Views of a Nepali Economist

Nepal’s financial industry needs to learn its lessons

By: Mukesh Khanal

Nepali financial market took a tumble between late 2009 until late 2011. Nepal Rastra Bank (NRB) urged some banks and financial institutions (BFIs) to merge. Some were allowed to go bankrupt, while some were rescued by the NRB. Despite these setbacks, however, banks and finance cooperatives have mushroomed continuously. Are these mushrooming BFIs adding any value to Nepal’s financial market and growth? Is Nepali financial market making any contributions to economic growth? If yes, how much is that contribution, and how can it be measured?

BFIs pay interest to depositors, and that interest is considered the “cost” that they incur. BFIs lend money to people and businesses, and interest charged on these is considered their “earnings”. The difference between earnings and cost is considered their “profit”, and this profit is considered to be their contribution to national economic growth. This consideration is disingenuous for a couple of reasons.

First, difference between earnings and cost is the value they have added to our money deposited with them. It is not their profit because some portion of this value addition is yet to be spent as “costs”. Some of this value addition is spent to pay for various evaluations and monitoring costs that BFIs incur while assessing, evaluating, re-evaluating and monitoring their high-risk loans. These costs are not paid by borrowers of loans, but by the BFIs themselves. So, BFIs end up spending a portion of their value addition on paying such costs. Therefore, the number that NRB and BFIs report as contribution of the financial industry to our economic growth is wrong. The actual contribution is much less.

This misleading figure is the reason why we suffer through liquidity crises, every now and then. In our recent liquidity crisis, the level of profit and savings that BFIs showed to their shareholders was distorted due to the above mentioned fudging of facts. They actually did not earn the amount of profit that they claimed to have earned.

Second, interest rates charged on mortgages issued by BFIs have been significantly higher than interests guaranteed on government issued long term bonds and treasury bills. Money for providing mortgages comes from money deposited by the accountholders. Since mortgages fetch high interests, BFIs tend to give higher returns to their depositors as well to lure depositors into depositing more money into their bank accounts. Therefore, entire financial system rests on the shoulders of depositors and how confident they are with their respective BFIs. A slight reduction in their confidence can mean a huge reduction in available funds for BFIs. Thus, our entire financial cycle has a very high risk associated with it. Rising instances of default—either by depositors or by mortgage holders—takes our entire financial market on a decline.

Many studies have disputed this general notion that risk-taking behavior of BFIs is a “productive activity”.  In 2011, Andrew Haldane and Vasileios Madouros analyzed the worldwide financial crisis of 2008, and discovered that investing capital in a risky asset did not contribute to productivity. This suggests that Nepali investors who purchase bonds from a company, or Nepali consumers who borrow from a bank to buy houses, are taking financial risks but contributing “zero” to economic activity. The reason for this being that nothing new is created from these transactions in our economy. There is simply a reallocation of available finances from one party to the other. Hence, loan portfolios have negligent contribution—if there is one—in growing our economy.

Another chronic problem with Nepali financial system is that consequence of risks is not borne by parties that take those risks but by others in the society. BFIs utilize our money in issuing risky loans with much higher returns than the interest they pay us for our deposits. If these risky loans get repaid, they make tons of money. CEOs and shareholders of those BFIs get rich. If these risky loans are not repaid, they go bankrupt. We lose most of our money that we deposited with them. CEOs and shareholders of those BFIs do not have to pay us the money that was ours but which they lost through their risky behavior. Where’s the balance in rewards versus punishment in our BFIs?

Nepali financial system is structured in a way where CEOs get away with their risky behavior without being held accountable for their actions. If BFIs go bankrupt, CEOs know NRB will rescue them i.e. the public will rescue them. If they earn ridiculous profits, CEOs know the profit will be solely their shareholders’. So CEOs do not have to pay for their risky behavior, and so they take more risks. Nepali financial system has created this “moral hazard” situation where society has been paying the price for the follies of BFIs.

These criticisms do not mean that our financial system is utterly useless and a zero contributor. Researches around the world have shown that world’s financial industries do provide some services, and hence they provide positive value additions. However, he also discovered that these value additions have been overstated. Contribution of any country’s financial industry—including Nepal’s—to its economic growth has always been overstated. Rapid growth in contribution to Nepali GDP by our financial sector in the last few years is a mirage.

Exceptionally high returns that Nepali financial industry experienced before the recent liquidity crisis was not a result of increasing productivity of our financial sector but a result of illusion of growth shown by high-risk lending and borrowing. If current trend of high risk-taking in Nepali financial sector continues, soon there will be another liquidity crisis worse than the one that lasted from 2009 until 2012. The reason Nepali financial market has not yet recovered fully from that crisis is because the risk-taking behavior continues even today.

Political leaders who led and participated in the democratic movement of 2046 BS are still referred to as “freedom fighters” in our daily parlance. There was one who had been jailed by the Panchayat government. His best friend, a fellow freedom fighter, would frequently visit his family during that period like any good friend would. When the one in jail went home after being released, his wife ran away with the best friend. The two best friends went on to become ministers in the post-Panchayat pro-democratic government at the same time. In any function one attended, the other would be absent in order to avoid any confrontation. This continued until one died recently.

In another incident, another freedom fighter was caught jumping out of a prostitute’s window not very long ago. There were a few who, when denied a ministership by their respective political parties, ran as independents and lost. These incidents and examples illustrate a lack of ethics, character and morality in our political leadership. This lack of ethics, character and morality then seeped into our bureaucracy and the larger civil society.

I know a few civil servants who are the best fathers, husbands, sons and uncles for their children, wives, parents and nieces. One of them was an officer who extracted money from Sita Rai in the now-infamous airport immigration extortion and rape case. That civil servant is still in hiding. What makes these best fathers, husbands, sons and uncles leave the confines of their own homes and turn into the sleaziest of civil servants and the vilest of human beings? I believe that this is replication, in civil service, of our Hindu tradition of sweeping and mopping our own homes clean every morning while throwing our filth and garbage right outside our boundary walls with complete disregard of how our actions affect others in the society.

How else can we, otherwise, explain our public officials in immigration and customs stealing two lakh rupees from a bruised and battered female worker returning from Saudi Arabia? On top of the extortion, the female worker is, then, handed over to a police officer who proceeds to rape her multiple times. What kind of safety and security should our mothers, sisters, aunts, nieces and grandmothers expect in this country where a police officer—entrusted with the duty to protect and serve—systematically and methodically rapes them?

Our police and army perform excellently while earning dollar salaries as UN peacekeeping forces in Africa. Why can’t these same police and army personnel show same kind of dedication and duty while serving in Nepal? Why can’t they fulfill their duties of “serve and protect” without unzipping their pants to rape a Maina Sunuwar or a Sita Rai? In addition to committing gender based violence crimes by themselves, our security forces are responsible in aiding and abetting such crimes, too. Human rights organizations have reported that—in most of Terai region—police officers have been mediating cases of gender based violence instead of registering the cases and bringing the perpetrators to justice. Police officers have been found conducting negotiations between victim’s family, perpetrators and local political actors.

Amidst all these, our national government remains not only a meek observer but actually contributes to the impunity. Murderers of journalist Dekendra Thapa have taken responsibility for their crime and have asked to be punished to the maximum extent allowable by the law. So, why is then the prime minister of the country asking the investigation officers to drop the case against the murderers who have confessed to their crimes and seek punishment?

The government has filed very few charges against the rapists, and has doled out even fewer punishments. Instead, immediately after a rape case becomes public news, the government announces monetary compensations to victims. Why is the government paying compensation to rape victims? A monetary compensation is not the first thing that victims of rape have in their minds when they ask their government to hear their case. The perpetrator of rape should be brought to justice and punished according to the law. In the event that the law decides to award compensation, it should come from perpetrators, not from the tax revenue that the government collects from hardworking everyday Nepali like me.

Abraham Lincoln once said that if you want to test a man’s character, you should give him power. Government bureaucrats who stole from, and then handed Sita Rai over to the police officer, lost their character when in a position of power. The police officer, who then raped Sita Rai, did the same. The army officers who raped and killed Maina Sunuwar did the same. Our public officials seem to be unable to keep their characters intact when in a position of power. They seem to be the worst of human beings when in duty and in a position of power.

Violence against Nepali women will continue because of impunity. None or very little consequences for committing crimes fail to deter the criminals from further committing similar crimes. If our government truly feels guilty for the frequency in which Nepali women seem to be raped, announcing an immediate monetary compensation is not the way to show that remorse. It should draft better laws and stronger punishments to prevent such incidents from occurring in the future. However, that has not been the case.

Further rapes and other forms of violence against Nepali women have been reported even after public outrage against recent rape cases. A woman in Banke and one in Bara were burnt alive by family members. A housemaid in Kathmandu has been found dead under mysterious circumstances. A woman was raped in one of the tea estates in Ilam. It seems the Nepali polity, bureaucracy and society has collectively decided to go down the moral drain at the same time. All because there is impunity to any and all crimes in today’s Nepal. Friedrich Nietzsche, the philosopher, once said that fear is the mother of all morality. Until and unless our polity, bureaucracy and society fear the consequence of their heinous actions, they will stay amoral.

(c) Mukesh Khanal

Jhapa’s refugee woes—then and now

Bhutani refugee influx in eastern Nepal made many Jhapalis unhappy two decades ago. Local governments were not ready to accommodate a large influx of people. As a result, public service delivery got stretched to its limits. The incoming group’s different cultural background brought frequent conflicts between locals and refugees. Slowly, the locals and the refugees adjusted to the situation, and the locals even employed refugees as cheap labor in construction and agriculture. However, now that many refugees have started relocating to western countries, many Jhapalis are unhappy, again.

It is not that there were no local conflicts in Jhapa before the refugees arrived. Arrival of Bhutani refugees and their subsequent resettlement in the eastern camps further aggravated many social problems in Jhapa. Youth unemployment was already a significant problem. After their arrival, the refugees provided their labor and services for cheap since they were not legally permitted to work. Local unemployed youths did not view this favorably, and conflict ensued. 

Refugees were also accused of bringing with them an acceptance of a culture of taking in multiple spouses.  Elders in local communities in Jhapa disapproved of this practice among the refugees. However, in the last two decades, the practice has seeped into local culture. As a result, recent generations of locals in communities next to refugee camps have also started taking in multiple wives. That has created conflict between older and younger generations of locals in communities surrounding the refugee camps in Jhapa.

Locals in surrounding communities also mention that, in comparison to the local population, the refugees were knowledgeable about medicinal herbs. They could identify medicinal herbs and plants in the forests around the camps. Since they were not allowed to work legally, refugees took to the forests and collected these herbs, and sold them as a way to earn an income. As a result, locals still accuse refugees of overharvesting local forests of essential herbs which ultimately affects the wellbeing of the forests.

Because their incomes were limited, refugees could not afford fuels and resorted to getting firewood from nearby community forests. As a result, locals still accuse them of destroying local community forests through excessive cattle grazing and cutting trees for firewood. The illegal use of community forests’ resources created a variety of conflicts between the refugee population and the locals. While blaming refugees for deforestation family and friends of a refugee that died in the camp were declined necessary wood for cremation by the locals and community forestry groups in multiple occasions.

Life continued in the refugee camps and in surrounding communities despite, even amidst, various disagreements and conflicts. Slowly the two sides learnt to live with each other. However, the locals who had failed to adapt to changing conditions had hoped that rehabilitation efforts by various agencies, such as the International Organization for Migration, would take care of the refugee nuisance, thus bringing the good old peaceful times back. But, current rehabilitation and resettlement efforts for refugees have not brought desired peace and harmony back in the local communities. Instead, resettlement efforts have brought new sets of problems.

There has been an increase in intra-camp conflicts between refugees who want to leave and those who don’t. Those who wish to leave cannot be faulted for their choice because they have remained stateless for over two decades now with no hopes of getting citizenship rights in Nepal. For the sake of their own future and of their children’s, resettlement to America, Canada or Australia is an enticing offer as it opens an opportunity of citizenship and larger rights instead of becoming stateless citizen for who knows how many more years. Also, many have accepted the reality that it seems highly unlikely Bhutan will ever accept them back.

However, a group of refugees who choose to stay behind in the camps abhor these asylum seekers. Those who have decided to stay behind claim doing so in order to keep fighting for their principles and rights. They believe that seeking asylum in the west represents a win for the brutal Bhutani monarchy and a defeat for those who champion democratic ideals. Resettlement has polarized the camp population into factions, increasing intra-camp conflicts. Many have been hurt, a few even killed, during demonstrations and subsequent altercations between the two groups.

Those that have successfully resettled in the western countries frequently send remittance money to their friends and family left behind in the camps in Jhapa.  While remittance money helps refugees in the camps to afford essentials and luxury goods which were beyond their means earlier, it has also fueled an increase in drug use among camp members according to the locals in the surrounding communities. As a result, locals accuse those left behind in camps as being “criminal” types who are going to affect and spoil the current and next generation of locals. Such accusations have further increased conflicts between refugees and locals.

There are also economic impacts due to resettlement efforts. Local entrepreneurs who had bought land and built shops by spending exorbitant amounts near camp sites have suffered huge losses after resettlement efforts. Land and rent prices have fallen sharply in the surrounding areas. Local youths who went for employment overseas because they could not compete with cheap refugee laborers aren’t coming back to work locally. So, local businesses now face difficulty finding sufficient labor. And, so, the local communities in Jhapa, surrounding the refugee camp sites, are back to being unhappy, again.