With the promulgation of the 2015 Constitution, Nepal became a federal republic. Though it has been seven years since then, the provinces have not been able to fully implement their rights and privileges. Nevertheless, a few institutions have come under their authority. The Province Public Service Commission has started working. In order to manage relations of central units, the Inter-Provincial Council, National Concern and Coordination Committee and Provincial Coordination Committee have been established to safeguard the essence of federalism. The federal government has already handed some of the projects to the provinces while some are in the pipeline.

Lumbini province is mulling to establish its own provincial bank which will be named Lumbini Provincial Bank. If this bank becomes a reality, it will become the first province to exercise its financial rights as allowed by the constitution. Article 59 under the heading "Use of fiscal power" states in clause 1, "The federal, provincial and the local entities shall enact law, make annual budget, make necessary decisions, formulate policies and planning, and implement them in regard to the subjects related to the fiscal power mentioned in their respective list of powers."

Clause 4 states, "The federation, province and the local level entity shall have to make arrangements for equitable distribution of the benefits from the development of natural resources. A certain portion of such benefit, royalty, services or objects, shall have to be distributed in areas affected by projects and to the local communities as provided for by law." Clause 5 states, "When the federal, provincial and local level entity utilise natural resources, they shall have to give priority to local communities to make certain percentage of investment if they wish to do that in view of the nature and percentage in the investment."

Pilot project

Following a lot of study, research and discussions made with the stakeholders, it was established that banks and financial institutions are beyond the reach of deprived people. Even government banks have not been able to fulfil the expectations of deprived people as they are found to be straying from their goals. It is apparent that the establishment of a bank involves a lot of challenges. A pilot project of Lumbini Province Bank started in 2021. All the findings support its establishment as it can contribute to the development of economic activities in the province. It has been proposed that the starting capital of the bank will be Rs5 billion, and 51 percent of the shares will be held by the province and the remaining 49 percent will be issued in an initial public offering.

The bank will primarily focus on the development of physical infrastructures, food security, sustainable development and loan disbursement at the local level with due focus on small and medium-sized enterprises. All the government-related budgets and social security payments can be disbursed from the bank.

The concept of provincial or regional banks has been flourishing in India and China. In China, state-owned and joint stock banks still have an upper hand over other banks. China has well positioned itself in The Asian Banker Strongest Banks in 2021. The results can be credited to the strong performance of provincial banks as they took half of the share of the top 10 strongest banks in China. In India, there are 57 Regional Rural Banks operating in various rural areas of the country. They have been established for the sake of providing rural people with banking information and facilities.

In Nepal, the poor have no access to banks and financial institutions. Hence, it is believed that provincial banks can reach out to that population to accelerate financial access for poverty alleviation which will eventually lead to economic transformation and revival of the provinces. For this to happen, special emphasis will be given to import substitution to promote exports in order to cut the trade deficit by making the province self-sufficient in food products by promoting agriculture-based enterprises. If the province bank comes into operation, it can bring a lot of opportunities as it can spread its wings to the local level to provide financial knowledge and opportunities and people will be prevented from falling into the trap of loan sharks.

Nevertheless, challenges loom large. Being a new scheme in the country, it is not yet sure what category the bank is likely to fall into. Will it get a totally new dimension as it has to adhere to the policies set by Nepal Rastra Bank or can it be operated without the central bank's approval? Its actions would be contradictory to its current policies if Nepal Rastra Bank provides a licence to open a new bank while it focuses on cutting down the number of banks by asking them to go for acquisition or merger. Also, with a plethora of banks already operating, cutthroat competition can be a setback for such a newcomer.

Strengthen federalism

It is hard to believe that a provincial bank will be free from political interference. Being a provincial bank, political parties can misuse their influence by forcing it to recruit incompetent staff, as some government banks are already finding out.

With the announcement of election dates, it is likely that the bank’s pilot study will yield no results. If the government formed after the election shows reluctance to establish such a bank, the investment made in its feasibility study will go in vain. Also, the final verdict remains in the hands of Nepal Rastra Bank, as it is the one who will grant a letter of intent only if it sees that the establishment of the bank is appropriate.

Nonetheless, if the provincial bank starts operations and fulfils its mission to obtain the desired result, it will strengthen federalism in terms of financial and monetary practices. It is likely to benefit people at the grass-roots level as it will focus on service more than profit. It could become a trendsetter of federalism. Though there are lots of challenges, it is also equipped with a few positive aspects. Therefore, the benefit of the doubt must be given to its establishment.