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Accelerating DFI Investments in Nepal’s Financial Service Industry

Nepal’s financial sector is undergoing transformative growth and is poised to play a key role on a national, regional, and global scale.

IIN hosted their second mission in April 2024 which brought together 14 DFIs and Impact Investors.

Development Finance Institutions (DFIs) are increasingly attracted to Nepal’s potential for impactful and sustainable change, driven by a significant appetite for investment. Cadmus, through Invest for Impact Nepal (IIN), and with the support of British International Investment (BII), Dutch Entrepreneurial Development Bank (FMO), and the Swiss Agency for Development and Cooperation (SDC), aims to shape and build the markets of tomorrow in Nepal. Their primary focus is on accelerating DFI investments to achieve these goals.

Overcoming Challenges, Paving the Way

However, Nepal’s financial and investment ecosystem has faced several challenges, including:

  • Inadequate, over-regulated, cumbersome, and time-consuming regulatory regimes.
  • Businesses not aligned with foreign and DFI requisites.
  • Perceived high country risk.
  • A nascent investment ecosystem.
  • Information and capacity gaps in the market, preventing the private sector from fully accessing DFI capital.
  • Limited understanding of Nepali markets by DFIs.

To address these challenges, IIN has collaborated with about 20 DFIs and Impact Investors, providing valuable market intelligence and local context to both current and potential investors in the country.

Regulatory Reforms and Capacity Building

Initially, the regulatory regimes for DFI investments, especially for debt investments, were quite stringent. However, after conducting a thorough study on the regulatory barriers, IIN, with the help of champions, started addressing the more accessible issues and has achieved several regulatory reforms to date.

For instance, in the latest amendment of the Foreign Investment and Foreign Loan Management Bylaws, the central bank has recognized DFIs as a distinct category of investors alongside foreign government-regulated financial institutions. Similarly, the government has reduced Withholding Tax from 10% to 5% on interest payments to foreign banks and financial institutions.

Furthermore, IIN has organized various capacity development trainings for banking and investment professionals, roundtable discussions with investors, and policy dialogues with regulators to strengthen the overall investment ecosystem of Nepal.

Bridging Information Gaps

IIN is continuously developing various market intelligence, including market snapshot on DFI investments, Private Equity and Venture Capital (PEVC) investments, Investee toolkits, and Investment readiness scorecards for small and medium enterprises (SMEs), to bridge the information gaps in the market about the DFIs and help enable local investees to access DFI Capital.

Successful DFI Missions and Deepening Relationships

Following a successful DFI mission to Nepal in 2023, IIN hosted their second mission in April 2024 which brought together 14 DFIs and Impact Investors to update them on policy developments, review collective investments, and discuss strategies for impactful investments in Nepal’s financial services industry.

The mission fostered deeper relationships between the Government of Nepal (GoN) and DFIs, with the Central Bank (Nepal Rastra Bank) providing commitment to facilitate investors to freely invest, operate, and exit the country at their discretion, while creating a level playing field for all. Additionally, the Ministry of Finance assured DFIs to review practices related to Withholding Tax in the region to take reform initiatives and position Nepal as a competitive destination for investment.

Highlights from First DFI Mission

  • Brought together financial institutions and DFIs to partner around SME Financing and addressing the financing gaps in the segment.
  • Showcased the potential for DFI investments in Commercial Banks and Private Equity Funds.
  • The participation of the eight DFIs and Asset Managers, along with the Class A Banks that led to debt investment of around $156 million and a pipeline of $150 million in the year.
  • Several regulatory knots had also been loosened after the first mission, such as
    • Reduction in lock-in period by Securities Board of Nepal (SEBON)
    • In the amendment to the Foreign Investment and Foreign Loan Management Bylaws in 2024, Nepal Rastra Bank recognized DFIs as an institutional investor alongside foreign government regulated financial institutions.
    • Signing of an MoU between the GoN and Six DFIs through the Ministry of Finance (MoF).

Engaging Stakeholders and Collaborating for Impact

The mission also facilitated connections between representatives of a broader financial service industry, including Development (Class B) Banks, Microfinance Institutions (Class D/MFI), and Digital Financial Service (DFS) institutions, and DFIs, providing an opportunity to strengthen their engagement and jointly explore potential investment opportunities.

Moreover, IIN highlights a successful collaboration model that brings DFIs and Development Partners together, enabling them to understand each other’s goals and better align their activities for more impactful outcomes within the financial sector in Nepal. This collaboration has helped surge DFI investments into the country, demonstrating a successful partnership.

Market Shaping and Sustainable Finance

Witnessing the progress and growth of DFI investments in the financial service industry, IIN and DFIs emphasize the need to further themes such as sustainable finance; environmental, social, and governance (ESG); client protection; gender; and climate financing to achieve more impactful results on Nepal’s financial ecosystem.

These initiatives will ensure that future investments are not only financially viable, but also contribute to broader developmental goals in a sustainable and inclusive manner, ultimately fostering economic and social progress within the country.

Through its multifaceted efforts, Invest for Impact Nepal is playing a pivotal role in shaping Nepal’s financial future, paving the way for impactful investments, regulatory reforms, capacity building, and sustainable development.

Learn more about how DFIs are accelerating their investments in Nepal’s financial service industry in the following releases:

About Invest for Impact Nepal

IIN is a collaborative platform established and funded by British International Investment (BII), the Dutch Entrepreneurial Development Bank (FMO), and the Swiss Agency for Development Cooperation (SDC) to complement existing efforts to attract DFI investment to support private sector growth in Nepal. The IIN initiative commenced in February 2021 to research and understand the investment market and ecosystem constraints. Since August 2022, it translated these findings into implementation. This phase of the program will run until July 2025.

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