CAPITALIZING GROWTH: AN IN-DEPTH EXPLORATION OF PAID-UP CAPITAL IMPACT ON COMMERCIAL BANKS IN DEVELOPING ECONOMIES – INSIGHTS FROM NEPAL

Abstract

Commercial banks play a pivotal role as financial intermediaries in driving economic growth within developing countries, especially in regions where a significant portion of the population relies on low wages and engages in traditional agriculture. This is primarily attributed to the substantial capital provided by commercial banks, which is essential for the development and maintenance of infrastructure, as well as the establishment of new businesses (Beck, Demirgüç-Kunt, & Levine, 2010). Term loans serve as a prevalent financial instrument through which banks channel funds to businesses. However, effective asset management and loan collection pose persistent challenges for commercial banks in developing countries (Dziobek & Pazarbasioglu, 1997; Gizaw, Kebede, & Selvaraj, 2015). This study focuses on the case of Nepal, where commercial banking commenced in 1937 with the establishment of Nepal Bank Ltd. (Baral, 2005). Subsequently, the private sector significantly entered the market during the 1990s. The Nepal Rastra Bank (NRB) functions as the national or central bank overseeing monetary policy. As of 2018, there were 28 commercial banks in Nepal, broadly categorized into public sector banks, joint venture banks, and domestic private banks (Gnawali, 2018). Despite public sector banks historically holding the largest share of loans, their performance has consistently lagged behind that of joint-venture and domestic private banks. Interestingly, joint-venture and domestic private banks exhibited comparable levels of performance, as evidenced by empirical findings (Jha & Hui, 2012). This research aims to provide a comprehensive understanding of the dynamics within the commercial banking sector in Nepal and shed light on the performance differentials among public sector, joint venture, and domestic private banks. By investigating the historical evolution of commercial banking in Nepal and analyzing the performance patterns of different types of banks, this study contributes valuable insights to the existing literature on banking in developing countries