Banking in Bhutan, a small country in East Asia, is an industry that has grown slowly as the country has pursued modernization. The country has a vibrant informal culture of finance which only weakly integrates formal financial services.
Since its establishment in 1982, the Royal Monetary Authority of Bhutan, headquartered in Thimphu, has served as the central bank of Bhutan. The authority is responsible for issuing currency, implementing monetary policy, coordinating financial institution activities, and holding the government's foreign exchange earnings. Among its initial duties was the administration of financial assistance for rural development, a duty later delegated to the Bhutan Development Finance Corporation, which was founded in 1988.
Overview
There is no formal system of microfinance in Bhutan. However, informal intermediaries (broadly, moneylenders and "family and friends") provide limited financial services. Households in Bhutan have a vibrant, but informal, culture of savings, lending, and financial management, with formal financial services only weakly integrated. Rural areas, women, and youth are particularly underserved by formal financial services.
As of 2014, Bhutan's financial sector consists of five banks (Bank of Bhutan, Bhutan National Bank, Druk PNB, T-Bank, Bhutan Development Bank) and three other organizations (Royal Insurance Corporation of Bhutan, Bhutan Insurance, National Pension and Provident Fund).
The Royal Monetary Authority is one of the primary regulators of financial institutions and is also responsible for Bhutan's monetary policy.
Bhutan's currency, the ngultrum, is pegged to the Indian rupee. This has created confidence in the ngultrum, but it also effectively makes India's monetary policy Bhutan's monetary policy. It has also made it difficult for Bhutan's monetary authorities to deal with economic imbalances caused by hydroelectric power projects. This in turn allowed consumption to rise and exacerbated the currency imbalances, so that new construction is done primarily in concrete and steel (which must be imported), and which also risks the peg's sustainability. As a result, the Royal Monetary Authority of Bhutan sold 20% of its United States dollar reserves in late 2011 and ban imports of vehicles, imports of construction materials, loans on vehicles, and loans on housing in early 2012.
History
1960s-1980s: Bhutan's Central Bank
Bhutan remained isolated from the world until it had trouble controlling its monetary system, so the Central Bank of Bhutan was established. Bhutan's commercial bank, Bank of Bhutan, was established on 28 May 1968 as a joint venture with the Chartered Bank of India, Australia and China, which owned 25% of the bank. In 1970, this share was transferred to the State Bank of India. The bank was restructured in the year 1971. Government departments were required to deposit all of their accounts with this bank to ensure that it had sufficient funds until 1982, when the Royal Monetary Authority was established. Since then, the Bank of Bhutan has been the retail banking agent for the Royal Monetary Authority.
The Royal Monetary Authority was established in 1983; before then, Bank of Bhutan was the country's central bank.
The Bhutan Development Finance Corporation/Bhutan Development Bank
The government of Bhutan established the Bhutan Development Finance Corporation (BDFCL) on 31 January 1988 with assistance from the Asian Development Bank to serve small and medium-sized enterprises, and it took over the administration of rural financial assistance from the Royal Monetary Authority. International multilateral organizations such as the Asian Development Bank subsidized BDFCL with grants and concessional loans. Loans were granted for improving farmland, obtaining livestock, and meeting short-term seasonal requirements. Some of the funding for the corporation, including an initial US$2.5 million loan in 1988 for the expansion of small- and medium-sized, private-sector industrial development, came from the Asian Development Bank. The corporation had been privatized by 1991.