Separate regulator to established for Nepal’s non-bank financial institutions under new financial sector strategy

KATHMANDU: The Government of Nepal has moved to create a dedicated specialized regulatory authority to oversee major non-bank financial institutions (NBFIs) including the Employees Provident Fund (EPF), Citizen Investment Trust (CIT), and Social Security Fund (SSF), marking a structural reform in the country’s financial governance architecture.

The provision is embedded in the Five-Year Financial Sector Development Strategy (FY 2025/26–2029/30), approved by the Cabinet on January 12, 2026 (Poush 28, 2082 BS).

The strategy outlines an institutional roadmap to separate the regulation, supervision, and risk oversight of large state-linked savings and social security funds from the existing fragmented oversight model.

The reform is positioned as a step toward strengthening financial stability, governance standards, long-term capital mobilization, and inclusive economic growth in Nepal’s evolving financial system.

Regulatory Gap Identified

Although Nepal Rastra Bank (NRB) regulates banks and financial institutions, major social security and provident funds have remained outside a unified prudential supervision framework.

These entities operate under the Ministry of Finance’s jurisdiction, but growing fund sizes, expanding investment portfolios, and rising long-term liabilities have exposed institutional weaknesses in risk management, compliance monitoring, and fiduciary oversight.

EPF, CIT, and SSF collectively manage savings, retirement benefits, and social security contributions of millions of public, private, and self-employed workers, accumulating large pools of long-term domestic capital.

These funds play a key role in infrastructure financing, capital market participation, government securities investment, and long-term asset allocation, yet lack a consolidated regulatory perimeter comparable to banking supervision.

The strategy explicitly proposes an independent regulatory mechanism to govern establishment, operations, investment norms, governance conduct, disclosure standards, and participant protection frameworks of NBFIs.

Social Security System Integration

The reform also targets structural inefficiencies in Nepal’s fragmented social protection ecosystem. Currently, multiple funds run parallel schemes, leading to duplication, higher administrative costs, and service delivery complexity.

The strategy calls for a contribution-based integrated social security system, supported by legal reforms and a unified digital platform.

Feasibility studies will assess system integration, while legal amendments are planned to support contribution-linked social protection mechanisms.

The government also aims to expand coverage to informal sector workers, self-employed individuals, and migrant Nepali workers abroad, groups historically outside formal pension and protection systems.

To facilitate overseas and informal worker participation, payment gateway systems and digital contribution channels will be simplified and expanded, aligning with Nepal’s digital economy and fintech adoption goals.

Investment Diversification and Capital Market Impact

A major policy shift involves allowing these funds to diversify investments beyond traditional instruments. The strategy envisions enabling NBFIs to allocate capital into specialized investment funds, private equity structures, housing projects, portfolio management services, and closed-end collective schemes, subject to legal and policy adjustments.

This diversification is expected to deepen Nepal’s capital market, infrastructure financing ecosystem, and housing finance sector, while improving long-term return profiles of retirement and social security savings.

The move aligns with global pension fund investment practices emphasizing portfolio diversification and alternative asset exposure.

Governance, Transparency, and Risk Framework

The strategy prioritizes institutional governance reform. It mandates development of comprehensive risk management systems covering financial, operational, market, and social security liabilities.

Internal control mechanisms will be strengthened, and funds will be required to disclose financial conditions, investment exposures, and administrative costs regularly.

Participant protection measures will include conduct standards, clear benefit claim procedures, transparent contract risk disclosures, and formal grievance redress mechanisms — a shift toward a consumer protection–oriented regulatory model.

Legal and Digital Reforms

Existing acts governing EPF, CIT, and SSF will be amended to clarify mandates, eliminate overlapping programs, and align with the new supervisory framework. The government also plans to deliver integrated services through a single digital portal, combining pension, insurance, and loan-related services.

Financial literacy and awareness programs will accompany the reforms, emphasizing the importance of social security participation, long-term savings discipline, and citizen responsibility in contributory systems.

The creation of a dedicated NBFI regulator signals Nepal’s transition toward a more sophisticated financial sector governance model, reflecting rising asset volumes, systemic importance of social security funds, and the need for stronger prudential architecture to support sustainable economic development, capital market growth, and long-term fiscal stability.