Nepal's financial system is on a transformative shift. As digital technologies reshape global financial services, digital lending has emerged as a powerful force that could democratize credit access and fuel economic growth in a country where traditional banking services remain out of reach for many. Digital lending offers a unique opportunity to bridge the gap and promote financial inclusion. It provides a streamlined and convenient alternative to conventional lending processes, enabling individuals and businesses to access essential capital quickly and efficiently. Digital lending’s strength lies in its capacity to swiftly address urgent, small-scale financial needs, enabling people to seize opportunities and improve their economic standing. This shift towards digital finance promises to unlock the economic potential of previously underserved communities and drive broader economic development.

The journey of digital lending in Nepal can be traced back to September 2020 when Nabil Bank partnered with the Foneloan platform. Since then, Foneloan has experienced remarkable growth, accumulating 215,000 registered customers and disbursing a total of Rs 8.15 billion by February 11, 2025. The platform has a low default rate of below 2%, demonstrating the effectiveness of its risk assessment and management systems. Currently, 10 banks are affiliated with Foneloan, offering instant digital lending services to their customers. The platform’s success is built in its streamlined, automated processes that eliminate manual paperwork and time-consuming branch visits. Customers can receive loans within minutes of applying. This has revolutionized the speed and convenience of borrowing.

Financial innovation extends beyond traditional digital lending. The Buy Now, Pay Later (BNPL) concept is also gaining traction in Nepal. Banks are forming partnerships with merchants to offer BNPL services, primarily through credit cards. While credit card penetration remains relatively limited with only 306,000 cards in circulation, strategic partnerships with online marketplaces like Hamrobazaar, which reaches over 100,000 customers daily, are expanding the scope of BNPL services.

Non-Banking Financial Companies (NBFCs) are further complementing this digital transformation. Ten NBFCs, led by Hulas FinServe which commands a 23% market share, collectively handle transaction volume of around Rs 20 billion. These institutions play a vital role in broadening access to financial services, particularly for small and medium-sized enterprises (SMEs) and individuals who may not be adequately served by traditional banks. These parallel developments in digital lending - BNPL and the established presence of NBFCs - are collectively contributing to greater financial inclusion in Nepal.

The digital lending landscape in Nepal has been significantly disrupted and reshaped by the entry of eSewa, the country's leading payment service provider. eSewa's venture into lending has demonstrated the transformative potential of leveraging existing digital platforms and user data to expand access to credit. Within just five months, eSewa has disbursed loans exceeding Rs 250 million to over 2,500 individuals through its "easy loan" feature, in collaboration with Kumari Bank Ltd and Goodwill Finance. This rapid uptake underscores the demand for accessible credit and the effectiveness of eSewa's innovative approach.

The platform’s success is rooted in its sophisticated, data-driven methodology for credit risk assessment. By analyzing a wide range of factors, including transaction volume, frequency of transactions, number of unique customers served, overall customer worthiness and hundreds of other data points, eSewa has developed a comprehensive understanding of its users' financial profiles. This granular insight enables eSewa to make informed lending decisions and effectively manage risk. As a result, the platform has an impressively low default rate of less than 0.5%. This is particularly notable when compared to the banking industry’s non-performing (NPL) level of 4.92% as per the latest monthly statistics published by the Nepal Rastra (NRB). This remarkable performance highlights the power of leveraging data and technology to make informed lending decisions. This underscores the potential of digital lending to responsibly expand financial access and drive economic empowerment in Nepal.

Nepal can draw valuable insights from global experiences. India’s digital lending boom, fueled by initiatives like the Unified Payments Interface (UPI) and supportive regulations, can offer a valuable lesson. The success of platforms like Paytm and Lendingkart highlights the transformative impact of accessible digital credit. Similarly, China’s digital lending ecosystem, dominated by tech giants like Alipay and WeChat Pay, demonstrates the power of leveraging user data for instant, personalized loans. In developed markets like the US and UK, platforms such as LendingClub and Zopa have democratized credit access through innovations like open banking and APIs, while regulatory sandboxes have balanced innovation with consumer protection.

Digital lending holds immense promise for Nepal. It can serve as a catalyst for financial inclusion by bringing millions of unbanked and underbanked citizens into the formal financial system. The disparity between the 57.9 million savings accounts and a mere 1.9 million loan accounts—representing less than 6.5% of the population accessing formal credit—calls for the urgent need to bridge this gap. Digital lending can empower small businesses, farmers and women entrepreneurs, while also spurring economic activity, creating jobs and reducing poverty. Moreover, it can enhance efficiency, transparency and cost-effectiveness, potentially leading to more competitive interest rates. For example, eSewa’s digital lending services offer a streamlined alternative to traditional banking processes, with eSewa claiming to disburse loans in less than 30 seconds. In comparison, traditional banks, which involve lengthy paperwork and delays, take up to a month for loan disbursement. 

To fully harness the potential of digital lending, Nepal must adopt a comprehensive, multi-faceted strategy. While the central bank has taken a step in the right direction by issuing the Digital Lending Guidelines, 2021, stakeholders say there is a need for greater clarity and refinement. Key priorities for the central bank include addressing robust credit risk management frameworks and developing a comprehensive regulatory framework for fintech collaborations. Despite the acknowledged importance of digital lending, several challenges impede its widespread adoption and effectiveness. Loan utilization and repayment discipline present significant concerns, as borrowers often lack seriousness when accessing credit through digital channels. Additionally, assessing the commitment of borrowers beyond their financial capacity remains a critical hurdle in digital lending. Since lending through digital platforms is not backed by collateral, one big challenge lies in recovery. Collaboration between fintech companies, banks and financial Institutions, and credit bureaus is necessary to accelerate the development of effective credit and risk scoring frameworks. Collaborations between the government, banks and fintech companies can drive innovation and scale digital lending initiatives. Nepal also needs to learn from global best practices and adopt successful models from India, China and developed markets to its unique context.

The NRB and government should develop digital scoring systems and link National ID to credit profiles. Integration of digital services with government systems would facilitate restricting blacklisted defaulters from accessing banking services. Additionally, the government should build sophisticated mechanisms for credit monitoring and educating borrowers on the consequences of defaulting.

Digital lending has the potential to transform Nepal's financial landscape by driving economic growth and fostering financial inclusion. Futurist Brett King rightly said that mobile phones are the biggest tool for financial inclusion. With strategic policies, investment, and collaboration, Nepal can become a leader in fintech innovation and unlock opportunities for its unbanked rural population to build a more prosperous and inclusive future.

(Ghimire has over six years of dedicated experience driving growth and innovation within eSewa's digital payment ecosystem.)

(This opinion article was originally published in  March 2025   issue of New Business Age Magazine.)