Legal Reforms
For Financial Sector Development

By Bashu Dev Phulara

THE scope of the legal environment for financial sector development and justice is widening worldwide. Various countries are proceeding quickly with modernising their legal and judicial institutions. Laws governing business firms and financial organisations now regulate the market.

Current Efforts

A workable and clear legal infrastructure is the base for safeguarding acceptable financial sector development for developing countries. In the absence of strong legal framework, the risks linked with financial institution increase. The present Constitution of Nepal has been lauded as one of the most liberal and democratic instruments in the world. A number of new policies and legislations were introduced in different sectors to allow active participation of the private sector. Economic liberalisation has formed the basic development strategy of the government. The expressed intention and commitment of the government is to act as the facilitator, rather than administrator of development.
For the past several years, the government has been engaged in financial sector reforms. The Nepal Rastra Bank is enhancing a more sensitive regulator of monetary institutions. The role of the government as an owner-manager of commercial banks, such as Rastriya Banijya Bank and Nepal Bank Limited, is becoming atypical. As of 2002, Nepal's financial sector has emerged as the focal point of the country's scheme of economic development. In due course, the sector has turned into a key stadium for multidimensional legal reform.

The government and various development partners, such as the Asian Development Bank, the World Bank, the International Monetary Fund and others are working in concert style over that thrust of activities. Civil society groups are also amalgamated into this liberal environment. However, reform practices under the optical glass expose merged sketching of challenges, vulnerabilities and opportunities.

Capable lawmakers and skillful judicial activists certainly raise economic growth by designating new-fashioned mercantile laws. For that reason, the need of legal reforms for corporate sector development have been felt.. The fresh guidance of openness and transparency has thrown open the door for rapid improvement in corporate governance. Right now, the threat is to grab the opportunity and to complete significant gains for corporate governance in Nepal.

As noted elsewhere in policy statement of the Asian Development Bank 2002, corporate governance is being taken into account as a part of legal reform programme. The proceedings of writing and adopting a coherent set of laws to govern business behaviours for financial institutions are well advanced. The laws governing finance and corporate governance were discovered to be dated and contradictory.

Despite several efforts, the present legal environment is far from satisfactory. This is true for corporate activities, arranged by different statutes. The diverse laws controlling the financial sector are in conflict with the company laws. On that account, there is an apparent need to craft the new laws on vital areas of financial regime. Such statutes are key to the successful operation of financial markets.
The aim of legal reforms is to develop laws and institutions to maintain the progress of an effective marketplace. The reform procedure is also associated with other items. Poorly directed reform programmes may not address the major problems faced by the public investors in financial market. Legal reforms should be focused on socio-economic norms.

Strong corporate governance hinges on an effective legal system and without a strong legal system corporate governance device will either perform badly or fail to perform. So, the judiciary has a crucial role in widening the corporate governance. Though Nepalese judiciary has been working pragmatically as regards the civil and political rights of the citizens, it is not giving much emphasis on corporate governance. Although, there are numerous cases approaching before the courts, the cases related to corporate governance are not many.

By the same token, most of the judges and judicial personnel are yet to be equipped with essential information and skills of corporate laws. Judicial personnel along with the private lawyers should be familiar with the world wide corporate movements. Their abilities should be modernised through ongoing legal education and appropriate training. Besides, constitution of National Judicial Academy (NJA), that could provide training to the concerned authorities will be effective. Similarly, all the statutes relating to corporate governance should be designed with universal standard in view.

Moreover, administration of the court system should be reviewed, in terms of corporate governance.
The saying "business is the game of money" is now replaced by another saying "time is money". Furthermore, understandable and competent management should be advanced for the solution of complex commercial issues in the time of ever increasing knowledge-based economy. Alternative Dispute Resolution (ADR) mechanism should be entirely incorporated for the settlement of financial and business disputes. Also required is a distinct commercial bench in the Supreme Court to hear the cases involving commercial affairs. The Judges of specialised commercial bench should be well educated in commercial transactions. In addition, they are required to be more active in the emerging issues pertaining corporate governance.

Legal Premises

Last but not the least; it can be argued that laws and judicial system are certainly the crucial walls for financial sector development. The standing legal framework would remain incomplete if it fails to affirm these elements of good governance. Introducing new laws would not yield any results until and unless the mindsets of government representatives are changed.

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