The Entrepreneur’s Challenge: Navigating Nepal’s Business Landscape

Foreign Direct Investment is essential to Nepal's capital formation and investible resources, but it is also important for the technology, skills, and managerial and organizational techniques it brings with it. 

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Sudeekshya Dwa

  • Read Time 5 min.

According to the World Bank’s Ease of Doing Business Report 2020, Nepal ranks 94 among 190 economies. This indicates that the process of running a business is not easy, and the business environment in Nepal is not investor-friendly. For the same reason, we have not been able to attract investment and foster entrepreneurship. As investors and entrepreneurs are the primary sources of job creation, the lack of a friendly business environment has indirectly created job shortages in the domestic market. Citizens are forced to seek better employment and opportunities in foreign lands. Robert Kasca, UN Resident Coordinator, said, “More than 2.1 million Nepali are abroad for employment or education.”

In Nepal, since initiation, a business owner is required to adhere to numerous compliances. Despite the government making the initial registration process available online, easing it to a certain extent, there are still other aspects of operating a business that require physical presence, such as obtaining a PAN card, presenting documents, and paying fees. Additionally, a business owner is also required to pay compliance fees like company registration fees, tax registration fees, business license fees, etc., to have their business set up. Moreover, the time-consuming process of registering the business also discourages entrepreneurs from taking a formal route into the business world. According to a report from the Nepal Rastra Bank, operating a business in Nepal is highly impacted by slow decision-making, a complicated tax system, the non-committal attitude of the government, and legal risks that inhibit business expansion and discourage foreign investment.

The aspect of outdated policies also proves to be a hindrance for businesses. The Yatri Motorcycles’ case sheds light on how there are no laws regarding the manufacturing of automobiles in Nepal, as policymakers in the past had no vision that such a feat would be possible in Nepal. Only after a public outcry did the government take this matter into serious consideration. Lorik Yadav also shares a similar story. He started a mobile mill business in his village and solved many household problems like traveling to stationary mills to grind cereals. Unfortunately, he was soon forced to abandon his enterprise due to the antiquated business registry laws, which did not allow him to register his business without having an office address. In light of the innovative nature of problem-solving entrepreneurs, the country needs to focus on making laws that adapt to such innovations, encouraging them instead of hindering or discouraging them.

Foreign Direct Investment (FDI) is essential for Nepal’s capital formation and investible resources, as well as for the technology, skills, and managerial and organizational techniques it brings. FDI serves as a highly beneficial source of finance for Nepalese enterprises, although it is often overlooked. Starting from the fiscal year 2022/23 AD, the minimum threshold for FDI is set at Rs 20 million, which is still a substantial amount for a minimum threshold.

Recently, the minimum threshold for the Information and Communication Technology (ICT) sector was removed, paving the path for new investment opportunities in the sector. The same approach could be applied to FDI in other sectors as well, where the threshold could be eliminated altogether. This would be beneficial in helping investors reach enterprises in various sectors of the country, especially small enterprises, where the introduction of new technology can be achieved. Micro, Small, and Medium-sized enterprises (MSMEs) would also gain access to finance through smaller FDI. Although MSMEs make up 90% of all registered businesses in Nepal, the country still lacks institutions that provide affordable and suitable financial services and products. A study estimates that the financing gap for Micro, Small, and Medium-sized enterprises (MSMEs) in Nepal is $3.6 billion. A major obstacle to SME financial access is collateral, as most banks and financial institutions (BFIs) only accept high-liquidity collateral, and Nepal has no specialized banks for MSMEs. Venture capital and private equity are emerging as new sources of MSME financing, but this remains marginal, with private equity contributing only 0.5 per cent to total MSME financing.

Technology can be a potent enabler to tackle obstacles. Cloud solutions, for instance, can streamline local government tasks such as business licensing, which often involves multiple departments in the approval process. In 2017, the Philippines’ Department of Information and Communications Technology implemented a cloud-based solution to automate its business permits and licensing system. This innovation allowed local government units to process business permit applications and renewals online, reducing the processing time from 2–3 days to a range of 30 minutes to half a day. The US government has also been actively utilizing data analytics, not only in federal agencies but also in state and local governments. This approach aims to improve public policy decision-making, identify efficiencies, enhance service delivery and public safety, and recover lost revenue through the insights gained from data analysis.

The presence of adaptable laws that do not require a permanent address when registering mobile businesses would encourage innovative individuals like Lorik. Similarly, in the case of Yatri Motorcycles, flexible pre-existing policies related to the manufacturing of automobiles in Nepal could highly encourage such innovative enterprises. The use of financial technology (FinTech) to support micro, small, and medium-sized enterprises (MSMEs) is on the rise among financial institutions in Nepal, with the majority of banks facilitating the digitalization of banking services for consumers. However, regulations are necessary to protect consumer privacy, ensure the security of transactions, and provide a user-friendly interface.

Regarding the lack of access to finance for MSMEs, easing physical collateral requirements by introducing project-based financing and allowing MSMEs to pledge collateral assets could provide relief to businesses. For instance, collateral assets, such as land and buildings, could be valued at market prices rather than official administrative prices. For enterprises without collateral, unsecured loan schemes based on credit scores could be introduced. An example of such a loan is Himalayan Bank’s Small Personal Business Loan, where the only eligibility criterion is to have a steady source of income from remittances, business itself, salary, and so on. Banks and financial institutions could also be encouraged to invest part of their Corporate Social Responsibility funds in financial and business literacy programs for MSME entrepreneurs. This additional support can contribute to the empowerment of MSMEs by enhancing their understanding of financial matters and business strategies.

Nepal has undoubtedly seen improvement in the business environment in recent years.  However, there is still room for improvement. From bringing new policies with regards to development, to decreasing the time taken to follow the compliances required by the government, there is still much more to be done. The improvement of such would definitely be a huge step in the ease of doing business in Nepal acting as a major boost for Nepalese to return after living abroad. When the business environment in Nepal is improved, then the citizens who go abroad for studies or employment will have a much easier time starting and operating businesses in Nepal. This will result in  easy access to domestic as well as international funding which will in turn create job opportunities. This can also manage the brain drain of the youths which will slowly but surely aid in the economic reformation of the country.

(Sudeekshya Dwa ​​is a researcher at Samriddhi Foundation, an economic policy think tank based in Kathmandu. The views expressed in this article are the author’s own and do not represent the views of the organization. Email: [email protected])