Importance of Financing for Nepalese Agriculture and Economic Development

The agriculture sector in Nepal has not been growing as expected over the last decade. To understand the ongoing dynamics in the Nepalese agriculture sector, the study states a hypothesis that lack of effective and efficient financing cause slow agriculture sector growth. The hypothesis is tested using a system dynamics model representing the Nepalese agriculture sector with causalities of financing on the sector. The analysis of the hypothesis states that insufficiency in formal banking access causes aggregate interest rate to rise, which reduces investment and capital in the sector, causing production levels to fall and vice versa. The model used to test the hypothesis replicates the historic production trajectory in the Nepalese agriculture sector with only a maximum deviation of an approximate 5 percent. Based on the reliability of the model in terms of representing the Nepalese agriculture sector for the past 15 years, two policies are proposed to increase productivity. The policy propositions, expansion of formal banking market share and interest rate cut, to cost-effectively cover the rural agriculture sector, result in significant improvements on production and income levels over the next 25 years. These policies have significant positive implications for restructuring the growth trajectory of the Nepalese agriculture sector towards an optimistic outlook. (Note: Due to time constraint, the study doesn't incorporate the consequences of the Nepal earthquake of April 25, 2015