Bhutan's financial system is a fundamental building block for both the private sector and economic growth.

Thimphu, Bhutan - For Namgya Dolma, the modernization of Bhutan's financial system cannot happen too soon. The Lungta Handicrafts shop manager in Thimphu said the lack of ATMs, credit card authorization systems, and other international financial systems hurts the country's tourism businesses. She has to e-mail credit card information to a bank in neighboring Nepal to get clearance, a process that can take 2 to 3 days. And that is only for Visa cards; she has yet to find a way to get clearance for MasterCards.

"Some of our customers want to buy so many things," she said. "They are piled up on our counter. Then they take out their MasterCard, and we can't process it, and they have to put it all back. We lose those sales."

"It's difficult for us to do business," she said. "We still have a very old-fashioned financial system in Bhutan. We have to run a cash business and our foreign tourist customers don't travel with a lot of cash."

Developing the Competitive Edge

Traditionally, banks in Bhutan have never been very customer-friendly. They have generally served a few large customers and left others by the wayside, according to officials.

An ADB-backed financial services project is helping open up the country to financial services such as credit card use by tourists. But that is only part of the program's much broader mandate.

"Banks and financial institutions never went to the doorstep of the customer," said Eden Dema, chief of the Financial Institution Supervision Division of Bhutan's Royal Monetary Authority (RMA), the equivalent of its central bank. "The customers had to come to the banks. There was always a firewall between the customers and the banks, and there was little the RMA could do about it."

The $13 million ADB-supported Financial Sector Development Program was designed to improve governance, promote a better investment climate, and encourage private sector participation. Among its other achievements, the program helped build the capacity to license new banks.

"We tried everything to break the ice between the banks and customers, but we couldn't succeed because it couldn't be done through regulations," Dema said, noting that the RMA was primarily a regulatory agency. "It required that the banks be proactive. It wasn't a regulatory issue, it was a customer service issue."

The program helped the RMA bring in new players to boost competition in the banking industry.

In 2008, with support from the ADB-backed program, it granted licenses to two new banks and one new insurance company.

"After we gave the approval in principle for these two new banks, we immediately saw changes in the existing banks," Dema said. "They felt the oncoming competition and we saw mobile banking, we saw increased customer services, we saw a menu of new services being offered to attract customers."

"This is just the tip of the iceberg," she said. "Once the new banks start operations, the financial changes we will see in terms of services offered and quality of customer service will be much more than what we are seeing even now."

Loans for Growth

The licensing of new banks is just one part of a far-reaching ADB program to modernize the finance sector. ADB's assistance to the finance sector has included four loans totaling $21 million. ADB helped prepare a finance sector development strategy that was incorporated into Bhutan's Ninth Five-Year Plan and has helped the country develop its capacity to manage project financing and risk appraisal. The RMA has increased its ability to evaluate bank license applications, while ensuring legal compliance and consumer protection.

Although Bhutan has enjoyed a high rate of economic growth, based primarily on exporting power to neighboring India, it remains a country with a small, underdeveloped economy. The government and ADB are working together to boost private sector development, diversify the economy, and create jobs. A key constraint on improving the economy is entrepreneurs' limited access to finance.

"We have seen that some financial institutions have too much of an appetite to offer credit but they do not have the funds to offer credit," said Dema. "We have seen others who have too many funds to offer but no appetite to extend credit. They traditionally only lend to a few clients, not to entrepreneurs and new businesses."

"We have made it very clear to the financial institutions that had too much concentration in a few borrowers that we want to see their lending diversified," she said. "As a result, we have seen a growth in the extending of loans and the use of credit in the country."

While ADB helps build a credit information system that will further enhance the use of credit and lending, Dema said the results of ADB's program are already evident.

"Lending is already increasing," she said. "On average, we have seen a 28% growth year on year over the last 5 years."

"Development of the country's financial sector will improve access to finance, diversify existing financial services, and provide a conducive business climate overall," said Chia-Hsin Hu, an ADB finance sector economist.

"To help this process," she said, "ADB's program will promote a better regulated and organized financial system that will encourage private sector activity and promote economic growth."