Open Banking for Enhanced Finance to SMEs

 

Dr. Hom Nath Gaire

Open banking—which powers the consumers and businesses to access a wide range of financial services in a secured and regulated environment—offers a model that Nepal could adapt to bridge its chronic financing gap and boost entrepreneurship.

Across the globe, micro, small, and medium-sized enterprises (MSMEs) are the backbone of the economy but remain starved of affordable credit. As MSMEs across the globe face a common challenge i.e. access to finance, a new approach to banking has been introduced which could be a game-changer, if implemented effectively. Despite contributing for the majority of employment and enterprise activity, MSME businesses are seen as risky borrowers by commercial banks. Major reasons being a lack of assets for collateral, difficulties in attesting creditworthiness, and high transaction costs of processing small loans, the combine effect of such limitations make lenders reluctant to approach the banks for formal credits.

Nepal is no exception where MSMEs have been contributing the majority of economic activities, formally or informally. According to estimates from the International Finance Corporation (IFC), about 40 percent of small and medium enterprises in developing economies are credit-constrained. If translated that ratio to Nepal’s scale, this suggests tens of thousands of businesses operating below potential (installed) capacity because they cannot secure loans on reasonable terms. Many entrepreneurs in Pokhara, Biratnagar, and Nepalgunj end up relying on personal savings, informal borrowing, or high-interest microfinance loans. This is why, the shut-down ratio of start-ups found to be extremely high in Nepal, in comparison to its peers.  

The consequences are stark: while larger firms can leverage bank loans for expansion, majority of banking assets of Nepali banking system have been concentrated to few conglomerates or groups of them. On the other side, small businesses have always been struggling to obtain bank loans to formalize operations, invest in technology, or scale up the venture. This hampers Nepal’s ambition of building a resilient and inclusive economy whereby becoming middle-income developing country by 2030.

Lessons from Abroad

Globally, the G-20 countries have placed MSME finance at the heart of their economic reform agenda. From the Antalya Action Plan in 2015 to the recent initiatives under India’s presidency 2022-2023, G-20 member states have emphasized innovative solutions, particularly digital public infrastructure for enhancing access to finance for MSMEs. India’s Account Aggregator (AA) network, launched in 2021, is one of the prime examples. It allows individuals and businesses to securely share their financial data—such as bank transactions, tax filings, and cash flow statements—with lenders, but only with consent. Instead of relying solely on physical collateral, lenders can assess an applicant’s creditworthiness through such “information collateral.” This framework is called Open Banking, which is getting popular all over the world in one or another taxonomy.

The results are promising in India. Within two years of its rollout, India recorded nearly two billion accounts enabled for data sharing and over 148 million consent requests. Early evaluations suggest that MSMEs are benefiting from quicker loan approvals, reduced paperwork, and more competitive rates. In some cases, loans are being approved in just a few clicks. Brazil too has experimented remarkable results with open banking, building a consent-driven digital ecosystem that allows small businesses to access financial services more easily.

Why It Matters for Nepal

Nepal’s financial system remains highly traditional. Loan approvals typically require immovable collateral such as land and buildings—an asset most of the micro and small entrepreneurs, especially women and youth, do not possess. Despite government directives, commercial banks remain cautious in extending collateral-free loans. Open banking could shift this equation by creating a secure digital system where businesses can share verified transaction histories, tax data, or even e-commerce sales records, lenders would gain a more accurate picture of risk. This could reduce the premium charged to small borrowers and crack down the much-needed liquidity management issue of Nepali banking system.

For example, with the open banking practice, a small handicraft exporter in Lalitpur who sells through Daraz or any other online platform could use digital transaction records as proof of cash flow or income when applying for a loan. Similarly, a farmer’s cooperative in Chitwan or any corner of the country could leverage data from digital payment platforms to access credit without mortgaging land. List of such examples can be longer, if the monetary authority opened up the open banking window in Nepal. 

The Digital Readiness

Nepal has already made strides in digital finance. The widespread adoption of mobile wallets like eSewa and Khalti, the rollout of National Payment Switch, and growing use of QR-based payments reflect increasing digital comfort. The government’s plans for a National Digital ID and the use of PAN-based tax filing also create potential data layers that could feed into an open banking framework. However, challenges remain. Digital and financial literacy is still limited among MSME owners. An OECD report found that globally only 27 percent of very small business owners demonstrate strong financial literacy. In Nepal, the figure is likely to be lower. Without adequate knowledge, entrepreneurs may hesitate to share data or fail to use new financial products effectively.

Equally critical is the regulatory framework. India’s AA network was possible because of clear directions from the Reserve Bank of India and supporting legislation such as the Digital Personal Data Protection Act. Nepal’s central bank, the Nepal Rastra Bank (NRB), would need to take a similar lead in framing guidelines, ensuring interoperability, and safeguarding data privacy. In this regard, Nepal can opt for a phased approach in building an open banking ecosystem and engage with the neighbors or any other countries to explore standardized templates for cross-border financial data sharing, potentially easing trade finance for Nepali merchants.

Risks and Safeguards

While the potential of open banking is immense, associated risks cannot be ignored. Data privacy breaches, misuse of personal information, and cyber security threats are major concerns. In developing countries like Nepal, weak enforcement of regulations may leave small entrepreneurs vulnerable.

Therefore, Nepal must build robust safeguards: consent managers should not have access to raw data; users must retain the right to revoke consent at any time; and strong oversight mechanisms should be in place. Importantly, participation should remain voluntary, ensuring that entrepreneurs can opt in only if they trust the system.

Means of Transformation

The success of open banking is not just about technology—it is about economic opportunity. In India, it is helping to replace physical collateral with information collateral, enabling millions of small businesses to borrow on fairer terms. For Nepal, where MSMEs account for nearly 80 percent of GDP and over 70 percent of employment, the stakes of open banking are even higher by:

• Lowering the cost of credit for small businesses.
• Encouraging competition among lenders, leading to better services.
• Empowering women, youth, and rural entrepreneurs excluded from traditional finance.
• Reducing dependence on informal lending.

As the G-20 and global financial institutions push for wider adoption of open banking, Nepal stands at a crossroads. With the right policies, investment in digital infrastructure, and public trust, Nepal can set in motion a financial revolution that truly democratizes access to credit. The time for pilot projects and policy reform is now. For a country seeking inclusive growth and digital transformation, open banking could be the missing link between aspiration and achievement.

Author is an Economist