FINANCIAL INSTITUTIONS
Financial institutions are organizations that deal with money. They collect small savings from many people and provide loans to individuals, businesses, farmers, and industries. In this way, they act as a bridge between people who have extra money (savers) and people who need money (borrowers). Because of this role, they are very important for the economic development of a country.
Main functions
1.Accept deposits from the public
2.Provide loans and advances
3.Mobilize scattered savings
4.Help in economic growth and development
TYPES OF FINANCIAL INSTITUTIONS IN NEPAL
1.Banks
These are the most important financial institutions. They accept deposits and provide loans.
2.Insurance Companies
They provide financial protection against risk like death, accident, fire, theft, etc.
3.Employee Provident Fund (EPF)
A compulsory saving scheme mainly for employees, useful after retirement.
4.Citizen Investment Trust (CIT)
An organization that encourages people to save and invest for the future.
5.Financial Cooperatives
Small financial organizations formed by members to save and borrow money.
BANK
A bank is a financial institution that accepts money from the public as deposits and gives loans to people and businesses. It earns profit from the interest charged on loans.
First modern bank of Nepal → Nepal Bank Limited (1994 B.S.)
IMPORTANCE OF BANKS
1.Capital formation
Banks collect small savings from many people and turn them into large capital for investment.
2.Provide loans
They give loans to industries, traders, farmers, and entrepreneurs.
3.Encourage saving habit
People deposit money in banks to earn interest.
4.Easy transfer of money
Banks help transfer money through cheque, draft, online banking, remittance, etc.
5.Help the government
Banks collect taxes, manage government funds, and provide financial information.
6.Support foreign trade
Banks provide foreign currency exchange and facilities like Letter of Credit.
TYPES OF BANKS IN NEPAL
Class A Commercial Banks
They provide full banking services like deposits, loans, ATM, online banking.
Class B Development Banks
They provide medium and long-term loans for development activities.
Class C Finance Companies
They provide hire purchase, leasing, and small business loans.
Class D Microfinance Institutions
They give small loans to poor and rural people to reduce poverty.
NEPAL RASTRA BANK (CENTRAL BANK)
Nepal Rastra Bank was established in 2013 B.S. It is the central bank of Nepal and controls all banks.
Functions
1.Issue notes and coins
2.Control and supervise banks
3.Act as banker to the government
4.Lender of last resort (helps banks in crisis)
5.Control credit and inflation in the country
3. Types of Banks in Nepal (Nepal Rastra Bank Classification)
| Class | Type of Bank | Main Work | Minimum Paid-up Capital |
|---|---|---|---|
| A | Commercial Bank | Normal banking for everyone (deposits + loans) | Rs 2 billion |
| B | Development Bank | Medium & long-term loans for development | Rs 640 million |
| C | Finance Company | Hire-purchase, leasing, small loans | Rs 200 million |
| D | Microfinance / Financial Cooperatives | Small loans to poor & rural people | Rs 100 million |
Central Bank of Nepal = Nepal Rastra Bank (established 2013 B.S.)
CHEQUE
A cheque is a written order given by a bank account holder to the bank to pay a certain amount to a person.
Parties in cheque
1.Drawer – Person who writes the cheque
2.Drawee – Bank that makes payment
3.Payee – Person who receives the money
TYPES OF CHEQUE
1.Bearer cheque
Anyone holding it can get money. It is risky.
2.Order cheque
Only the named person can receive money.
3.Crossed cheque
Money must be deposited in a bank account. It is the safest.
Types of crossing
1.General crossing – Two parallel lines
2.Special crossing – Bank name and “A/c Payee Only”
REASONS FOR CHEQUE DISHONOUR
1.Insufficient balance
2.Signature mismatch
3.Wrong or expired date
4.Words and figures do not match
5.Stop payment order
INSURANCE
Insurance is a contract in which a person pays a small amount called premium regularly. In return, the insurance company promises to compensate financial loss caused by death, accident, fire, theft, etc.
TYPES OF INSURANCE
Life Insurance
It provides both protection and saving.
1.Endowment policy – Money paid on maturity or death
2.Whole life policy – Money paid only after death
3.Term policy – Protection only, no maturity benefit
4.Children education plan
5.Double accident benefit plan
Non-Life Insurance
It provides protection only, usually for one year.
1.Fire insurance
2.Marine insurance
3.Motor insurance
4.Employer’s liability
5.Aviation insurance
6.Fidelity guarantee
| Point | Life Insurance | Non-Life Insurance |
|---|---|---|
| Duration | Long (10–30 years) | Short (mostly 1 year) |
| Purpose | Saving + protection | Only protection |
| Payment | On death or after maturity | Only if loss happens |
| Premium | Monthly, quarterly, yearly | Mostly yearly in advance |
EMPLOYEE PROVIDENT FUND
It is a compulsory saving scheme for employees.
1.10% salary deducted from employee
2.10% contributed by employer
3.Used after retirement
4.Gets interest and bonus
5.Loan facility available
CITIZEN INVESTMENT TRUST
It is a voluntary saving and investment institution.
1.People save a portion of income
2.Invests in shares, bonds, securities
3.Provides retirement benefits
4.Supports capital market development
FINANCIAL COOPERATIVES
These are small institutions formed by members.
1.Collect savings from members
2.Give loans to members
3.Help poor and middle-class people
4.Popular in villages
5.Based on self-help principle
10 Most Important Exam Points
1 First bank in Nepal – Nepal Bank Ltd. (1994 B.S.)
The first modern bank in Nepal. Introduced formal banking, allowing people to deposit money, take loans, and conduct secure business transactions.
2 Central bank of Nepal – Nepal Rastra Bank (2013 B.S.)
The central bank controls and supervises all other banks, issues currency, manages government funds, controls inflation, and acts as the lender of last resort.
3 Only bank that prints notes – Nepal Rastra Bank
It is the sole authority in Nepal allowed to issue currency notes and coins.
4 Safest cheque – Crossed cheque (A/c Payee)
A cheque that must be deposited into a bank account. Reduces risk of theft or misuse.
5 Least safe cheque – Bearer cheque
A cheque payable to anyone holding it. Risky because it does not require the payee’s name.
6 Life insurance – Saving + protection
Provides financial security to the family in case of death and may also offer maturity benefits if the insured survives the policy period.
7 Non-life insurance – Only protection
Covers financial loss due to accidents, fire, theft, or damage. Does not include savings or maturity benefits.
8 Endowment policy – Money on maturity or death
Pays a lump sum either on the death of the insured during the policy term or on maturity, combining saving and protection.
9 Provident Fund – Compulsory 10% + 10% saving for retirement
Employees contribute 10% of salary, and employers contribute another 10%. Provides interest and bonuses, ensuring financial security after retirement.
10 Main function of financial institutions – Collect savings → Give loans → Develop economy
They mobilize individual savings into productive loans for businesses, trade, industry, and agriculture, contributing to economic growth.
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