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Finance Education in Nepal is Painfully Outdated; Here's What Needs to Change Right Now

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Wed, Apr 21, 2021 5:27 AM on Stock Market, Exclusive,
-ShareSansar

- Bivek Neupane

Author's Note: This article is a reflection on my own experience as a student in Nepal and the things that I would have loved to be taught. With a benefit of hindsight, I can point out things that I know very well now but was completely clueless a few years ago when I completed the BBA program from TU. I have to be honest and say that I don’t know much about how the courses are structured in other universities. I have looked into the syllabus of KU and found that a large part of the courses is fairly similar. So, I am going to point out few things in this article that I feel are vital in creating a good human resource for the Nepalese capital market. Although a large part of students might eventually leave the country for obvious reasons, this does not change the fact that the system should evolve with time. I am going to stick with Finance as this is the field I can confidently speak about. So, let’s start:

1) Not enough quantitative courses

This is perhaps the major point. I cannot stress it enough. Listen, guys, Finance is basically Math alright! Math can explain everything there is in Finance. When I say Math, I am talking about everything that encompasses Finance and Economics. It can be as trivial as the arithmetic time value of money to a bit sophisticated concepts like stochastic calculus.

I still see that there are no courses for Econometrics or Probability theory which is just bizarre. One can argue that there is a Business statistics course but those are limited to measures of central tendency and do not even go in-depth into the concepts of multivariate regression models. Multi-variate regressions are so crucial in Finance that more than 70% of the empirical research in finance is based on it. And since there are thousands of products that are based on those academic researches, if students do not understand the power of the regression models, they are missing out on a huge area of the industry.

I haven’t even discussed the whole derivative industry, which will make up a whole another article if I were to go into detail about that.

More importantly, these quantitative courses should connect to actual studies that have been done in the past. Students should feel that they are learning something that can actually be applied to the markets. This will surely answer this question that every student probably has in a certain stage of his/her life: “When are we ever going to use this in real life?”

2) Portfolio theory and asset pricing models

The Nepalese market is gradually developing and as the market adopts new technology and starts introducing new products, there will undoubtedly be significant demand for skilled manpower. The portfolio management business is only going to go up from here.

Therefore, the students should know Markowitz’s (1952) portfolio theory. This includes some of the major concepts in finance such as expected returns, volatility, diversification, separating systematic and idiosyncratic risks, mean-variance analysis, portfolio construction, and optimization, etc.

And again, every concept here is basically Math. You don’t need to memorize all the theories because everything can be derived from a few formulas and the intuition behind it.

Furthermore, the asset pricing models should be introduced to the students. I saw in the syllabus of the KU BBA program, they do have CAPM, which is at least a good start. However, that is clearly not enough. The concept of beta as a market factor that fully describes the cross-section in average returns has been long refuted by researchers. Hence, there come the Fama French factor models that include the major pricing anomalies and forms a multi-variate model that explains more than 90% of the average returns in the market. These factor models are a must-have in any finance specialization courses in an undergrad program.

3) Empirical research in Finance

There is not enough empirical research with regards to the Nepalese capital market. The norm is that the research and studies come from academics rather than practitioners. It is not mandatory but that’s the norm.

However, in our case, the students are not encouraged to do so or the students have absolutely no clue about how to conduct empirical research or any combination of the above. The bottom line is every college should at least have decent finance educators that promote the idea of research in the markets.

I mean, to start, it does not have to be complicated. One can easily do a fairly simple study of whether the beta explains all the returns generated from the Nepalese capital market. You do not even need to know any programming language for that. Excel is sufficient in itself. My point is that students should be taught about the major empirical researches that have changed the finance industry all over the world. The things that work and other things that have been scientifically rejected by the research should be communicated to the students. 

4) Technical skills

The world is changing rapidly. As time changes, companies adopt new tools to facilitate their operations. Now, given that we are talking about Nepal, it might take a while for this kind of change to really affect the job market.

Nevertheless, I believe students should be taught (or students themselves should learn) at least one programming language. Now you might ask, “What for? I am a business student, Why do I need to learn to code?”. The answer is that coding is the future. You can automate everything, literally everything there is (at least quantitative tasks) via programming languages like Python or R ( I mentioned these two because these are the most used in the industry).

I will give you an example alright. I remember a few years ago, I was taking a Finance class and we were being taught how to calculate IRR using the trial and error method. We were using a pen, paper, and calculator. Looking back, that was the stupidest thing anyone can do. The work can be done in a few clicks in Excel or 2-3 lines of code in Python.

Rather than focusing on teaching the foundational concepts behind project evaluation, the students are taught how to solve a numerical problem. This is just nonsense. If I am the manager of a company and I am hiring people, I would not hire anyone for their calculation capabilities. I would rather hire someone for their interpretation and decision-making skills.

If I need any calculation, I will just ask my computer. Why anybody would ask humans to do the calculation is beyond me. Hence, students need to be taught things like why having multiple negative cash flows generates multiple IRR rather than giving them mind-numbing and time-wasting exercises that lead to no knowledge.

If any student is reading this and is interested in learning more about the concepts discussed above, here are some of the resources that have helped me a lot in my education:

Bivek Neupane is a MSc. Finance and Economics student. He is also a CFA candidate. He is specializing in quantitative finance and research. His other interests include Factor modeling, Portfolio optimization, Behavioral finance, Alternative asset management, etc. Connect with him via LinkedIn or his blog.

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