This study provides a comprehensive analysis of Nepal’s banking sector’s readiness to finance green projects and assesses the effectiveness of existing economic incentives to promote green finance. Nepal, a country with high vulnerability to climate change, is in dire need of investments in sustainable development. The report examines key aspects ranging from the policy and regulatory framework, including the recently adopted Green Finance Taxonomy, to the practical implementation of initiatives by banks and the government.

The key findings indicate that despite the emergence of building blocks for green finance, such as dedicated credit products and green bond issuance, the banking sector faces significant systemic challenges. These include limited capacity to assess and manage the risks of green projects, continued reliance on secured lending, which makes it difficult to finance innovative and low-cost green start-ups, and a significant gap in financing for small and medium-sized enterprises (SMEs) that could be key players in the green economy.

The effectiveness of existing economic incentives, particularly subsidized credit programs, is seriously undermined by the government’s fiscal indiscipline and implementation problems. Tax incentives are fragmented and do not always directly incentivize environmentally meaningful outcomes. Nepal’s inclusion on the FATF “grey list” creates additional obstacles to attracting international green investment.

To stimulate green finance in Nepal, a comprehensive approach is needed, including strengthening the capacity of the banking sector, reforming and increasing transparency of government incentive programs, ensuring coherence in the policy and regulatory environment, and actively leveraging international cooperation to attract capital and expertise. Without coordinated efforts by the government, regulators, the financial sector, and international partners, Nepal will struggle to achieve its sustainable development goals and build a climate-resilient economy.

2. The Green Imperative: Context for Sustainable Finance in Nepal

2.1 Nepal’s Acute Climate Vulnerability and Urgent Need for Eco-Projects

Nepal is among the countries most vulnerable to the impacts of climate change. According to the Global Climate Risk Index, the country ranks 10th in the world in terms of past exposure to climate-related disasters and 44th in terms of vulnerability to future climate risks.¹This high level of vulnerability is due to the country’s unique geography, fragile mountain topography, and heavy reliance on climate-sensitive sectors. Temperature increases in Nepal are projected to outpace the global average, exacerbating existing challenges.¹

Key climate risks for Nepal include increased frequency and intensity of floods, landslides, droughts and heat waves.¹These events have a devastating impact on agriculture, which is the main source of employment for 64% of the population and 75% dependent on monsoon rains.¹Climate change also threatens water resources, the potential for hydropower – a key sector of Nepal’s economy – and the tourism industry, which relies heavily on natural landscapes and stable ecosystems.¹

The problem is exacerbated by rapid urbanization, often spontaneous in nature, which increases the vulnerability of urban settlements, especially informal ones, to climate-related disasters.¹In addition, climate change poses risks to public health by facilitating the spread of vector-borne diseases such as malaria and dengue fever.¹

In this context, green finance is no longer just a matter of environmental protection but a critical factor in ensuring national security, economic stability and sustainable development. The need for urgent investments in climate resilience and climate change mitigation is not an option but a necessity for Nepal. This implies that green finance should be directed primarily to adaptation and resilience projects that bring immediate and tangible benefits to vulnerable communities and critical economic sectors.

2.2. Identifying Eco-Projects: Key Sectors for Green Investment in Nepal

Eco-projects in Nepal cover a wide range of sectors that are critical to the country’s sustainable development. The priority area is renewable energy  Nepal has a huge hydropower potential estimated at 42,000 MW of economically viable capacity.³, while by 2035 it is planned to increase generation to 28,500 MW.⁴Along with hydropower, solar energy is rapidly developing, with a technical potential of 432 GW.⁴, and the Nepal Electricity Authority (NEA) plans to enter into power purchase agreements (PPA) for 800 MW of solar power.⁴

Sustainable tourism is also an important area for green investment. Initiatives include the development of eco-hotels, the promotion of community-based tourism (CBT) and the preservation of cultural and natural heritage.⁵Such projects not only contribute to the economic development of regions, but also minimize the negative impact on the environment.

“Green” construction and energy-efficient housing are becoming increasingly widespread thanks to specialized credit products offered by banks.⁸This direction includes the use of environmentally friendly building materials, the introduction of energy-saving technologies and rainwater collection systems.

Other important sectors for green investment include:

• Waste management and recycling: projects for the creation of systems for collecting, sorting and processing waste, as well as the production of organic fertilizers.¹¹
• Sustainable agriculture: implementation of climate-resilient agricultural practices, organic farming and conservation of agrobiodiversity.
• Electric mobility: encouraging the use of electric vehicles and developing the corresponding charging infrastructure.⁸

Although hydropower has traditionally dominated Nepal’s energy sector³, the growing potential of solar energy⁴and the urgent need for sustainable development of agriculture and tourism¹point to the need to diversify the green investment portfolio. Financial institutions should develop expertise and offer products that focus on a wider range of green projects, including small-scale decentralized solar installations, agroecology projects, and sustainable tourism. Such diversification is key to inclusive green growth.

3. Current Green Finance Ecosystem in Nepal

3.1 Policy and Regulatory Framework: Role of the Central Bank of Nepal (NRB) and Taxonomy of Green Finance

Nepal has laid the foundation for a policy and regulatory framework for green finance, with the key milestone being the adoption of the UNFPA in October 2024. “Taxonomies of Green Finance in Nepal” (Nepal Green Finance Taxonomy).¹⁵Developed in collaboration with the Central Bank of Nepal (NRB), the Ministry of Finance, the Ministry of Forestry and Environment, the Securities Exchange Board of Nepal (SEBON) and the Insurance Authority of Nepal, the document is a standardized classification system for green economic activities to guide investments in sustainable projects.¹⁵

The Central Bank of Nepal (NRB) is playing a leading role in promoting green finance. It has issued a directive mandating banks and financial institutions (BFIs) to integrate climate change considerations into their investment decisions using the taxonomy as a guideline.¹⁶These measures are in line with broader national strategies such as the Environmental Protection Act, the National Climate Change Policy, Nationally Determined Contributions (NDCs) and the Green, Sustainable and Inclusive Development (GRID) approach aimed at achieving carbon neutrality by 2045.¹⁵Nepal prioritizes adaptation funding in its Nationally Determined Contributions.¹⁷

Table 1: Overview of Green Finance Policy and Regulation in Nepal

While the creation of a Green Finance Taxonomy is an important first step, its effectiveness will depend on the robustness of the implementation, monitoring and capacity building mechanisms in the BFIs. NRB Directive on Climate Risk Integration¹⁶important, but without proper enforcement and support it may remain a formality, especially given the existing limitations of the BFU’s potential.¹⁸Therefore, significant investment in training BFU staff in green project assessment methods, climate risk analysis using taxonomy, and sustainable finance principles is of paramount importance. The NRB will also need to develop an effective system for overseeing green lending.

3.2. Existing green finance instruments and initiatives: green bonds, specialized credit products, international support

Specialized green financing instruments are beginning to emerge in Nepal. A landmark event was the release of the country’s first “green” bonds NMB Bank for $60 million, supported by IFC, British International Investment (BII) and MetLife. The funds are intended to finance SMEs implementing sustainable projects, including electric vehicles and solar energy.²¹Nepal Infrastructure Bank (NIFRA) has also received approval to publicly issue green energy bonds worth NPR 5 billion for renewable energy projects.²⁴

Some banks are actively developing specialized “green” credit products. For example, Nabil Bank offers the Nabil Eco-Friendly Business Loan.¹¹and the Nabil Sustainable Savings Account.²⁶Global IME Bank has launched the Global Green Home Loan and Green Drive Scheme to finance electric vehicles.⁸NMB Bank also has an extensive renewable energy financing portfolio and offers the NMB Green Savings Account.¹⁰

International Development Partners (IFC, BII, SDC, ADB, GCF, KOICA, GGGI) play a key role in supporting these initiatives by providing investment, technical assistance and capacity building.²⁷

Despite these innovative steps, the current scale of green bond issuance and dedicated lending is insufficient to meet Nepal’s massive green investment needs, estimated at around $77 billion by 2030 to achieve climate goals.¹⁶Nepal’s Nationally Determined Contribution (NDC) requires $28.4 billion¹⁹, and the overall SDG financing gap is NPR 585 billion ($17.7 billion annually for SDGs)²⁸). Existing initiatives are just a drop in the ocean.

To address this, a strategy for rapidly scaling these instruments is needed. This includes creating a more favourable market environment for green bonds (e.g. standardised frameworks, investor incentives) and encouraging all BFIs to develop and implement green loan portfolios, not just individual market leaders. International partnerships will remain critical both to attract capital and to gain the necessary expertise.

4. Assessing the real readiness of the Nepalese banking sector to finance eco-projects

4.1. Current lending practices: portfolio distribution across green and priority sectors

The Central Bank of Nepal (NRB) sets mandatory lending quotas for priority sectors of the economy. By 2027, commercial banks must allocate at least 10% of their loan portfolio to the energy sector and 15% to lending to micro, small, and medium enterprises (MSMEs).²⁹Currently, about 10% of the total loan portfolio of NPR 5.5 trillion (approximately NPR 500 billion) goes to the broader SME sector.²⁹

Traditionally, energy lending has focused on hydropower.³¹As of January 2020, commercial banks have disbursed loans to the hydropower sector worth NPR 129.77 million.¹⁴However, as per Nepal Electricity Authority (NEA) data as of mid-July 2022, Independent Power Producer (IPP) hydropower plants accounted for 46.60% of generation while IPP solar power plants accounted for only 1.51%.¹⁴This indicates a significant bias towards hydropower, despite the enormous potential of solar energy.⁴Overall lending growth has slowed since the pandemic.³¹

The current priority sector lending guidelines for “energy” may not be detailed enough to specifically encourage investment in a variety of renewable energy sources such as solar power. This could result in continued over-concentration on conventional hydropower. Given that the NRB mandates a 10% allocation to “energy” overall²⁹, and hydropower has historically dominated Nepal’s energy balance and banking portfolios.¹⁴, without specific sub-targets or enhanced incentives for non-hydro renewables, a general “energy” directive is unlikely to significantly shift investment flows towards a diversified “green” energy mix. To align with national diversification goals and exploit the vast potential of other renewables, the NRB may need to refine its priority energy sector lending requirements to include sub-quotas or enhanced incentives for solar, wind and other underrepresented renewables.

4.2. Potential of banks in assessment, risk management and monitoring of “green” projects

A significant challenge is the limited technical capacity of Nepalese BFIs to effectively assess, manage and monitor green projects.¹⁸Banks often lack experience in project finance and rely on collateral and personal guarantees rather than cash flow analysis when lending for projects such as small hydropower plants (SHPs).²⁰There is a lack of understanding of the specific risks and returns associated with different green technologies. International partners such as the Asian Development Bank (ADB) and the International Finance Corporation (IFC) are engaged in capacity-building initiatives.²⁰Green entrepreneurs also point to limited access to green finance, partly due to the lack of capacity in banks.¹²

The lack of specialized expertise in green finance among banks is a major obstacle, even when funds and green credit products are available. This can lead to mispricing of risks, overly conservative lending, or even avoidance of green sectors. Banks are accustomed to traditional lending methods²⁰, whereas “green” projects, especially those involving new technologies or small-scale initiatives, have different risk profiles and require special assessment skills.¹⁸Without the necessary capacity, banks will resort to traditional collateral approaches, which will make it difficult to implement innovative or low-asset green projects.

A concerted national effort, supported by international partners, is needed to intensively train and build the capacity of loan officers, risk managers and credit analysts in green project appraisal, climate risk analysis (in line with the Taxonomy) and sustainable finance principles. This could include “train the trainer” programmes and placing experts directly in banks.

Table 2: Overview of eco-project financing by Nepalese banks (selected examples)

This table provides concrete examples of how some Nepalese banks are starting to engage in green finance. It allows comparison of the types of products offered and the sectors targeted, and demonstrates best practices that can serve as a benchmark for other BFIs. Information on stated impacts, where available, provides insight into the current scale and demand for these green products, which is important for assessing the “real readiness” of the sector.

4.3. Issues identified: collateral requirements, interest rate structure, non-performing loans (NPL), information gaps

SMEs, including green start-ups, face high and variable interest rates, significant collateral requirements and cumbersome loan approval processes.³²Banks tend to perceive SMEs as high-risk borrowers due to information asymmetry and low business survival rates.³²Non-performing loans (NPL) in banking sector rises to 3.9% in FY24³¹, which could make banks even more cautious. For SME loans of less than NPR 10 million, the NPL rate is 4.3%²⁹, which is slightly higher than the sector average in some reports, although other data²⁹indicate that it is lower than the overall NPL level, which suggests some discrepancies or differences in specific groups of borrowers. Information gaps regarding the viability of green projects and market data also pose problems. Banks and financial institutions (BFIs) give preference to larger borrowers.³⁴

The traditional collateral-based lending model is fundamentally inadequate for the needs of many innovative eco-projects, particularly those undertaken by SMEs or in new green technology areas where significant physical collateral may not be available. Banks require collateral³², while many green projects, such as energy efficiency software or sustainable tourism platforms, are asset-light. This creates an immediate mismatch. The rise of NPLs³¹will make banks even more risk-averse and dependent on collateral.

Alternative credit assessment methodologies (e.g. cash flow based lending, use of alternative data for SMEs) and risk mitigation tools (e.g. loan guarantee schemes specifically for green SMEs) are critically needed to bridge this gap. The NRB’s 2% cap on interest rate premium for SME loans up to NPR 20 million and 75% risk weighting²⁹are steps in the right direction, but may require strengthening or better promotion for “green” projects.

4.4. The New Role of Fintech and Digital Lending in the Accessibility of Green Finance

Fintech platforms like Foneloan are active in Nepal, offering digital, collateral-free short-term loans through partner banks using mobile banking apps and machine learning-based credit scoring.³⁵Invoice discounting platforms such as InvoiceD Nepal are also emerging to help SMEs manage cash flow.⁴⁰eSewa and Khalti provide broader digital payment ecosystems.⁴¹The NRB has launched a Digital Finance Innovation Centre (March 2025) and is exploring the possibility of creating a regulatory sandbox and a central bank digital currency (CBDC).⁴⁶

While these platforms are primarily focused on general retail or SME lending, their infrastructure and technology could potentially be adapted or used to provide small green loans or finance green products (e.g. home solar systems, energy-efficient appliances). However, challenges such as underdeveloped digital infrastructure and low levels of financial literacy remain.⁴⁹

Fintech platforms, especially those with established digital credit scoring and lending mechanisms like Foneloan, offer a scalable route to channel micro-green finance to individuals and SMEs, bypassing some of the traditional banking barriers. Foneloan provides instant, collateral-free loans.³⁷Many eco-projects at the household or micro-SME level are small-scale (e.g. solar lanterns, efficient cookstoves, small organic farms). Fintech can reach these segments more effectively than traditional branch lending.

Cooperation between BFU, fintech companies and green technology providers could facilitate the creation of targeted products such as a “green Foneloan. NRB regulatory “sandbox”⁴⁷ could be an ideal environment for piloting such fintech-focused green lending solutions. Addressing digital literacy and infrastructure gaps⁴⁹ will be critical to wider adoption.

5. Economic Incentives for Green Finance in Nepal: A Review of Effectiveness

5.1. Government Subsidized Lending Programs: Impact, Use, and Systemic Problems

The Central Bank of Nepal (NRB) introduced a unified subsidy procedure in 2075 Nepali calendar year (2018/19) for lending to productive sectors for job creation and entrepreneurship development.³⁴Initially, these programs led to an increase in lending volumes and the number of borrowers, with loans to women entrepreneurs becoming particularly popular.³⁴

However, these schemes face significant systemic challenges. One of the main ones is the government’s outstanding debt to banks for these subsidies, amounting to 15 billion Nepali rupees, which has led many financial institutions to stop issuing new loans.⁵¹As a result, the number of beneficiaries and total loan amounts disbursed have declined sharply, from 147,000 beneficiaries receiving NPR 213 billion in FY 2079/80 to 103,000 beneficiaries and NPR 91 billion in the current FY.⁵¹

Other issues include concentration of loans among larger borrowers, potential misuse of funds (especially in the category of loans to women entrepreneurs where ownership can be transferred without creating new businesses), a culture of loan defaults, and a preference for BFIs over larger borrowers due to lower administrative costs and risks.³⁴Although some entrepreneurs report positive experiences and business growth⁵², the overall effectiveness of the programs is seriously hampered. The government has announced the continuation of the program and a potential increase in loan amounts⁵¹, but without addressing the underlying financial management issues, its impact will remain limited. The startup loan program (up to NPR 2.5 million at 3% through Rastriya Banijya Bank with a DCGF guarantee) is a newer iteration; 1,314 projects were selected from 5,250 applications in the 2025/26 financial year.⁵³

The subsidized lending program, despite good intentions to stimulate entrepreneurship (including potentially “green” businesses), fails due to fundamental fiscal management errors on the part of the government and the gap between the policy intent and the reality of SME financing on the ground. The government promises a subsidized interest rate.³⁴Banks issue loans expecting the government to reimburse the subsidized portion of the interest. The government does not pay the banks.⁵¹Banks, faced with financial difficulties and damaged confidence, are stopping issuing new subsidized loans.⁵¹This directly undermines the program’s objectives, no matter how “green” the proposed projects are. The problem is not only with the terms of the loans, but also with the credibility of the government as a partner.

For subsidized loans to be an effective stimulus for green finance, the government must first restore fiscal discipline and creditworthiness by paying off its debt to banks. Future programs need more robust mechanisms for timely payment of subsidies and better targeting to avoid misuse of funds and ensure that they reach truly green SMEs. Without this, subsidized loans are an unreliable tool for greening the economy.

5.2. Tax incentives for green investments (e.g. electric vehicles, solar energy, SEZs): current coverage and expected impact

The 2025-26 Budget takes a mixed approach to tax incentives for green investment. Customs and tax rates on electric vehicles (EVs) have been maintained to support green mobility and reduce carbon emissions.⁵⁵A customs duty of 1% is imposed on equipment for the production and assembly of EV chargers.⁵⁶Tax incentives have been extended to the IT, hospitality and tourism sectors in the form of a 20% reduction in the corporate tax rate.⁵⁷Startups with an annual turnover of up to NPR 100 million are exempt from income tax for the first five years of operation.⁵⁷New businesses in special economic zones (SEZs) and industrial zones receive a three-year rent exemption, and rents in SEZs are significantly reduced.⁵⁸

However, the budget retained a 2% luxury tax and 13% VAT on air tickets and domestic tourism services, which the Hotels Association of Nepal (HAN) says is a deterrent to tourism.⁵⁹The effectiveness of these incentives in achieving specificgreenThe results within these broader categories require careful evaluation.

Current tax incentives are a patchwork of sorts, with some directly promoting green technologies (such as electric vehicles), while others provide general benefits to sectors (such as tourism or IT) that could to implement “green” projects, but do not receive explicit mandates or incentives to do so through these tax measures alone. Maintaining taxes that are seen as harmful to tourism (a potentially “green” sector) creates political conflict. Maintaining tax breaks for EVs is a clear “green” incentive.⁵⁵Tax incentives for the tourism sector are general in nature⁵⁷; a hotel may use this incentive for general renovations rather than specific green upgrades unless other conditions or incentives apply. Luxury Tax/Tourism VAT⁵⁸may make sustainable tourism offerings (which may have somewhat higher upfront costs) less competitive.

Tax incentives need to be more targeted and linked to verifiable green outcomes to be truly effective for green projects. For example, tax incentives for hotels could be differentiated based on the availability of green certificates or investments in energy efficiency/renewable energy. A comprehensive review is needed to ensure that tax policy consistently supports green objectives rather than undermines them.

5.3. Comparative Analysis: Drawing Lessons from International Best Practices on Green Incentives for Developing Economies

International experience demonstrates different approaches to green incentives. Explicit subsidies include direct financial benefits such as tax breaks, payments and loan guarantees.⁶²Implicit subsidies may arise from the lack of pricing of external environmental costs.⁶²Some countries use Renewable Energy Targets (RETs), requiring electricity retailers to purchase a certain percentage of energy from renewable sources, often through trading of certificates, which passes the costs on to retailers and consumers rather than direct government spending.⁶²Green subsidies in an open economy can have a “reverse leakage” effect, reducing fossil fuel production both domestically and abroad, unlike carbon taxes, which can cause leakage.⁶³International climate agreements (ICAs) tend to focus on carbon taxes, but the role of green subsidies under ICAs is more complex and may even be diminished by such agreements.⁶³

The current set of incentives in Nepal relies heavily on direct subsidies (interest rate subsidies on loans) and some tax breaks. Exploring market mechanisms such as renewable energy certificates or more sophisticated risk-sharing mechanisms common in other developing countries could offer more sustainable and fiscally sound ways to incentivize green finance. Subsidized loans in Nepal are fiscally burdensome and unreliable.⁵¹Australian RET model⁶²offers an alternative that does not directly burden the federal budget. The “leakage” argument for “green” subsidies⁶³ suggests that well-designed subsidies can have broader positive externalities, justifying careful consideration despite fiscal constraints.

Nepal could benefit from learning from and adapting incentive models from other developing countries that have successfully mobilized private green finance. This could include feed-in tariffs for renewable energy, green credit guarantee schemes, or frameworks to support a domestic carbon market or trading of green certificates, which would reduce direct dependence on the national budget.

5.4 Gaps and opportunities for more effective incentives (e.g. risk-sharing mechanisms, carbon pricing considerations)

A key gap is the lack of reliable risk mitigation instruments for green projects, especially for SMEs. Although the Startup Lending Program mentions the Deposit and Credit Guarantee Fund (DCGF)⁵³, its overall effectiveness for green SMEs is unclear. The Udaya program plans to establish a Provincial SME Lending Risk Mitigation Facility (Final Loss Guarantee Fund) in Koshi Province²⁷, indicating a recognized need. There is little discussion of carbon pricing mechanisms in the submissions, which could provide a powerful incentive for decarbonization if implemented. Taxonomy of Green Finance¹⁵provides a classification system, but incentives are not yet explicitly and comprehensively linked to projects meeting specific taxonomy criteria.

The most significant lever for increasing the effectiveness of incentives foreco-projectsis their direct linkage with the Taxonomy of “green” finance and the introduction of reliable risk-sharing mechanisms that reduce the risks of “green” lending for BFIs. Banks tend to avoid risks, especially in relation to SMEs and new “green” technologies.³²Taxonomy defines what is “green”.¹⁵Incentives (subsidies, tax breaks) should be conditional on projects meeting the Taxonomy criteria. Risk-sharing mechanisms (such as the guarantees mentioned in²⁷) will directly address the banks’ core problem and facilitate lending to initially riskier (or perceived as riskier) “green” businesses.

Future incentive development should focus on the following priorities:

1. Conditional stimuli: Link all green finance incentives (subsidized interest rates, tax incentives) to projects verified against the Nepal Green Finance Taxonomy.
2. Risk sharing mechanisms: Expand and institutionalize credit guarantee schemes or first-priority default guarantees specifically for green projects that comply with the Taxonomy, especially for SMEs.
3. Link to capacity building: Combine financial incentives with technical assistance for BFUs and SMEs to develop profitable green projects.
4. Exploring Carbon Pricing: Explore the feasibility of introducing an internal price or tax on carbon, the revenues from which could finance green incentives or climate change adaptation.

Table 3: Assessment of Key Economic Drivers for Green Finance in Nepal

This table systematically evaluates the main existing or recently emphasized economic incentives. It allows a direct comparison of different types of incentives based on available evidence on their effectiveness and problems. Highlighting the “Identified Problems/Issues” for each incentive provides a clear evidence base for recommendations on reforming or revising these incentives to better support green finance. This helps answer the user’s key question of “which economic incentives really work” by showing what is (or is not) currently working.

6. Systemic Barriers to Scaling Up Green Finance in Nepal

6.1. The widespread lack of SME finance and its implications for green entrepreneurship

Nepal faces a significant small and medium enterprise (SME) financing gap estimated at $3.6 billion⁶⁴or $1 billion according to UNESCAP.²⁷Only 16% of startups get access to bank loans³¹, and 44% of SMEs cite access to finance as a major barrier.⁶⁴SMEs make a significant contribution to GDP (22%) and employment (1.8 million people).⁶⁵SME challenges include limited access to capital, technology and knowledge; high/variable interest rates; significant collateral requirements; and cumbersome credit procedures.²⁷Green entrepreneurs, often SMEs, face these general barriers compounded by specific challenges such as limited access to targeted green finance, policy incoherence and poor infrastructure.¹²Banks are often reluctant to lend to start-ups and SMEs without significant collateral.⁶⁶

The systemic failure to adequately finance SMEs in general is a fundamental barrier to green SME financing. Green finance initiatives cannot succeed in a vacuum if the broader SME financing ecosystem is dysfunctional. SMEs are vital to Nepal’s economy.⁶⁵Eco-projects, especially in areas such as sustainable agriculture, small-scale renewable energy and ecotourism, are often implemented by SMEs.¹²If SMEs in general cannot obtain loans³¹, then “green” SMEs will face even greater difficulties, as their projects may be perceived as newer or riskier.

Thus, addressing the general SME finance gap through broader financial sector reforms (e.g. improving credit information systems, promoting cash flow-based lending, strengthening credit guarantee schemes) is a precondition for effectively channeling finance to green SMEs. Specific green incentives should be layered on a more functional SME finance framework.

6.2 Policy coherence, regulatory clarity and implementation effectiveness

Although Nepal has some fundamental documents such as the Green Finance Taxonomy¹⁵, problems remain in the areas of policy coherence, regulatory clarity and, especially, implementation. Green entrepreneurs point to policy incoherence as a barrier.¹²Foreign investors are discouraged by cumbersome bureaucracy and inconsistent application of laws and regulations.⁶⁷The difficulties with the subsidized lending program highlight the failures in implementation despite stated policy goals.⁵¹There is a need for better coordination between government departments.¹⁸

The mere existence of green policies and taxonomies is not enough; the lack of consistent implementation, regulatory predictability and inter-agency coordination undermines their effectiveness and investor confidence. Nepal has a Green Finance Taxonomy.¹⁵However, if subsidized lending programs designed to support productive sectors (which could include green ones) fail due to government defaults⁵¹, and if bureaucracy hinders overall investment⁶⁷, the green finance framework lacks the stable operating environment it needs to thrive.

It is essential to strengthen institutional capacity for policy implementation, ensure regulatory predictability (avoiding frequent, ad hoc changes), and establish clear, streamlined processes for accessing green finance incentives. A dedicated inter-ministerial body to coordinate green finance efforts could improve coherence.

6.3. Inclusion in the FATF “grey list”: impact on international financial flows and investor confidence

Nepal was placed on the Financial Action Task Force (FATF) grey list in February 2025 due to deficiencies in law enforcement, investigation and prosecution of financial crimes, and inadequate regulation of high-risk sectors such as cooperatives and real estate. This entails significant negative economic impact.⁶⁸The implications include enhanced due diligence and scrutiny of transactions involving Nepalese entities, expanded documentation requirements for correspondent banking and trade finance, and tighter oversight by global regulators.⁶⁸This could harm international transactions, reduce official remittances, discourage foreign investment due to increased perceived risk, increase transaction costs for financial institutions, and damage Nepal’s international reputation by negatively impacting tourism and trade partnerships.⁶⁹This also makes access to global capital markets difficult.⁶⁹, which is critical for mobilizing large-scale green financing.

The FATF grey listing poses a serious systemic threat to Nepal’s ability to attract international green finance and investment, potentially undermining any domestic green finance initiatives unless urgently addressed. Green finance often requires international capital, especially for large projects or access to specialized funds.¹⁷The grey listing makes international banks and investors wary of Nepal due to increased regulatory requirements, reputational risks and the potential for illicit financial flows.⁶⁸This directly cuts off a vital channel for green finance.

Rapid and tangible progress in addressing the concerns raised by FATF is of paramount importance. This is not just a matter of financial compliance, but a critical factor for Nepal’s sustainable development agenda. Failure to quickly exit the grey list will make attracting the necessary scale of green investment extremely difficult.

6.4. Shortcomings of “green” infrastructure and technical potential

Nepal faces problems of inadequate overall infrastructure⁷⁰, which also affects the viability of “green” projects (e.g. poor road networks affecting the transportation of renewable energy components or access to ecotourism sites⁷¹). Specific “green” infrastructure, such as widespread charging stations for electric vehicles or efficient waste management systems, is still under development. In addition, there is a lack of technical capacity in local institutions and BFUs to design, manage, implement and monitor complex climate and “green” projects.¹²

Investment in green projects cannot be separated from investment in basic infrastructure and human capital. A green project may be financially viable on paper, but fail due to logistical problems or lack of skilled personnel to operate/maintain it. A solar power plant needs road access for construction and a connection to the grid for transmission (general infrastructure problems are implied in⁷¹). Banks need qualified personnel to evaluate such projects.²⁰If this is not the case, green financing will be difficult.

A national green growth strategy should integrate plans for the development of supporting infrastructure (both general and specifically green) and long-term capacity building programmes for engineers, technicians, financial analysts and project managers specialising in green sectors.

Table 4: Key challenges and bottlenecks in Nepal’s green finance ecosystem

This table summarises the multifaceted barriers discussed in the report in a clear, categorised format. It directly addresses the issue of ‘assessing real readiness’ by describing what is holding back progress. By linking specific issues to their impact on green finance and citing evidence, the table provides a solid foundation for the recommendations in the next section. It helps the reader understand that green finance challenges are not isolated but interconnected and systemic.

7. Strategic Pathways to Unlock the Potential of Green Finance for a Sustainable Nepal

7.1. Recommendations for enhancing the potential of the banking sector and product innovations

There is a need to focus on targeted capacity building programmes for BFIs in green project appraisal, climate risk analysis (in line with the Green Finance Taxonomy) and understanding of emerging green technologies. The development of innovative financial products tailored to different types and scales of green projects (e.g. small loans for decentralized solar energy, value chain financing for sustainable agriculture, special products for energy efficiency retrofits) should be encouraged. It is important to promote the implementation of cash flow-based lending methodologies, especially for SMEs. These recommendations are based on the identified gaps¹⁸and examples of existing products.⁸

Product innovation must be combined with enhanced risk assessment capabilities to ensure that new green credit products are attractive to borrowers and managed wisely by banks. Although banks offer some green products⁸, their ability to assess the unique risks of diverse green projects is limited.²⁰Simply introducing more products without improving basic assessment skills will not solve the problem.

Therefore, the NRB, together with development partners, should promote the creation of sector-specific training modules. Banks could establish specialized green finance departments with qualified personnel.

7.2. Proposals for the development and implementation of more effective and transparent economic incentives

Subsidized lending programs need to be reformed by ensuring fiscal discipline (government repayment of debt to banks) and better targeting mechanisms to prevent misuse and ensure funds reach genuine green SMEs. All fiscal incentives (tax breaks, subsidies) need to be directly linked to projects verified against the Nepal Green Finance Taxonomy. Risk-sharing mechanisms such as green loan guarantee funds or first-priority default guarantees need to be introduced and scaled up. Market-based incentives such as feed-in tariffs for renewable energy or a pilot carbon pricing mechanism need to be explored. Transparency in the distribution and impact of all incentives is needed. These suggestions build on criticisms of current subsidies³⁴and international practice.⁶²

The credibility of government incentives is as important as their design. Fiscal prudence and transparent operations are key to restoring the confidence of the BFIs and ensuring the sustainability of the programs. Subsidized lending programs have failed in part due to non-payment by the government.⁵¹, which undermines bank confidence. Any new stimulus, no matter how well-designed, will face skepticism if the government’s commitment is in doubt.

Future stimulus programs should have clear, targeted funding mechanisms and transparent, performance-based payment protocols. Independent oversight would enhance credibility.

7.3 Strengthening the regulatory and policy ecosystem for green investment

There is a need to ensure consistent and predictable application of the Green Finance Taxonomy and related NRB guidelines. It is important to promote inter-ministerial coordination (e.g. between NRB, Ministry of Finance, Ministry of Environment, Nepal Investment Board) to streamline approval procedures and support for green projects. Bureaucratic processes for green FDI and domestic investment should be simplified. Clear guidelines for issuance of green bonds and an enabling market environment should be developed. It is imperative to urgently address the issues related to FATF grey listing to restore confidence of international investors. These measures aim to address the issues identified in⁶⁸, and development of provisions.¹⁵

To create a truly enabling environment for green finance, a “whole of government” approach is needed, where regulatory signals are consistent and processes are effective. The Green Finance Taxonomy is an NRB initiative.¹⁵However, “green” projects need approval from environmental authorities, investment councils, etc. If these bodies are not coordinated or the processes are cumbersome⁶⁷, the Taxonomy’s impact is limited. Problems with FATF⁶⁸affect the ability of the entire financial system to interact internationally.

It is advisable to establish a high-level Green Finance Steering Committee with participation of all relevant ministries and agencies to ensure policy coherence, streamline approval procedures for projects that comply with the Taxonomy and advance the green finance agenda.

7.4. Strategies for attracting international climate finance and partnerships

It is necessary to actively engage with international climate funds (GCF, Adaptation Fund), multilateral development banks (World Bank, ADB) and bilateral partners to attract financing and technical assistance. It is important to develop a portfolio of profitable “green” projects that meet the criteria of international investors. The capacity of national institutions to effectively access, manage and report on international climate finance should be strengthened, addressing current problems with the disbursement of funds.¹⁸Blended finance mechanisms should be used to de-risk private investment in large green infrastructure projects. These strategies build on existing partnerships²⁷and are aimed at solving the problems specified in.¹⁸

Attracting international climate finance requires not only identifying needs, but also demonstrating the ability to effectively use and account for funds in line with international standards. Nepal has received funding from the GCF, but implementation has been delayed by capacity issues.¹⁸International partners such as IFC and BII are investing in green bonds.²¹To scale up this process, Nepal needs to show that it can manage larger, more complex green projects and meet rigorous fiduciary and ESG standards.

Investment in specialized project preparation centers to develop high-quality, cost-effective green projects is recommended. The capacity of relevant ministries and implementing agencies in climate finance management, procurement and M&E should be strengthened, possibly through technical assistance from development partners.

Conclusion: Charting a Course for Green Economic Transformation in Nepal

Nepal is at a critical juncture in its development, where a transition to a green economy is not just desirable but essential to ensure a sustainable future. The analysis shows that while the country is laying the foundations for green finance, including the development of a national taxonomy and the introduction of the first green financial instruments, the banking sector and economic incentives are not yet fully prepared to support the ambitious transformation required by the climate agenda and the Sustainable Development Goals.

The banking sector’s real readiness is limited by a lack of specialized expertise in assessing green projects, the prevalence of traditional collateral-based lending approaches, and systemic problems such as a significant gap in SME financing. Existing economic incentives, in particular subsidized lending programs, suffer from poor governance and lack of transparency, and tax incentives do not always specifically encourage green investment. The country’s inclusion on the FATF “grey list” makes it even more difficult to attract much-needed international capital.

Overcoming these barriers requires coordinated and determined efforts. The Government of Nepal needs to ensure fiscal discipline and improve the effectiveness of public support programs by explicitly linking them to the criteria of the green taxonomy. Regulators, led by the Central Bank of Nepal, should continue to strengthen the legal framework, encourage innovation in green financial products, and, most importantly, establish effective supervisory and support mechanisms to build the capacity of the banking sector. Financial institutions themselves need to invest in expertise, rethink risk management, and more actively implement digital solutions to increase the availability of green finance, especially for SMEs.

International cooperation will remain key, providing not only financial resources but also technical assistance and access to best practices. Nepal’s journey to a green economy is a marathon, not a sprint, requiring long-term commitment, institutional reforms, and adaptive governance. Success will depend on the ability of all stakeholders – government, regulators, the financial sector, businesses, and civil society – to work together to integrate sustainability principles into all aspects of economic planning and development. Only in this way can Nepal realize its enormous potential in renewable energy and other green sectors, ensuring prosperity for its citizens and preserving its unique natural and cultural heritage for future generations.factors for sustainable economic growth and improving the quality of life of the people of Nepal.

Sources used

1. IDU-a6b7751e-0e3c-4435-a5c9-3a740a4c1c89.txt – World Bank Documents and Reports
2. CLIMATE CHANGE TECHNICAL NOTE Nepal Disaster Resilience Second DPC with Cat DDO (NDRC) (P181344)
3. Nepal and small-scale renewable energy | EBSCO Research Starters
4. Sustainable energy solutions: Hydropower vs solar for green hydrogen production
5. Community-Based Tourism in Nepal: A Sustainable Travel Approach – Footprint Adventure
6. Nepal Travel Trends 2025: What’s New for Trekkers and Tourists
7. Green Tourism in Nepal: Leading the Way in Sustainable Travel for 2025 – Binita Karki
8. Banking on sustainability: Global IME weaves ESG values into the …
9. Training on Energy-Efficient Building for Valuators in Partnership with Global IME Bank Ltd.
10. NMB Green Savings
11. Nabil Bank launches ‘Nabil Eco-Friendly Business Loan’ « Nepal …
12. Sustainable Business through Green Entrepreneurship in Nepal – Theseus
13. NMB BANK
14. (PDF) Role of Domestic Banking and Financial Institutions in Project Finance: Insights from Hydropower Sector in Nepal – ResearchGate
15. Green Finance Taxonomy – Nepal Rastra Bank
16. NRB’s forward-thinking policy on green finance taxonomy – myRepublica
17. Unpacking Climate Finance in Nepal: Gaps, Challenges and Opportunities – AWS
18. Navigating Climate Finance: Nepal’s Challenges and Pathways to Resilience – myRepublica
19. A BAckground Policy PAPer on Green FinancinG in nepal
20. Nepal SREP Small Hydropower Finance Program – Climate Investment Funds (CIF)
21. Nepal Signs Landmark Green Bond Deal to Drive Sustainable Growth
22. Nepal’s first green bond launches with $60 million from BII, IFC and MetLife – Impact Alpha
23. NMB Bank Pioneers Nepal’s First Green Bond, Advancing Sustainable Finance
24. First Public Green Bond issued in Nepal with support from South Korea
25. Nepal’s First Public Issuance of Green Bond: NIFRA Secures Regulatory Approvals with GGGI and KOICA’s Support
26. Nabil Bank launches ‘Nabil Sustainable Savings Account’ – Insurance Khabar
27. Blended Finance for SME Growth: Evidence from Nepal – DAI Blogs
28. Nepal’s potential for blended finance: A country-level study – Southern Voice
29. “Small and Medium Enterprises Are the Backbone of the Economy; There Is No Major Credit Issue in This Sector” – NRB Executive Director – Banking Samachar
30. Coordinated Fiscal and Monetary Policies Crucial for Sustainable Development: NRB Deputy Governor Dhungana – Banking Samachar
31. World Bank Documents and Reports
32. Expanding Access to Finance for Small and Medium Enterprises: An Analysis of Demand and Supply Side Constraints of Nepal
33. Exploring SME Financing Facilities in Nepal
34. Changing Structure of Concessional Loan in Nepal – Nepal Journals …
35. NIC ASIA Foneloan
36. Kumari Foneloan
37. Foneloan – Reshaping Digital Lending in Nepal – Blogs
38. Developing a Credit Scoring Model for Evaluating Credit … – WCSE
39. Developing a Credit Scoring Model for Evaluating Credit Risk in the Nepali Setting – WCSE
40. InvoiceD | Nepal’s Premier Invoice Discounting Platform
41. Can Nepal Continue Building Fintech Foundations to Support Economic Development and Growth?
42. 16 Years of Innovation: eSewa celebrates 16th Anniversary
43. About Us – Khalti
44. Khalti: Digital Wallet & Online Payment Services in Nepal
45. eSewa | Digital wallet in Nepal for Online payment services
46. Digital Financial Services in Nepal – International Finance Corporation
47. Nepal Rastra Bank launches digital finance innovation hub to boost fintech
48. Nepal: World Bank Approves $150 Million to Improve Resilience of Bridge Network, Connectivity, and Access to Services
49. A Study on Digital Lending and Its Impact on Access to Credit in Nepal: Opportunities, Challenges, and Pathways Forward – ResearchGate
50. Government Funds: Loan Support for Entrepreneurs in Nepal (FY 2075/76)
51. Subsidized Loans: Continuation Announced, But Budget Shortage Remains
52. Interest-free loans draw youths to entrepreneurship – The Kathmandu Post
53. Government Finally Defines “Startup” Business in Nepal – Khatapana
54. Shortlisted for Nepal Government’s Startup Loan? Here’s What to Do Next – Khatapana
55. Nepal’s Fiscal Year 2025-26 Budget Explained: Key Highlights and Priorities
56. NAIMA welcomes annual budget, says it aims to promote the automobile and mobility sector
57. Finance Bill 2025: Key Tax Changes in Nepal – Infinity & Partners
58. Private sector has mixed reactions to 2025–26 budget – The Kathmandu Post
59. Budget balanced, but success hinges on implementation: NCC – The Rising Nepal
60. HAN applauds tax exemptions for hotels, resorts – myRepublica
61. Budget tourism-friendly, says HAN – Nepal News
62. Do renewable energy projects get more government subsidies than other energy projects?
63. Carbon Taxes and Green Subsidies in a World Economy∗ – Yale University
64. IFC’s $56-Million Investment in Global IME Bank to Bolster Gender and Climate Financing in Nepal
65. The critical role of SMEs in Nepal’s economic development – Friedrich Naumann Foundation
66. Giving start-ups a head start | Nepali Times
67. 2024 Investment Climate Statements: Nepal – State Department
68. AML and Terror Financing Risks As Nepal Returns to FATF Grey List
69. Floods, airport upgrade cut GDP growth by 1 percent – The Kathmandu Post
70. 2025 Monitoring Report – the United Nations
71. Karnali Corridor: Nepal’s Strategic Crossroads between China and India – myRepublica
72. An Imperative on Green Financing in the Perspective of Nepal – ResearchGate
73. CARBON DISCLOSURE REPORT – PCAF
74. Sustainable Banking and Finance Network : Global Progress Brief 2024 (English)
75. Government Funds: Loan Support for Entrepreneurs in Nepal (FY 2075/76)