Bhutan’s Financial Regulators: The Role of the Royal Monetary Authority and Other Institutions
Introduction
Bhutan, a small Himalayan kingdom, has been gradually modernizing its financial sector. Despite having an informal culture of finance, the country has made significant progress in integrating formal financial services. This article explores the role of the Royal Monetary Authority (RMA) and other institutions in shaping Bhutan’s financial landscape.
The Central Banking Landscape
History of the RMA
Established in 1982, the RMA is the central bank of Bhutan, responsible for issuing currency, implementing monetary policy, coordinating financial institutions’ activities, and managing government foreign exchange earnings. One of its earlier tasks was to administer financial assistance for rural development, which was later transferred to the Bhutan Development Finance Corporation (BDFCL) in 1988.
Responsibilities
The RMA is one of the primary regulators of Bhutan’s financial institutions, responsible for implementing monetary policy and ensuring financial stability. Its responsibilities also include:
- Issuing currency
- Coordinating financial institutions’ activities
- Managing government foreign exchange earnings
- Implementing monetary policy
Banking Sector: A Growing Network
Overview
Bhutan’s banking sector consists of five commercial banks and three other financial organizations. The RMA is responsible for regulating these institutions and implementing monetary policy.
Commercial Banks
The five commercial banks in Bhutan are:
- Bank of Bhutan
- Bhutan National Bank
- Druk PNB Bank
- T-Bank
- Bhutan Development Bank
Other Financial Organizations
Other financial organizations in Bhutan include:
- Royal Insurance Corporation of Bhutan (RICBL)
- Bhutan Insurance
- National Pension and Provident Fund
The Currency and Monetary Challenges
Peg to the Indian Rupee
Bhutan’s currency, the ngultrum, is pegged to the Indian rupee. While this has instilled confidence in the ngultrum, it also ties Bhutan to India’s monetary policy.
Challenges
The arrangement has made it difficult for Bhutan to deal with economic imbalances caused by hydroelectric power projects, resulting in an increase in consumption and currency imbalances, primarily driven by imports of concrete, steel, vehicles, and loans. To tackle these imbalances, the RMA sold 20% of its US dollar reserves in late 2011 and imposed import bans on vehicles, construction materials, vehicle loans, and housing loans in early 2012.
History: A Look Back
Establishment of the Central Bank
Bhutan’s formal banking system began to take shape in the 1960s when the Central Bank of Bhutan was established due to the country’s inability to control its monetary system. Bank of Bhutan, initially a joint venture with the Chartered Bank of India, Australia and China, was established in 1968 as the country’s retail banking agent.
Evolution
The RMA took over central bank duties in 1983, leaving Bank of Bhutan to serve as Bhutan’s retail banking agent. In 1988, the government established BDFCL to serve small and medium enterprises and took over the administration of rural financial assistance from the RMA. The BDFCL was later privatized and is now known as Bhutan Development Bank Ltd. (BDB).
Non-Bank Financial Institutions
Overview
With economic modernization, non-bank financial institutions were established to provide additional financial services.
Examples
Examples of non-bank financial institutions in Bhutan include:
- Royal Insurance Corporation of Bhutan (RICBL) - established in 1975
- National Pension and Provident Fund - re-established in 2000
- Unit Trust of Bhutan - channels investment funds into industrial and commercial development projects
Post-2000 Developments
Management Changes
In 2002, the RMA returned the management of Bank of Bhutan to the Government of Bhutan. The bank has since expanded its reach, offering larger loans for capital programs such as irrigation projects.
Upgrades
The Bank of Bhutan’s management system was upgraded to “Flexcube CBS technology” in an effort to boost efficiency, and Internet banking and ATMs were introduced. Similarly, the Bhutan Financial Switch was created, allowing customers of any bank to withdraw funds from any ATM.
The Board of Bank of Bhutan
Composition
The Bank of Bhutan’s board consists of six members, including personnel from the Department of Finance and the Ministry of Information and Communications.
Conclusion
Bhutan’s financial regulatory landscape continues to evolve, aiming to cater to the needs of the country’s population while maintaining financial stability in the face of economic challenges.