offerings (IPOs). Moreover, Nepal’s financial sector talent is currently better suited to manage debt transactions than equity deals. Private credit can therefore serve as a stepping stone, facilitating sustainable business growth and preparing the ecosystem for deeper equity participation in the future.
Empowering SMEs and Infrastructure Development
Nepali banks often perceive SME lending as too risky and infrastructure finance as too long-term to align with their balance sheets. Private credit funds, with their flexible structures and active engagement models, are better positioned to address these challenges. Debt instruments can be tailored to the cash flow cycles of SMEs or the project timelines of infrastructure ventures, unlocking capital where it is most urgently required.
A New Financial Architecture for Nepal
The diminishing confidence in Nepal’s co-operative sector should not simply result in stricter regulations. Instead, it should prompt a comprehensive reevaluation of the nation’s financial architecture—one that prioritizes resilience, innovation, and inclusivity.
Expanding Nepal’s private credit market presents an opportunity to establish such a system. Nepal can draw inspiration from emerging markets that have successfully utilized private credit instruments. Balanced, risk-based regulation and incentives to attract both domestic and foreign capital will enable Nepal to develop a more diversified and robust financial sector, less susceptible to collapse and more responsive to the requirements of its entrepreneurs and citizens.
The global capital is prepared. The domestic need is pressing. Do we have the will to seize the moment?
