HoR approves bill introducing digital currencies and age limits for bank directors

KATHMANDU: In a significant move aimed at overhauling the country’s financial regulatory framework, the House of Representatives (HoR) on Thursday approved the Banks and Financial Institutions Bill 2024, marking the first amendment to the Banks and Financial Institutions Act (BAFIA) 2017.

This pivotal bill, which envisions the regulation and modernization of Nepal’s financial market, was passed after extensive deliberation over the past two and a half months since it was initially tabled in parliament.

The Cabinet had given its nod to the bill on February 8, and it was subsequently presented to the lower house on March 18. The revised BAFIA encompasses a range of new provisions, including the conditional validation of digital currencies and an age limit for board members of any bank or financial institution (BFI), which stands at 70 years.

One of the most notable provisions of the new bill is the introduction of digital currencies into the financial system. Nepal Rastra Bank (NRB), the central bank, will be responsible for issuing these digital currencies. Additionally, the central bank will have the authority to license other entities to operate as digital banks. These designated digital banks will be empowered to accept deposits, provide loans, and carry out other financial transactions related to digital currencies based on guidelines issued by the NRB.

The new BAFIA sets an age limit of 70 years for individuals serving as board members of any BFI, a move aimed at ensuring dynamism and fresh perspectives within the boards. While the existing act already caps the maximum term for chief executive officers (CEOs) of BFIs, there was previously no such restriction for board directors.

The new bill also restricts an individual from holding a position on the board of more than one BFI and limits their tenure to two terms.

The bill proposes to reduce the maximum stake an individual can hold in a BFI from the current two percent to one percent of the paid-up capital. This measure is intended to prevent excessive concentration of ownership and ensure a more equitable distribution of stakes.

For the first time, the bill defines the concept of collateral in clear terms. According to the new act, any asset provided to a BFI as security for a loan is considered collateral. This formal definition aims to bring clarity and uniformity to the lending process.

Microfinance institutions will be required to issue primary shares to their borrowers, with a cap set at 40 percent of the offerings allocated for the general public. This provision seeks to enhance the participation of borrowers in the ownership structure of microfinance institutions, thereby aligning their interests with those of the institution.

The bill mandates that board members of BFIs must hold a master’s degree and have a minimum of five years of relevant work experience, up from the previous requirement of three years. This change aims to elevate the expertise and competency of individuals serving on the boards of BFIs.

Following the approval of the bill, parliament has set a 72-hour deadline for lawmakers to submit any further revisions they might want to propose. Once this period concludes, the bill will be forwarded to the parliamentary Finance Committee for detailed discussion and review.

The passing of the Banks and Financial Institutions Bill 2024 is a landmark event for Nepal’s financial sector. By introducing digital currencies and setting new standards for governance and ownership within BFIs, the bill aims to modernize and stabilize the financial market. The new regulations on collateral and microfinance are expected to bring more clarity and inclusiveness to the financial system.

The approval of the Banks and Financial Institutions Bill 2024 marks a significant step forward in the evolution of Nepal’s financial regulatory framework.

As the country continues to integrate more sophisticated financial technologies and practices, the updated BAFIA will play a crucial role in ensuring that the financial sector remains robust, transparent, and inclusive. The forthcoming discussions in the parliamentary Finance Committee will further refine and solidify the provisions of the bill, paving the way for its implementation in the next fiscal year.