Nepal and Papua New Guinea: Two Banking Systems, Two Regulatory Philosophies

A comparison between Nepal and Papua New Guinea (PNG) reveals two fundamentally different approaches to banking regulation, pricing freedom, and market discipline. While Nepal’s banking sector is often regarded as mature in terms of institutional depth and regulatory coverage, its heavy reliance on strict controls has increasingly constrained market-driven decision-making. PNG, by contrast, follows a more liberal regulatory philosophy, allowing banks to operate with greater autonomy while placing responsibility for risk squarely on management and shareholders.

Nepal’s banking system has expanded rapidly over the past two decades, with a large number of banks operating under detailed prudential rules. Interest rates, spreads, service charges, liquidity ratios, and even sectoral lending priorities are tightly guided by Nepal Rastra Bank. These controls were introduced to ensure stability in an emerging financial system, but critics argue that they now limit competition, innovation, and risk-based decision-making.

In PNG, the regulatory environment is notably different. The Bank of Papua New Guinea adopts a market-oriented stance, intervening minimally in pricing decisions. There are no caps on interest rates, no mandated spread limits, and no compulsory lending quotas for specific sectors. Banks are free to price loans and services based on their assessment of risk, cost of funds, and business strategy.

This difference is most visible in how interest rates are determined. Nepal follows a regulated framework where banks must lend at a rate derived from a base rate plus a limited premium. In PNG, pricing is entirely risk-based. Banks can charge higher interest rates for unsecured or high-risk borrowers—sometimes exceeding 30 percent—while offering significantly lower rates to well-structured corporate projects. The regulator does not interfere as long as banks manage risk prudently.

The absence of price controls in PNG has strengthened negotiation between banks and borrowers. Interest rates are determined through dialogue, allowing customers to choose between faster service at a higher cost or cheaper loans with longer processing times. This market-driven mechanism encourages competition not only on price, but also on efficiency and service quality—an aspect that is largely muted in Nepal’s regulated pricing environment.

Another striking difference lies in syndicated lending practices. In Nepal, multiple banks financing a single project are required to apply uniform interest rates and terms. PNG allows participating banks in a syndication to charge different rates depending on their cost structures and risk appetite. Borrowers accept this variation as a rational outcome of market forces, reflecting each lender’s role and capacity.

Governance structures also diverge sharply. In PNG, bank boards are largely independent, with directors recruited professionally through open competition and approved by the central bank. Major shareholders are not automatically entitled to board leadership positions. Board members receive substantial professional remuneration, reinforcing accountability and insulating decision-making from borrower influence. This contrasts with Nepal, where ownership and board membership often overlap, increasing the risk of conflicts of interest.

The impact of regulation is also evident in liquidity management. Nepal currently faces excess lendable funds amid weak credit demand, yet banks have limited instruments to park surplus liquidity profitably. In PNG, banks can place excess funds with the central bank overnight or for short terms at market-linked interest rates. This flexible liquidity absorption mechanism helps stabilize interest rates and preserve bank profitability without distorting lending behavior.

Directed lending policies further highlight regulatory contrasts. Nepal mandates minimum lending to sectors such as agriculture, hydropower, and small enterprises, regardless of individual bank expertise. PNG instead uses incentive-based models. When the government wants to promote small and medium enterprises, it provides low-cost funds to banks with conditions on end-borrower pricing, while allowing banks to assess credit risk independently. This approach aligns policy goals with commercial discipline.

The consequences of over-regulation are becoming more visible in Nepal as non-performing loans rise. While directed lending has supported infrastructure development, weaknesses in cash-flow monitoring and fund utilization have contributed to stress. PNG addresses this through strict escrow mechanisms, ensuring loan proceeds are used only for approved purposes. Such controls focus on fund discipline rather than price restrictions.

Technological progress presents a more balanced picture. Nepal has outpaced PNG in digital payments, mobile banking, and QR-based transactions. However, experts argue that Nepal must now transition toward data-driven and artificial intelligence–based banking systems. In PNG, limited competition slowed digital innovation, whereas Nepal’s competitive retail payments ecosystem has significantly reduced transaction costs.

Despite current economic headwinds, analysts caution against pessimism. Excess liquidity in Nepal reflects weak investment sentiment rather than systemic failure. Political uncertainty and cautious corporate behavior have dampened credit demand, while remittance inflows continue to boost deposits. As interest rates reach historic lows, conditions are gradually aligning for a recovery in productive lending.

Looking ahead, banking experts suggest Nepal can draw valuable lessons from PNG without abandoning prudence. Greater reliance on risk-based pricing, professional board governance, flexible liquidity tools, and incentive-driven sector promotion could enhance efficiency while preserving stability. Over-regulation, they warn, risks turning banks into compliance-driven institutions rather than dynamic financial intermediaries.

Ultimately, the contrast between Nepal and PNG underscores a broader policy debate: whether financial stability is best achieved through prescriptive controls or through market discipline supported by strong governance. As Nepal’s banking sector matures, the challenge will be to recalibrate regulation—loosening where markets can function and tightening where risks truly lie.