In the tranquil valleys and towering mountains of Bhutan, a significant transformation is taking place, one that holds the promise of shaping the nation’s economic landscape for years to come.

In this context, a country deeply entrenched in cultural heritage and currently undergoing a transition towards a more diversified economic landscape, the evolution of its financial market will be of immense importance. If the Bhutanese Financial Market is to effectively function as a crucial mechanism for bridging the gap between the financial sector and the real economy by facilitating accessible funds, attracting investments, and establishing the framework for sustainable economic growth – as underscored by His Majesty in His Royal Address – then it is clear that our financial sector too is standing at an inflection point.

Historically reliant on conventional sectors like hydro power, agriculture, and tourism, Bhutan’s economy is now on the cusp of a transformative shift. The emergence of a robust and dynamic financial market should be poised to chart novel courses for expansion and resilience, propelling the nation into a new era of adaptability and growth. At this critical juncture, the deliberations of our policymakers and regulatory bodies will be crucial in shaping the future of our financial industry.


Mobilization of long-term capital

Central to the advancement of any financial market is the capacity to attract cheaper capital resources from diverse origins. This inflow of funds serves as the driving force behind economic advancement, channelizing investments in areas such as infrastructure, manufacturing, services, and beyond. Through the creation of platforms that link investors with enterprises in need of capital, it has the potential to empower entrepreneurs to transform their inventive concepts into tangible realities.

A notable challenge within the Bhutanese financial ecosystem revolves around many businesses lacking adequate awareness regarding financial strategies to facilitate expansion. This absence of knowledge often results in a heavy dependence on bank credit as the primary means of funding. To address this issue, there is a pressing need for policies that incentivize the private sector to actively engage with and explore the opportunities presented by the financial market. Concurrently, the financial intermediaries’ such as investment banks, underwriters, rating agencies, fund management companies and institutional investors etc. which assumes a crucial role in augmenting the value of enterprises, serving as facilitators in this transformative process are missing.

The orientation and familiarity of policymakers and regulatory bodies with the subject matter have played a role in shaping the trajectory of our financial sector, particularly in relation to the financial market. Unfortunately, there has been a lack of emphasis on precisely defining the financial market itself – the realm where financial engineering and innovation transpire. Instead, the focus has primarily been directed towards reforming financial institutions.

In the era of financial digitization, where the prominence of distributed ledger technology is rendering traditional financial institutions less relevant, the concepts of decentralized finance and tokenization are poised to disrupt the financial market. It is imperative for our policymakers, regulatory agencies and industry practitioners   to be prepared for this impending transformation. Concepts like Initial Token Offering and the Tokenization of assets are already redefining the methods of fundraising, which extend beyond geographical boundaries and domestic financial systems.


Empowering Small and Medium Enterprises (SMEs)

Small and medium-sized enterprises (SMEs) are the foundational pillars of any economy, embodying the promising outlook for businesses to transition to a corporate scale and achieve significant growth in the future. They play a crucial role in generating employment, nurturing innovation, and propelling growth within local communities. A well-developed financial market ensures that these enterprises have access to the necessary funding to expand their operations, invest in modern technologies, and compete effectively both domestically and in the global market. This, in turn, leads to a more inclusive economic growth that benefits all sections of society.

The SME sector in Bhutan is facing a pressing demand for comprehensive reform. This transformation is essential to facilitate not only improved access to funding for SMEs but also to guide them towards successful fruition. A pivotal shift is necessary in the lending approach of financial institutions that serve this segment, transitioning from a transactional-based model to one grounded in relationships. Moreover, there exists a prominent need for start-ups and emerging entrepreneurs to have mentors in the form of angel investors and venture capital firms. These guiding hands are crucial to shepherd them through the challenging phase often referred to as the “valley of death” and ultimately lead them to maturity.

To achieve this, a collaborative endeavour encompassing all stakeholders vested in supporting SMEs is imperative. The current system disperses resources thinly, yielding few tangible benefits and resulting in outcomes that are less than satisfactory. A concerted and united effort is the way forward to ensure that the SME ecosystem flourishes and contributes meaningfully to Bhutan’s economic landscape. If deemed necessary, the establishment of an independent SME Board dedicated to fostering the holistic growth of SMEs appears to be a rational step.


Financial Inclusion and mobilization of savings

A financial market encourages individuals to channel their savings into productive investments. This culture of saving and investing not only stimulates economic growth but also promotes financial security among the population. Moreover, as the financial market expands, it can bring those on the fringes of the formal financial sector into its fold. Financial inclusion serves as a crucial mechanism for delivering financial services at the same time empowering society through enhanced financial education and literacy. Today financial literacy is acknowledged as an essential life skill that significantly contributes to one’s financial well-being. Its integration into mainstream education has become imperative.

As Bhutanese individuals, our inclination towards personal finance is often lacking, perhaps influenced by the assurance of free healthcare and education offered by the State. This prevailing financial indiscipline has led to the downfall of numerous businesses and has adversely impacted the quality of asset portfolio of financial institutions through the emergence of Non-Performing Loans.


Young entrepreneurs frequently falter in their ability to calculate their runaway and burn rates, the practice of proper book-keeping remains missing across a multitude of businesses.

While we do benefit from free healthcare and education, it’s important to acknowledge that our funeral expenses can be substantial, and the inevitability of retirement as we age necessitates a realistic consideration of financial resources to ensure a comfortable life. Hence, as we navigate towards an improved economy, it becomes imperative that alongside this transition, there exist policies and cognitive frameworks that actively promote and empower citizens to adeptly and proficiently manage their financial resources.

As of May 2023, the most recent statistics reveal that out of the cumulative deposit amounting to Nu 201.07 billion, a substantial portion of Nu 94.85 billion exists in the form of time deposits. In terms of investment perception, these time deposits are considered risk-free assets and which enjoy tax benefits for individuals in our context. Conversely, the progression from savings towards investments within the financial market is often perceived as venturing into risk and, notably, this decision is subjected to penalties in the form of dividend taxes. Therefore, while formulating new policies, it is important to deliberate on the optimal allocation of our financial resources from the private sector and individuals towards economically productive investments.


Foreign Investment and Global Integration

As Bhutan seeks to integrate into the global economy, a developed financial market can play an important role in attracting foreign investments. These investors bring not only capital but also expertise and technology, which can be instrumental in advancing key sectors of the Bhutanese economy. The financial market acts as a bridge, connecting the nation’s potential with international opportunities.

The existing legal structure in Bhutan prevents foreign individuals from directly engaging in portfolio investments, and there are no established avenues for either making investments in or sourcing funds from the global market. The expansion of the economy is contingent on the financial resources accessible for capital investments. To facilitate economic growth, it becomes imperative to attract and manage the inflow of capital from the international market. Despite the potential difficulties in opening our capital account due to our forex reserve, there exists a prospect to explore the possibility of securing international funds by issuing green instruments. The wisdom lies in how our economy can harness these funds to generate profits as a business entity and bolster our country’s financial position.  The subject on green finance holds broad attraction, yet a significant portion of the populace still lacks a comprehensive understanding of it.

It is also timely for our financial market to explore the benefits of opening up foreign currency and commodities markets given the foreign exchange risk and fluctuation in the prices of commodities. Forex market facilitates international trade, supports economic stability, enables price discovery, and offers opportunities for speculation and hedging. The market’s liquidity, size, and accessibility make it a vital component of the financial system, influencing exchange rates and impacting economies worldwide.

In the context of our prospect for precious metals and energy market, commodities futures offer crucial benefits. They stabilize prices, manage risks, and improve market efficiency for various goods like agriculture, energy, and metals. These futures instruments enable hedging, ensuring a consistent supply and attracting investments from international traders. By facilitating price discovery and enhancing transparency, these contracts promote market stability, benefiting both producers and consumers alike.


Effective Transmission of Interest Rate Policy

A well-functioning financial market aids the central bank to manage money effectively. This means they can control interest rates, the amount of money circulating, and keep prices stable. All of this creates a steady economy that’s good for growth and investments.

From an economic perspective, it’s now opportune to establish a robust money market that can effectively manage liquidity within our system and ensure efficient price discovery for short-term lending rates. Additionally, we may also need to evaluate the impact of external factors such as borrowing cost in INR other convertible currency while determining the policy rates. The absence of a well-defined yield curve for sovereign bonds, which would serve as a benchmark for interest rates in our economy, remains a challenge. The ambiguity to establish a sovereign bond market with a strategic long-term objective could potentially stem from   a lack of comprehension and a misinformed viewpoint on the part of the issuer.

The lack of adequate focus on determining suitable risk-free and policy rates within the financial system, without duly considering the cost associated with INR and convertible currencies required for imports could have economic repercussion in long run. It has become increasingly imperative to reassess and reconfigure our policies to align more harmoniously with our inherent economic context. At the same time, the exercise of caution and prudence by our financial institutions in credit creation is of utmost importance to navigate these complex dynamics.


Building Human Capital for Financial Market

The nascent stage of Bhutanese financial market has in turn limited the growth of professionals in the financial industry. Developing human capital for the Bhutanese financial market will be key in unlocking a range of benefits. Skilled professionals adeptly assess market trends, navigate risks, and make well-informed decisions, amplifying market stability and operational effectiveness. Moreover, their expertise fuels innovation via inventive financial products and strategies, nurturing market expansion and flexibility. This competence cultivates investor trust through transparent practices, diminished fraud, and the upholding of ethical standards

Furthermore, a workforce well-versed in financial matters plays a crucial role in proficiently managing risks, thus playing a vital role in averting financial crises and protecting both individual investors and the broader economy. Additionally, a highly skilled financial workforce enhances a nation’s global competitiveness by attracting international investments, fostering cross-border partnerships, and establishing the country as a prominent hub for financial services.

In a continually shifting financial environment characterized by technological advancements and market dynamics, the presence of skilled professionals equipped with essential expertise becomes imperative to propel the progression of the industry.

Today the entire nation faces a considerable task to retain its workforce. This pivotal moment demands that leaders in the financial industry construct a professional atmosphere that aligns with the preferences of the emerging generation. Beyond offering competitive compensation, growth opportunities, and regular recognition, it’s imperative to acknowledge the significance of quality of life to an individual and cultivate a positive environment. Providing clear paths for career advancement, autonomy, and engaging them in challenging tasks remains crucial. Complemented by wellness initiatives and a nurturing leadership approach, employees should feel both appreciated and motivated to remain dedicated.

In essence, by identifying and investing in the development of human capital for the financial market with long-term vision can create a skilled and knowledgeable workforce that contributes to the growth, stability, and sustainability of its financial sector.

Amidst these prospects, it’s crucial to acknowledge that fostering the growth of a financial market should be complemented by the establishment of a robust regulatory framework. Laws and regulations play an indispensable role in ensuring transparency, curbing abuses, and upholding the stability of the financial system. Particularly within our context, there exists a necessity to grasp the implications and work towards harmonising the existing pertinent laws that has segregated the financial market. This step holds paramount importance in adopting a coordinated strategy to effectively tackle the challenges at hand.

As we gear up for the demands of the 21st-century economy, it is imperative that our financial system and markets do not remain stuck in the paradigms of the 20th century. The financial market should function as a driving force to propel growth, necessitating collaborative efforts from all stakeholders. It’s crucial for us to collectively work towards redefining the underlying mechanisms that will effectively support Bhutan’s economic growth in this new era.


Contributed by

Dorji Phuntsho, RSEB


The opinions presented in this article solely reflect the author’s perspective and do not represent the official stance of any institutions.