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Fri, April 12, 2024

Small Business Hit Harder In Economic Slowdown

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Nepal’s Industrial Enterprise Act 2020 classifies firms by size based on the value of fixed assets. Nepal lacks a nationally representative survey of firms, including small and medium enterprises (SMEs), that yields detailed information on firm characteristics spanning production, sales, employment, exports, and sourcing (including imports), among other things. As a result, there is no credible basis for estimating the contribution of SMEs to the economy. The MoF (2016) mentions that SMEs contribute 22% to the gross domestic product (GDP) and employ around 1.7 million people without specifying the basis for the numbers. The contribution of SMEs to output, employment, and exports in the manufacturing sector is unknown. SMEs formulate a huge part of Nepal’s economy with an estimation of over 92,300 registered businesses. Among them, about 12% are small and medium businesses accounting for 40% of employment but despite this prominent contribution, they face constraints in growth marking a financial gap estimated at $3.6 billion with only $731 million currently available. The ongoing economic instability, inflation, increased cost of doing business, lack of business ethics, legal protection in transaction commitments, and high interest rates charged by banks has exposed SMEs to multiple risks and challenges and even a high probability of putting them out of business. While news of small entrepreneurs being unable to cope with the post pandemic economic instability has been making some news, a jolt came in the form of the recent tragic case of Prem Prasad Acharya from Ilam who self-immolated himself in front of the Parliament in the capital to call to attention his plight, his inability to cope, and a series of thought provoking conditions that small and medium entrepreneurs face at the hands of an indifferent government and lack of policies that protect SME rights in Nepal. Prior to taking his life, late Acharya had posted a suicide note on his Facebook page appealing for reform for the likes of entrepreneurs like him. Private sector umbrella organisations like the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), and the Confederation of Nepalese Industries (CNI) exist to champion the cause of private businesses and entrepreneurs. They are the apex bodies that the government corroborates with on policy reform. Yet small and medium entrepreneurs across the country echo that these bodies are limited to protecting the interests of a select few. In this edition of Business 360, we spoke to a few entrepreneurs, and business and economic experts on what should be the role of organisations like FNCCI and CNI in supporting SMEs. We also sought their opinion on how the government can facilitate small and medium entrepreneurs to minimise their risk in difficult times and economic slowdown.

Rajib Upadhya

Author and Former Advisor to World Bank in Nepal and South Asia

While the pandemic slowed down the global economy and hurt businesses everywhere, it dealt Nepali businesses a second severe blow so soon after the 2015 earthquake from which many were still recovering. Obviously, smaller businesses such as those represented by Prem Prasad Acharya are particularly vulnerable. There is only so much that a small economy like Nepal can do to relieve the pain that crises like these inflict on individual businesses especially when the impact is economy-wide. Moreover, when the playing field is not level, small businesses often find themselves far too low in the pecking order to benefit from what little the state might dole out in the form of subsidies, support or other relief measures.
Acharya’s note speaks volumes to the issue of contract enforceability in Nepal. This is prerequisite to the functioning of any market system. A second related point he makes is that of grievance redressal. Business organisations must find ways to strengthen their grievance handling mechanisms in more inclusive and equitable manners.
Studies from around the world have lately established the effects of the pandemic in exacerbating mental health problems. Nonetheless, what struck me in Prem Prasad Acharya’s case is that he took the trouble to elaborate his grievances in a suicide note he posted on Facebook, which in his own words is a biographical account of his setbacks. Albeit tragic, I found it a fascinating case study in the application of Murphy’s Law in fledgling Nepali businesses – that is, anything that can go wrong will go wrong. I earnestly hope Acharya’s act of desperation will not go in vain and nor that it would be just another blip in the news-cycle. As to my suggestion to business organisations: Acharya’s note speaks volumes to the issue of contract enforceability in Nepal. This is prerequisite to the functioning of any market system. A second related point he makes is that of grievance redressal. Business organisations must find ways to strengthen their grievance handling mechanisms in more inclusive and equitable manners. Oftentimes, peer-based naming and shaming can achieve a lot more good than any amount of government regulation.

Pawan Golyan

Chairman, Golyan Group

Small and medium enterprises are an integral part of the business ecosystem in Nepal, however, they are also one of the most vulnerable sections in the business world. The laws and systems of our country have only just recently started to recognise them as contributors to the economy and that it was due to the Covid pandemic. To be honest it was due to the pandemic that SMEs and microfinance started being recognised in the market. Prior to the pandemic they were never recognised even though they were an integral part in sustaining the country’s economy. Around 25-30% of the startups have folded up and that is due to the lack of government support. I believe private sector umbrella organisations like the Federation of Nepalese Chambers of Commerce and Industry and the Confederation of Nepalese Industries play a crucial role in helping and sustaining the SMEs in the market and our sister company, Mato, has been trying to do the same as well. FNCCI and CNI do provide the SMEs with seed money but that in itself is not enough. They have to provide the SME owners knowledge and training to improve their business along with showing them pathways when they are in a difficult situation. Guidance is the key to success in any business. Any business will make profits and also face losses over time, it is a cycle, but being able to make them understand this concept is key. That is what defines an organisation and their credibility.
Guidance is the key to success in any business. Any business will make profits and also face losses over time, it is a cycle, but being able to make them understand this concept is key. That is what defines an organisation and their credibility.
On this note, the government has taken a few steps to address the issues being faced and raised by SMEs. The government has taken the initiative to provide credit to SMEs through the banking channel at a nominal interest rate for a certain amount of loans. However, I strongly feel that asset management companies should be introduced in Nepal. The companies as such will be able to look after the SMEs and work according to the needs and requirements of small business owners. Many countries have started using this medium and it has proven to be a success in managing the SMEs and their needs.
Neeru Raymajhi Khatri   President, Federation of Women Entrepreneurs Association of Nepal Covid 19 has impacted the Nepali economy drastically and it’s very crucial to plan on delivering solutions to build businesses to become resilient and inclusive. We have experienced in the past that smaller the businesses the higher is the impact related to the disaster. Learning from the difficult circumstances, we have realised how important it is to build a Business Continuity Plan (BCP). It is the responsibility of the apex bodies of business associations to support and strengthen its members, especially MSMEs resilience to cope with economic shocks such as Covid 19 and beyond. One key role of such an organisation is to lobby and advocate Disaster Risk Reduction Management (DRRM) policies and programmes to MSMEs. This will help ease the disruptive supply chain and cash flows and thus enhance the skills and confidence of the entrepreneurs to cope with the disaster.
Learning from the difficult circumstances, we have realised how important it is to build a Business Continuity Plan (BCP). It is the responsibility of the apex bodies of business associations to support and strengthen its members, especially MSMEs resilience to cope with economic shocks such as Covid 19 and beyond.
Likewise, government agencies must have strong policies and laws for emergency plans to deliver solutions to support SMEs to become fully prepared in challenging times. The government also needs to focus on active participation and engagement in DRRM. Hence, collaborating and cooperating with all stakeholders of the business sectors is necessary. Being proactive in creating conducive business environment and offering incentive packages such as grants, subsidies, loans, tax exemptions, etc. will support the entrepreneurs to sustain their enterprises. To prepare for unforeseen challenges, the government, the private sector and business enterprises must all primarily focus on promoting sustainable and resilient business practice that incorporate Disaster Risk Reduction Management and Business Continuity Plan.

Anil Keshary Shah

Chairperson, Lead Nepal Inc

Small and medium enterprises are the backbone of our economy. While the large national corporations may be the face of our economy and the names that we all recognise, the true backbone of our economy are the small businesses that we find scattered all over the large cities, small towns, and even in the villages. Unfortunately, while we hear everything that happens to the large corporates, whether it be bad or good, we hardly hear the voice of the SMEs. I feel like the SME is the backbone of our economy because while individually they may be small, collectively the impact that they are having on the national economy is formidable. The small shops, manufacturing units, restaurants, or any other type of SME individually may employ only a few people, may be a dozen, but when you put them together collectively, the number of people employed by SMEs far surpasses that employed by our handful of national corporates. Even if it is a small kirana pasal (grocery store) in which the owners are the only employees, or the restaurant employing a few servers and people in the kitchen or a small manufacturing unit with a dozen employees, when you look at the number of such enterprises across the nation, the total number of people employed by SMEs is amongst the largest of any category. In addition to employment, the amount of revenue generated and the VAT or other taxes paid by SMEs is a major contributors to the exchequer of the Government of Nepal. And most importantly, SMEs provide services and goods to people of Nepal across all strata of society. SMEs by the nature of their business require entrepreneurs and everybody involved in it to be constantly working to keep the business afloat, they neither have the time nor the budget to take any issues or challenges that they may be facing to a larger audience. Therefore, I feel it is critical for private sector bodies like the FNCCI, CNI, etc. to broaden the network, and in fact have large scale units within them catering just to SMEs. With clear parameters, as to who or what qualifies as an SME and ensuring that they have a larger seat, and a larger voice as the large corporates do. The government of Nepal, whether it be the Ministry of Industry, Labour, Finance, or any other ministry or department that caters to the economy or the private sector, must give due importance to SMEs. The issues and challenges as well as the opportunities of the SME are quite unique, and if they are not given that due attention in time, they get lost among the larger issues and the louder voices of the national corporations.
Unfortunately, while we hear everything that happens to the large corporates, whether it be bad or good, we hardly hear the voice of the SMEs. I feel like the SME is the backbone of our economy because while individually they may be small, collectively the impact that they are having on the national economy is formidable.
In the recent past, financial institutions of all categories have all made concerted efforts to penetrate into the SME realm. While in the past banks, especially A Class commercial banks, used to be primarily focused on large scale, national corporations, today you’ll find even the biggest of banks having specialised cells for SMEs. Even today it is harder for SMEs to access financing than large corporates, but a start has been made and in line with this, today you will see more SMEs flourishing across the nation than ever in the history of Nepal. If you are an entrepreneur and looking for finance, I think today it is still difficult but far easier than it was yesterday. In the recent past, when we were in the midst of the Covid 19 pandemic, it was the SMEs that sustained and fulfilled the needs of the Nepali people. While many of the national corporations were shut down, it was small businesses dotted across the nation that provided the goods and services that were required by the people to survive and sustain themselves. The SMEs have consistently proven their need and the value to the people of Nepal, I think it is now time for everybody to give the SMEs the needed attention and assistance. Therefore, in order to transform the economy of Nepal, we have to focus on the SME sector. Without having government policies, bank financing and the attention of the private sector bodies, it will be increasingly difficult for the SMEs to survive, grow and prosper. And unless the SME sector flourishes in Nepal, it is not possible for the Nepali economy to reach its maximum potential. Therefore, a concerted effort has to be made to form the needed ecosystem for SMEs to thrive and grow in. We should have done this sometime back, but we did not, therefore there is no better time than now for us to start.
Manish Jha CEO and Co-founder, Facts Research and Analytics Government should promote the practice of business incubation centres. It works like a kindergarten for kids and gives them liberty to take risks and learn from it. We need to accept and promote the culture of profit-making but this is an old and bad perception about entrepreneurs. How can one survive without making profit? We should understand the differences between: entrepreneur, entrepreneurship, and enterprise building process and I think FNCCI and CNI play and help their stakeholders to understand the differences. Apex bodies like FNCCI and CNI should give access to all the stakeholders to raise their voice. They should stop being brand ambassadors of their own businesses and should become activists for better business practices, policies and economic environment. They should do some more things to promote and support SMEs.
We should understand the differences between: entrepreneur, entrepreneurship, and enterprise building process and I think FNCCI and CNI play and help their stakeholders to understand the differences.
We should encourage people to give, get and have practice of mentorship. These are the few things I have learned and it helps us to hold ourselves in time of crisis and also for strategic moves. READ ALSO:
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