Development of Buddhism in Nepal
Religiously, Nepal was known as a Hindu country, in the past and have given equal place to Buddhists as well. There was religious tolerance in the country. That's why both Hinduism and Buddhism developed in Nepal without any religious conflict. Even some of the deities are worshiped by both religious groups. For e.g. lokitesvara for Buddhists is same as Machhindranath for Hindus; Tara for Buddhists and Laxmi for Hindus; even Siddhartha Gautama Buddha is worshiped by Hindus believing him to be the reincarnation of Lord Vishnu. Hence, both Hindu and Buddhists temples are shared places for people to worship of both faiths. Therefore, it is not clear about the distinction between Hinduism and Buddhism in Nepal.
Mahayana Buddhism, also called Tibetan Buddhism, mainly practiced by Tibetan-related peoples of Northern areas of Nepal (Sherpa, Manangi, Lopa, etc.) and some ethnic groups of Central Nepal (Gurung, Tamang, Chepang, etc.).
Hinayana Buddhism, also called Theravada Buddhism, is mainly practiced in Central Nepal by some ethnic groups, mainly Newars.
Vajrayana Buddhism, also called Tantric Buddhism, is believed to be a mixture of both Hinayana and Mahayana Buddhism. It is mainly followed by Newars of Nepal.
Development of Buddhism in Nepal
If we trace the history of Nepal, Nepal has seen with various dynasties. From the earlier period, there have been cases of development of Buddhism in Nepal.
Mauryan Emperor Ashoka the Great put up a pillar at Kapilvastu, Lumbini in the second century BCE to denote birthplace of the Buddha. It is believed that Emperor Ashoka visited Patan and built five stupas, four in the surroundings and one in the middle. His daughter Charumati established Chabahil, northern side of Kathmandu.
Lichchavi Period (400 CE - 1200CE)
It is believed that Lichchavi Period was a golden period because, at that period, overall development of the state was observed. Lots of Buddha statues, chaityas, and stupas were carved and placed in different parts. For e.g. Antique Buddha statue like half-sunken Buddha in Pashupatinath, various Buddha statues in Changunarayan Premises apart from representations of Vishnu statues. The worship of Chaitya and festival of Avalokitesvara were also introduced around this period.
It is hard to know what schools of Buddhism were prominent but it can be assumed that the strongest early influences probably came from the Mahasanghika, Sammitiya and the Sarvastivada schools. Later, Makhyamaka and Yogacara schools were more influential with the emergence and growth of Vajrayana School.
It is known that Buddhist text, Manjushrimula Kalpa, and Mulasarvasti Vadavinaya was written in 2nd Century CE during Manadeva's reign.
Bhrikuti, daughter of Lichchavi king Amsuvarma, was married to the ruler of Tibet, King Songtsen Gampo. It is believed that she is the reincarnation of the Green Tara of Tibetan Buddhism and she helped to introduce Buddhism into Tibet.
Malla Period (1200 CE - 1769 CE)
Even Malla kings were Hindus, they also helped to flourished Buddhism. In this period, famous Paubha panting was flourished which is similar to Tibetan Thangka Painting. Several Monasteries and Buddha statues were also built in this period.
Shah Period (1769 CE - 1846 CE) (before Rana Period)
During this period, Buddhism could not flourish much as it had during the earlier period. It was mainly due to Hindu Gurkha, which rose to prominence. But in the northern areas of the Nepal, Tibetan Buddhism developed.
Rana Period (1846 CE - 1951 CE)
During this period, there were the cases of Buddhists being absorbed into mainstream Hinduism. But, in the north, they continued to practice Tibetan Buddhism. It was recorded that during this period, several Theravada Buddhists were banished from Nepal. It was done in order to suppress revival of Theravada Buddhism which began in the 1920s. During this period, General Khadga Sumsher Rana and other men rediscovered Lumbini, the birthplace of Buddha.
Shah Period (1951 CE - 2006 CE) (After Rana Period)
Buddhism gradually flourished after overthrown of Ranas. During this period, Nepal was promoted to many other nations and was open to all. Hence, Tourism Industry was developed. This helped to promote Sacred places of Buddhism and welcomed religious tourists as well.
In present context
Nepal is no more Hindu State, it’s a secular state, giving importance to all the religions followed here in Nepal. Hence anyone can change their religion if they wished to. It's been recorded that number of Buddhists here in Nepal has also been increasing.