Maha Prasad Adhikari: The changing face of financial services - plan
for the digital future
Guest of Honor address by Mr Maha Prasad Adhikari, Governor of the Central Bank of
Nepal (Nepal Rastra Bank), at the South Asian BFSI (Banking, financial services and
insurance) Tech Summit & Awards, Kathmandu, 29 February 2024.
* * *
Ladies and gentlemen,
It is truly an honor to stand before you today representing a nation with a rich history
and a promising future. I extend my heartfelt gratitude to the organizers of the South
Asian BFSI Tech '24 Summit and Awards, for providing this platform to discuss a topic
of paramount importance - "The changing face of financial services: Plan for the Digital
Future."
In the realm of financial services, Nepal has undergone a paradigm shift in recent
years. We have transitioned from traditional, paper-based transactions to a dynamic
and technologically driven financial ecosystem. This shift has not only been a response
to global trends but also a testament to Nepal's commitment to fostering economic
growth, financial inclusion, and innovation.
The initiatives taken by Government of Nepal for facilitating and encouraging initiatives
of regulators like Nepal Rastra Bank, Securities Board of Nepal etc, development of
public and private digital infrastructure by active players and active adoption by citizens
have made it possible. The Government of Nepal has put digitization in its top priority
and has formulated Digital Nepal Framework, 2019, incorporating eight important
sectors with potential for large scale digital adoption. The framework outlines
enhancement of digital finance as one of the major sectors.
Nepal Rastra Bank established a dedicated payment system department within the
bank in 2016. Necessary legal arrangement like payment and settlement act was
enacted. The licensing policy, payment and settlement bylaw, oversight manual,
payment, unified directive, RTGS rules and guidelines, and other payment-related
circulars were formulated to guide licensing, regulatory and supervisory arrangements.
The department has presently licensed 27 Payment service Providers (PSPs) and 10
Payment System Operators (PSOs) in addition to granting license to existing Bank and
financial institutions (BFIs) of the country. On the Payment Infrastructure, NRB itself
operates a large value payment system through Real Time Gross Settlement.
Digital wallets and mobile banking, in particular, have emerged as a game-changer,
allowing people to access banking services anytime, anywhere. This shift has not only
improved the convenience for consumers but has also enabled financial institutions to
enhance their operational efficiency and reduce costs. The smartphone penetration all
across the country and internet connectivity has provided tremendous support to
adoption of digital services.
The Covid 19 pandemic has accelerated the adoption of digital financial services in
Nepal. The necessity of contactless transactions and remote banking has further
highlighted the importance of a robust digital infrastructure. Nepal Rastra Bank has
recognized this shift and is actively working towards creating an enabling environment
for fintech innovation, ensuring regulatory frameworks that foster growth while
safeguarding the interests of consumers and the stability of the financial system.
Ladies and Gentlemen,
Allow me to substantiate our discussion on the changing face of financial services in
Nepal with some compelling data that reflects the robust growth in various payment
instruments. In recent years, we have witnessed a remarkable surge in the adoption of
digital payment solutions, underscoring the evolving financial landscape in our nation.
The used of Real Time Gross Settlement System (RTGS) have facilitated large value
transactions of the corporates and governments. I would share with this august
gathering that over 95% of government payments in Nepal are conducted digitally
which ranges from large value payment to contractors of infrastructure development
activities to distribution of social security allowance to the citizens. It has marked a
standard shift towards efficiency and transparency in financial transactions of the
government.
The volume of transactions using innovative platforms such as IPS and ConnectIPS
has experienced an exponential rise, with a notable increase of more than 67% in the
past 3 years.
Similarly, the volume of retail payment initiatives like QR code-based payments have
also witnessed a tremendous uptick in popularity, showing an increase of more than
1100% in last 3 years. The simplicity and security offered by QR codes have made
them a preferred choice for consumers and merchants alike. We have prioritized the
use of these technology in such an extent that even I went to local vegetable markets
and groceries to encourage its adoption.
The adoption of digital wallets has seen unprecedented growth in volume of more than
92% in last 3 years, with the number of users relying on these platforms for everyday
transactions. The versatility of digital wallets in facilitating peer-to-peer transfers, utility
bill payments, and even online purchases has made them an integral part of the
modern financial ecosystem.
Furthermore, the usage of cards, has shown a positive trajectory, showing an increase
of almost 50% in volume of transactions in the past 3 years.
In addition to these encouraging numbers, we have achieved significant progress in
cross border transactions, the Memorandum of Understanding signed between Nepal
Clearing House Limited (NCHL) and National Payment Corporation of India (NPCI) in
June, 2023 during state visit to India by Right Hon. Prime minister is expected to have
paradigms shift on cross border connectivity for digital financial services between both
countries. Based on latest updates, NCHL and NPCI are working on the issues
regarding network operating rules, joint interface, operating guidelines, selection of
settlement bank and developing the testing environment. The first phase of the project i.
e., Person to Person (P2P) transfer would be rolling soon. Similarly, some other
operators are also expected to come up with arrangements of cross border payments.
To further facilitate this arrangements from the central bank's side, recently a regulatory
term of reference has been signed between Nepal Rastra Bank and Reserve Bank of
India on integrating National Payments Interface (NPI) of Nepal and Unified Payments
Interface (UPI) of India. A joint steering committee formed to monitor the progress of the
bilateral payment integration is also active. As we rollout the system in full phase, I
expect that people traveling to both countries would leave their wallet at home and
manage all payments through the smart phones, like we are doing it in our respective
country.
I would like to reiterate that this is just a beginning, NRB is always open to expand such
arrangements with other countries in the region and beyond to make our economy more
vibrant and add convenience to the citizens.
Ladies and Gentlemen,
Now, let me put some light on the theme of today's gathering and allow me to highlight
key strategic orientations of Nepal Rastra Bank (NRB) aimed at further modernizing and
revolutionizing the country's financial landscape. These initiatives are the result of our
comprehensive studies, stakeholder consultations, technological advancements,
national needs, and our vision for a less cash society. I've emphasized in numerous
forums since assuming my role at NRB, that we should propel the digital landscape to
such an extent that Nepalese currency notes bearing Governor's signature would
become mere specimen notes.
Developing digital public infrastructure (DPI) is another agenda with the central bank.
The first phase of the National Payment Switch (NPS) i.e. Retail Payment Switch is in
full operation. The second phase of NPS which is related with issuing national card (
NEPALPAY Card), is under progress.
One of the major strategic areas Nepal Rastra Bank is rolling out Central Bank Digital
Currency (CBDC) in Nepal. The concept of CBDC as a legal tender is not something to
substitute physical currency immediately but rather it serves as supplement to existing
legal tender form of currency. Hence, based on the country's economic and
technological landscape, regulatory environment, and societal preferences, introduction
of a CBDC in Nepal has been envisioned in phase manner, with a full rollout in 2026.
1. The First phase of this project is establishment of dedicated unit and a team. NRB
has established a Division for CBDC and assigned a team to have focused efforts
on CBDC.
2. Second phase would be comprehensive research to come up with appropriate
design and technology such as block chain, distributed ledger technology, the
level of privacy and security features, scalability etc.
3. Third phase would be partnership and collaboration. NRB collaborates with
financial institutions, Payment Service Providers, and FinTech to integrate the
CBDC into the existing financial ecosystem. The dedicated team also started
engaging with other international projects like Aurum, mBridge, BIS Innovation
Hub etc and continues to build capacity on this complex issue. We have also
3.
initiated to receive technical assistance support from development partners, to
learn from international best practices while finalizing the architecture.
4. Fourth phase would be formulating and making legal arrangements, testing and
piloting. Prior to full rollout, NRB shall conduct pilot programs to test the CBDC in
real-world scenarios. This will help identify technical issues and allows for
adjustments before widespread adoption. At this stage, a strong security measure
would be implemented to safeguard transactions and user data. Encryption,
authentication, and fraud prevention mechanisms would be the essential
components to assure robust security system.
5. Fifth stage would be rollout. Nepal Rastra Bank might choose to introduce the
CBDC in a phase manner, starting with limited use cases and gradually
expanding its scope based on user feedback and performance evaluation.
6. We understand that CBDC roll out is not an end, it is crucial for continuous
monitoring of the CBDC's impact on the economy, financial stability, and payment
systems. Feedback from users and stakeholders would guide for further
improvements.
7. To ensure a smooth transition, NRB would make necessary legal arrangements,
conduct public awareness campaigns and educational programs through media,
social media and Videos, collaborate with Financial Institutions, Media agencies,
TV channels etc.
While CBDC remains Nepal Rastra Bank's important journey, the bank is also engaged
in the establishment and operationalization of a full-fledged digital bank to foster digital
intermediation. The legal frameworks and institutional modalities requisite for this
initiative are currently in progress.
In order to encourage innovation in the financial sector and provide a controlled
environment for testing new financial products, services, or business models, NRB
plans to establish regulatory sandbox and innovation center within NRB. We expect that
it will provide a safer place for innovators, especially millennial, generation Z to explore
and test their new concepts and innovations in financial landscape.
Nepal Rastra Bank is committed to foster financial access, usage and quality of the
financial products as well ensure data privacy of each financial consumer. We have
prioritized digital financial literacy through frameworks and guidelines, and have
directed BFIs to allocate corporate social responsibility funds accordingly. Our initiatives
include grassroots literacy programs, training for trainers, and collaboration on
educational syllabus of schools. Additionally, we're regulating fees for digital services,
promoting low-cost tools, and implementing robust market conduct supervision and
grievance handling arrangements for consumer protection.
Collaboration is another key element of our strategy for the digital future. We recognize
that the challenges and opportunities presented by the changing face of financial
services extends beyond national borders. By fostering collaboration with our South
Asian neighbors and the global community, we can collectively address common
challenges and share best practices, ensuring the resilience and sustainability of our
financial systems.
Finally,
As we reflect on this paradigm shift, we acknowledge that the journey is ongoing, and
there are challenges to overcome. With great technological advancements come great
responsibilities. However, the resilience and adaptability demonstrated by Nepal in
embracing digital transformation of financial services, exemplify our commitment to
progress. We stand at the cusp of a digital future, and Nepal is ready to leverage
technology to create a more inclusive, efficient, and secure financial landscape for all.
In conclusion, the digital future of financial services is both an exciting and challenging
frontier. Nepal Rastra Bank is committed to navigating this landscape with prudence,
embracing innovation, promoting inclusivity, and safeguarding the integrity of our
financial systems. Together, let us embark on this journey with enthusiasm,
collaboration, and a shared vision for a more digitally connected and financially
inclusive South Asia.
Thank you for your attention, and I look forward to fruitful discussions and
collaborations during the South Asian BFSI Tech '24 Summit and Awards.
Thank you.