SME in Nepal

The critical role of SMEs in Nepal’s economic development

Small and medium enterprises (SMEs) are considered to be the foundation for sustainable, inclusive and resilient economic development, playing a vital role in maintaining stability in the economy through sustained growth, employment generation and establishment of an effective value chain. 

The contribution of SMEs to Nepal’s economy is substantial. SMEs contribute 22% to the Gross Domestic Product (GDP) besides generating employment for 1.8 million people, especially women, making them invaluable to their empowerment; they also add to an inclusive and broad-based economy.

Despite its decade-long armed conflict with the Maoists, Nepal maintained its macro-economic stability and there was consistent moderate growth, according to Dr. Yubaraj Khatiwada, Former Finance Minister. However, SMEs are grappling with manifold challenges following the COVID-19 pandemic, as economic growth fell to -2.4%, a first in the 40 years the country has measured its gross domestic product.

As numerous SMEs wound down, people lost jobs, with problems now apparent in the financial sector. In the first quarter of 2023-24, non-performing loans of commercial banks increased twofold to 3.4% of the total loan portfolio of Rs 4,399.51 billion, compared to 1.77% in the corresponding period of the previous fiscal year. Also, interruptions in supply chains and the collapse of SMEs lead to protests by victims of microfinance institutions in various districts of Terai and Kathmandu.

A study carried out by the Ministry of Industry, Commerce and Supplies shows 10.81% of all Nepali SMEs have collapsed due to the pandemic. Pramila Acharya Rijal, President of the South Asian Women Development Forum, opined it is the government’s obligation to help SMEs, especially women-led businesses, revive. However, the magnitude of the impact borne by SMEs varies with the nature of the business. For businesses based on technology, the pandemic was a blessing in disguise as consumers shifted to e-commerce and online payment solutions.

The demand shock has crippled SMEs with backward and forward linkages in the country. Even service-related businesses like restaurants have faced similar challenges due to a substantial decline in the number of customers. It is imperative that the government accelerate developmental undertakings to mobilize capital in the economy, such as the construction of big-ticket projects, procurement of goods and services mostly available in the country and increases in tourist footfall as well as investments in various sectors of the economy.

The other avenue the government has to explore is the facilitation of the entry of new SMEs. This begins with easing of the business registration process. Currently, a company has to register first at the Office of the Company Registrar (OCR) and then again at the Department of Cottage and Small Industries or the Department of Industries or the Department of Commerce, depending on the capital base and nature (area of service) of the company. After registering at the OCR and DoI or DoC, the company must be registered in tax. All these registration processes would be better conducted together at a one-stop service center.

Further, company renewal, tax filing and various other services provided by the government must be digitalized. There should be no physical interface between public service providers and service seekers, and digital innovative measures must be implemented; such initiatives are recommended to be the most effective in countering corruption, whilst also saving time in availing services. 

Though Nepal Rastra Bank has offered subsidized credit across various sectors under deprived and propriety sector lending, setting up a company, business and tax registration and development of a business plan for a loan application are herculean tasks for aspiring entrepreneurs. Most importantly, the subsidized credit ticket size of Rs 1.5 million is deeply insufficient.

Access to finance remains low in rural areas. As a result, people are compelled to avail loans from the informal market at exorbitantly high rates. Loan sharks in rural areas victimize people, and, as a result, the parliament recently enacted a law to criminalize such predatory lending practices.  The central bank has made it mandatory for every branch of a commercial bank to provide at least 10 subsidized loans; however, the presence of bank branches in rural areas is still insignificant.

Enterprises operating low-key should be scaled up by providing market linkages, developing value chains whilst enhancing the quality of products and services and ensuring labeling and packaging occurs alongside branding of products and services. By bringing aspiring entrepreneurs, BFIs, public service providers, business development professionals, incubators, and equity/ venture capital providers together, the government can create synergy in entrepreneurship development, developing an ecosystem that facilitates their growth.

For years the European Union has supported Nepal in its bid to promote inclusive and sustainable economic development; this is especially apparent in its EBA (everything but arms) scheme, through which the EU has removed tariffs and quotas for all imports of goods from Least Developed Countries. The EU’s trade preference has supported the growth of SMEs in Nepal by providing market access. Carpet, pashmina, medicinal herbs and essential oils, handicrafts, and tea, among others, are the top exports to the EU. SME products with a very strong backward linkage in the country thrive with the prevalence of inclusive production and supply chains.

Nepal has tremendous potential for investment in sectors such as clean energy, ICT, tourism, and agro-processing among others. Avenues for entrepreneurship or investment in Nepal with respect to SMEs include tea, carpets, pashmina, mining of precious stones, aromatic plants and herbals and handicrafts, given that these are major products currently exported to the European Union. The EU has been providing support to production units via the government of Nepal for trade competitiveness (enhancement of quality and quantity and branding and marketing of Nepali products).

Gokarna Awasthi, Director General of the Federation of Nepalese Chambers of Commerce and Industry, states there are two types of SMEs – one that trades in goods and another that actually produces goods. SMEs involved in trade face a lesser challenge given the presence of a market. “The competitive strength of SMEs that produce goods is the export market. Carpets, garments, pashmina, felt and handicraft are goods that have to be exported as their market is outside the country.” He adds that domestic market demand has also declined because of people migrating abroad in the thousands. “So, the only option left for SMEs producing goods is to export their products,” he adds.