Chapter-1

1.1 Background

A bank is an organization, which deals with money transaction. Bank collects the
deposit in the public and channels it to the productive use. It collects deposit and lends
credit to the needed person. According to some economist, the word bank is derived
from the word ‘banco’; ’bancus’; ‘banque’; or ‘banc’ which means a bench. It was
upon the bench in the market place that the early bankers used to display their coins and
transact business.

The word has been in use from the middle age. In connection with the business of
banking as money changing was considered at that time as the most important function
of bank.1 Bank means an organization established for keeping money and valuables
safely, the money being paid out on the customer’s order by means of cheque.

As early as 2000 B.C., some sort of banking had been developed by the
Babylonians .they used their temples as their bank and the priest acted as the financial
agent.2 For the economic progress as well as for the betterment of a country bank is
very important. In the east, it is believed that banking was practiced at the time of
‘Manu’ as it is referred in Manusmriti. There is an opinion that at the time of Chanakya
it was in practice, as banking has been mentioned in ‘Kautilya’s Arthasastra’ which is
the first book on economics.3The Etymology is However ridiculed by Macleod on the
ground that” The Italian money changers as such were never called ”Banchieri” in the
middle ages. There are others, who are of the opinion that the word Bank is derived
from the word German “Back “meaning a joint stock fund, which was Italianized into “
Banco” when the Germans were masters of a great part of Italy4

1
R.P Nainta, banking system, frauds and legal Control, 2005, Deep& Deep Publication PVT.LTD

2
G. Lal & company, banking Law and practice, 1993, Educational Publishers

3
Madhu Sundar Shrestha, fundamentals of banking, 2006, Buddha Academic Publishers & Distribution Pvt.
Ltd.Kathmandu Nepal
4
Professor Rao,Ramchandra , Present day Banking in India,1st Edition,

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1.2 Objectives

The overall objectives of this paper are to understand the legal provisions for the
incorporation of bank & financial institutions.

 To know the Bank & Financial Institution Incorporation.

 To have the knowledge about the legal provision for incorporation of banks &
Financial Institutions.

1.3 Methodology
This paper is a doctrinal research based paper. Only secondary data have been taken for the
fulfillment of the objective of this paper. The literatures concerning to the title are the basis
of data of this paper. It is the attempt made for the concept of incorporation of banks &
financial Institutions.

1.4 Limitations

The paper is prepared for the academic requirement. So, it obviously has time and words
limitations. Therefore, this paper is not an extensive study on the subject. This paper however
covers the basic form definition of bank and incorporation of bank and it focuses much on
the role of bank & its legal provisions of Nepal. Conclusions made on this paper are limited
to the role of incorporations of bank in the development of Nepal.

1.5 Organization of Study

Chapter one includes introduction with background, Objectives, limitation, methodology and
organization of study. Chapter two deals with historical development of bank in Nepal,
importance of band, incorporation of bank and financial institutions, disqualification for
Establishment of Bank or Financial Institution. Chapter III deals with conclusion of the
study.

Chapter -2

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2.1 Historical Development of Bank in Nepal

At the time of king Bikramaditya there was a reconstruction of Kathmandu valley. So to

reconstruct the valley there was an excessive use of money. During 879 A.D person
named Sankhadhar did the money transaction. According to the scripture found, the first
coin used in Nepal called ‘Manank’. During the reign of king Jayasthiti Malla there was a
tribe called ‘Tankadhari’ who were related with the transaction of money. In 1962 B.S.
there was right provided to the KaushiTosakhana by Khadga Nisan Sawal to distribute
salary, pension and loan to the staff. There seems to be some banking transaction during
the time of Prime Minister Ranoddip Singh in 1987 B.S.

a. TejarathAdda and Banking

Some of the banking transaction in Nepal used to be done by government offices

(sarkariadda). Such kinds of government offices were called Tejarath Adda. This office
used to provide credit to the staff of Bahal. It used to provide loan to the people of
Kathmandu by mortgaging their gold n silver jewellery. Due to the need this office was
also established in Terai region.

b. First Banking Act in Nepal

Till 1993 B.S. there wasn’t any full fledge banking system in Nepal. The legal banking
system was started after the establishment of Nepal Bank Limited in 1994 B.S. During
the inauguration of Nepal Bank Limited king Tribhuwan Bir Bikram Shahdev have said
that “due to the absence of bank in Nepal there was the obstacle in the development of a
country, Nepal bank limited would be fruitful for solving those problems”. Due to this it
can be said that before this bank there was not any bank in Nepal. Institutionally Nepal
Bank Limited was the first bank in Nepal. There is a very special importance of The
Nepal bank act 1994 in the history of banking system as well as the legal system.

2.2 Importance of Bank

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 Banks are the never Centre of trade commerce and business in the country. Banking play
very important role in economic development of all the nation of the world. The
importances of Bank are as follow:

 To cultivate habit of saving

 Safety
 Facility in making payments
 Collection of chequesetc
 Securing loan and over draft
 To provide credit Information and letter of credit
 Other services

2.3 Incorporation of Bank or Financial Institutions

Provisions relating to Incorporation of Banks or Financial Institutions, and
Securities Thereof

3. Incorporation of bank or financial institution: (1) A person who is desirous of

incorporating a bank and financial institution to carry on Financial Transactions pursuant
to this Act may do so by getting such bank or financial institution registered as a public
limited company in accordance with the laws in force.

(2) The authority empowered under the laws in force to register a company pursuant to
Sub-section (1) shall register the same subject to Section 4.

4. Approval to be obtained to Incorporate Bank or Financial Institution:

(1) For the purpose of incorporating a bank or financial institution under Section 3,
the concerned person shall, before making an application for the registration of
the bank or financial institution pursuant to the laws in force, make an
application, accompanied by the following documents and the fee prescribed by
the Rastra Bank, to the Rastra Bank for prior approval:

(a) Memorandum of association of the proposed bank or financial institution;

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 (b) Articles of association of the proposed bank or financial institution;
(c) Feasibility study report of the proposed bank or financial institution;
(d) Personal details of the promoters in the form prescribed by the Rastra Bank;
(e) A certified copy of the agreement, if any, entered into between the promoters
prior to the incorporation a bank or financial institution in relation to the
incorporation of the bank or financial institution;
(f) Evidence of tax clearance by the promoters up to the fiscal year immediately
preceding the making of application pursuant to this Section;
(g) Such other particulars and documents as may be prescribed by the Rastra
Bank in relation to the incorporation of a bank or financial institution.

(2) If an application is made for prior approval pursuant to Sub-section (1), the Rastra
Bank shall, if it finds appropriate to grant approval upon the examination of the
submitted documents, grant its approval to incorporate such bank or financial
institution within one hundred twenty days after the making of application, with or
without prescribing any conditions. If there exists a ground for refusing to grant such
approval, information thereof, accompanied by the reason for such refusal, shall be
given to the applicant.

(3) If any foreign bank or financial institution makes an application under Sub-section (1)
for the incorporation, under this Act ,of a bank or financial institution in joint
investment with a corporate body incorporated in the State of Nepal or with a citizen,
or as a subsidiary company subscribing cent per cent shares of the foreign bank or
financial institution, the Rastra Bank shall grant approval for the incorporation of
such bank or financial institution pursuant to Subsection

5. Power to refuse to grant approval: (1) The Rastra Bank may refuse to grant prior
approval for the incorporation of a bank or financial institution in any of the
following circumstances:

(a) If the name of the proposed bank or financial institution is identical with the name of
any bank or financial institution which has already been registered and is still in
existence;
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(b) If the name of the proposed bank or financial institution or the financial transactions
to be carried on by it appears to be improper or undesirable in view of public interest,
decency, etiquette, religion, nationalities or communities;

(c) If the objectives of the proposed bank or financial institution are contrary to the laws
in force;

(d) If the incorporation of the bank or financial institution seems to be technically

inappropriate;

(e) If a study of the feasibility study report, particulars and documents and information
on other infrastructures submitted by the proposed bank or financial institution does
not provide a ground to believe that it can carry on financial transactions in a healthy
and competitive manner;

(f) If application for the registration of the memorandum of association and articles of
association has not been made in the names of all promoter members of the proposed
bank or financial institution;

(g) If all promoters of the proposed bank or financial bank or financial institution have
not signed the memorandum of association and articles of association, also setting out
their names and addresses, in the presence of any one witness, and the name and
address of the witness has not been set out;.

(h) If every promoter of the proposed bank or financial institution has not agreed to
subscribe at least one share of that bank or financial institution;

(i) If every promoter of the proposed bank or financial institution has not clearly
specified the number of shares to be subscribed by him or her while affixing his or
her signature on the memorandum of association;

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 (j) If the fees required to be paid and the documents to be submitted pursuant to Section
4 have not been paid or submitted;

(k) If any condition prescribed by the Rastra Bank is not fulfilled.

(2) If the Rastra Bank refuses to register the memorandum of association and if the Rastra
Bank refuses to register the memorandum of association and articles of association of the
proposed bank or financial institution in any of the circumstances referred to in Sub-
section (1), it shall give a notice thereof to the applicant.

2.4 Disqualification for Establishment of Bank or Financial Institution

All the purposed bank or financial institutions are not qualification to conduct financial
transaction due to varies reason. So NRB as well as company registar office has
authority to reject the incorporation of bank and financial institution according to
BAFIA 2063 and the company Act 2063 respectively. The bases for rejection are
mention in sec 5 and 32 of BAFIA 2063 and the sec 6 of the company Act 2063.

The bases rejections are as follow:5

- If the name of a proposed bank or financial institution identical with the already
established one

5
BAFIA 2063 sec. 5 And policy and procedural arrangement for incorporation of bank or financial institution
2063 para 6.4.1

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- If the name of the financial transaction of the proposed bank or financial institution
are against the public interest , common morality , religious or in appropriated by any
other reasons,

- If the objective of a proposed bank or financial institution is against the law in force

- If it is technically inappropriate to incorporation.

- If there is no point of believe that the financial transaction will be fair and
competitive on the basis of feasibility report and other document

- If application is not received from all promoter and authorized person for the
registration of MOA and AOA of the proposed bank or financial institution

- In case of lacking the name and signature of all promoters and witness in MOA and
AOA along with their address of proposed bank or financial institution.

- If all promoter have not agreed to subscribe minimum one share of proposed bank or
financial institution.

- If the number of the shares, which promoters have agreed to subscribe is not
mentioned in the MOA.

- In case of not submission of fees and documents by secti0on 4 (1) BAFIA 2063.
- If any condition prescribed by NRB is not fulfilled.

Even through proposed bank or financial institution get incorporation certification, it can’t
conduct banking business. So, incorporation of banking institution is not sufficient it should
get license. Until and unless it gets from NRB for financial transaction, incorporation
certificate dos not get value. Therefore NRB has authority to restrict to conduct financial
transaction on different ground. These grounds as follow:

a. In case it is not appropriate in the light of the existing condition and prospects of the
banking or financial sector to grant a license to a new bank or financial institution to
conduct financial traction.

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b. In case it is not appropriate for the protection the interest of the depositors transaction.

c. In case of particular or requirement mentioned 6

6
Sec 29 and 30 of BAFIA

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 Chapter-3

3.1 Conclusion

Bank and financial institution are the one of the basis for economic development in world.
Bank and financial institution as understood in a present day. World in a simple language in
an institution which deals with money. A bank and financial institution are those institutions
whose debts are widely accepted in settlement of other people’s debts to each other banks. A
bank and financial institution is an organization, the major function of which is to deals in
money credit. Their main business is to pool the scattered in the public and there productive
use Therefore banking and financial institution known as dealer of money by performing
variety of function so meaning of bank has been change according with time .As its main
objective is to promote the trust of the general public in the overall banking and financial
system of the country and protect and promote the rights and interests of depositors, provide
quality and reliable banking and financial intermediary services to the general public through
healthy competition among banks and financial institutions, minimize risks relating to the
banking and financial sector, boost and consolidate the economy of the State of Nepal by
liberalizing the banking and financial sectors and make necessary legal provisions relating to
the establishment, operation ,management and regulation of banks and financial institutions.

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BIBLIOGRAPHY

1 BAFIA 2063 (2006

2 Dahal, Bhuvan, A hand book of banking, Kathmandu , Asmita book and stationary 2002.
3 Garner Bryan, ‘Black’s law dictionary’ 7th edition
4 Jain M.L, Banking law and practice, G lal and company
5 Kalika, SatyaNaryan, Business law, Buddha academic publisher and distributors pvt ltd,
Kathmandu, 2008
6 NRB 2058 (2001)
7 Neupane, Avtar, Banking kanoon ma sarwacha adalat ko bhunika, Kathmandu mega
offset press 2060 .
8 Oxford Advance learner’s Dictionary .
9 Policy and procedure arrangement for the incorporation of bank or financial institution
2063 (2002)
10 Regmi, Resham Raj, Banking law of Nepal, Lumbini pustak Bhandar
11 Rross Cranston , Principle of banking law , London university press
12 Regmi, Yogendra, Eagle eye research institution, modern book system
13 Singh HridayBir , Banking and institution, Asian publication, Kathmandu, 2009
14 Shrestha MadhuSunde, Fundemental in banking, Buddha Academic publisher and
distribution pvt ltd, Kathmandu, 2006

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