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Compliance Challenges Hamper Fintech Growth in Nepal

Kathmandu - As Nepal’s digital payment landscape continues to expand, regulators are facing growing challenges in keeping pace with the rapid evolution of fintech.

Regulatory Gaps and Bottlenecks Hinder Fintech Growth

The National Payment Systems Development Strategy (NPSDS) 2014, formulated by Nepal Rastra Bank (NRB), aimed to modernize the country’s payment systems and promote secure, efficient, and robust transactions. Despite progress made since 2020, regulatory gaps and bottlenecks are hindering the growth of fintech in Nepal.

Discrepancy in VAT Collection

One significant gap is the discrepancy in value-added tax (VAT) collection between banking and financial institutions (BFIs) and non-BFIs providing similar services. BFIs, which provide financial services exempt from VAT, do not need to register under VAT, giving them an unfair advantage over PSOs when offering services subject to VAT. The NRB and the Government of Nepal must consider exempting VAT for services provided by PSP/PSOs to make these services more affordable and accessible.

Foreign Direct Investment Limit

Another challenge lies in the foreign direct investment (FDI) limit, which stands at 15 percent of paid-up capital. However, the minimum threshold for FDI in Nepal is Rs20 million, making it difficult for investments below this amount to qualify as FDI. The NRB should collaborate with the Government of Nepal to relax the FDI limit and encourage foreign investment in the payment and fintech sectors.

Language Barrier

Furthermore, regulatory documents are primarily available only in Nepali, creating barriers for foreign investors seeking to enter the market. The NRB must address this gap by issuing relevant documents in both English and Nepali.

Technological Advancements

Regulators also struggle to keep pace with technological advancements, hindering the introduction of new products and services due to regulatory constraints. The lack of a technology research and test department within the regulatory bodies is evident. A proposed solution includes implementing centralized KYC (National ID), linking Permanent Account Number (PAN) to every bank account, integrating mobile banking/internet banking with wallets and vice versa, linking wallets to each other, and developing a unified QR system capable of accepting any type of payment.

Fintech Education

The absence of fintech-related courses in Nepali universities also poses a challenge. The NRB must amend policies to create a thriving fintech industry in Nepal by incorporating fintech education into university curricula.

Conclusion

These compliance challenges highlight the need for regulatory reforms to support the growth of fintech in Nepal. Addressing these gaps will be crucial for the country’s digital payment landscape, which is expected to continue growing rapidly in the coming years.