Investing in Microfinance,Affordable housing in Nepal

 

• Central Bank has asked Banks to  make it easier for Farmers to coordinate the timing between  interest payment schedule and crop harvesting - Micro insurance - crop,livestock could be beneficial for both the farmer and the lender.(SKS model?)
•  Central Bank will count  -Collateral free  affordable housing loans up to  Rs 100,000 to low caste communities as deprived sector lending- Can some thing like" non-mortgage back securities " be foster affordable housing?
• Financial NGOs registered with  Central Bank can own upto 25% of a MFIs-INGO  involved in Impact investing could  use this Medium to invest in micro-finance 
  
  

Commercial banks have to invest at least 3.5 percent of their total loan portfolio to the deprived sector, while development banks should lend 3.0 percent and finance companies 2.5 percent.

Things in Italics my thoughts

NRB allows categorization of MFI share investments as deprived sector loans

Nepal Rastra Bank has allowed banks and financial institutions to categorize share investments made in various microfinance institutions (MFIs) as loans issued to the deprived sector.

Currently, only institutional share investments made by commercial banks and financial institutions in category ´D´ financial institutions can be labeled as deprived sector loans.

The latest amendment, made through a directive issued on Sunday, has provided one more avenue for banks and financial institutions to flow their credit.

As per the Nepal Rastra Bank´s provision, commercial banks have to channel at least three percent of total loans to the deprived sector. The proportion stands at 2.5 percent and 2 percent for development banks and finance companies, respectively.

The central bank has categorized credit of up to Rs 60,000 extended to low-income groups to set up micro enterprise as deprived sector loans. Loans of up to Rs 60,000 issued to install up to 50 MW of micro hydropower project, solar home system, cooker, dryer and pump, biogas plant, improved water mill or cooking stoves, and wind energy plans are also considered as credit to the deprived sector.

Similarly, loans of up to Rs 150,000 extended to foreign job aspirants and farmers and credit of up to Rs 250,000 issued to each family to conduct businesses such as animal husbandry, fish farming and bee keeping also fall under the category of deprived sector loans.

The central bank has made it mandatory for all the banks and financial institutions to report on credit amount extended to the deprived sector within 15 days of conclusion of every quarter of the financial year. Banks and financial institutions also have to report on utilization of such credit amount every six months if such loans are issued through other institutions.

Source:Republica;Nepal Rastra Bank 

SME financing facility for Nepal

"Under the scheme, Britain will join the International Finance Corporation (IFC) – the arm of the World Bank that promotes private-sector investment – in creating a new package of support for banks in fragile and conflict-affected countries."

Lars Thunnell, chief executive officer of the IFC, said: "Small and medium enterprises are a vital engine of job creation in developing countries. Yet they face a huge financing gap – especially in Africa, where SMEs need three times more funding than is currently available. This facility will help narrow the gap, creating opportunity for entrepreneurs who need it most."

"The first 15 countries to benefit from the facility will be South Sudan, Malawi, Ghana, Sierra Leone, Liberia, Uganda, Democratic Republic of the Congo (DRC), Tanzania, Mozambique, Kenya, Nigeria, Bangladesh, India, Nepal and Pakistan."  Source

deal sourcing in Nepal

In a recent blog post impact investing leaders shared  their experience on how to build a robust pipe line  of  impact companies in emerging markets. I don't have much deal sourcing experiences in other emerging/frontier markets but this is what I am experience in Nepal. Challenges I am facing  when trying to source deal from   .......

- Multi lateral and Bilateral organization

• Even though some  donor organization have private sector development mandate majority of  the organization are involved in micro enterprise sector.For impact investors economics does not work to invest in a micro scale enterprise.These enterprises are often seeking capital in the range of USD 1000- USD 5000.
• Overall strategy/mission of a donor organization is made in their HQ somewhere abroad.On the ground staff have very little authority to introduce new strategy  that might foster impact investing 
• Lack of  business acumen.Most of the officials working in donor agencies do not understand  difference between  equity investment and debt investment.What are the advantage and disadvantage of venture capital model? When they struggle to understand the concept of venture capital financing they will naturally struggle to covey the message to potential business.

Banks 

• Liquidity in the market in developing countries is often very volatile
• When banks are having hard time to extend credit in the market, commercial bank often think impact investors are competitors . 

entrepreneur

• Writing a business concept paper/ plan  is always an issue
•  Entrepreneur does not often trust - an outsider wanting to do " research" on  his company 
• Most of the time they often struggle to understand why they are needing growth capital ?

Nepal - What lack of access to finance?

Source:The Asia Foundation,2010

Why Banks are reluctant to lend to SMEs in Developing Countries

• Banks can often earn high returns in their core markets, giving them little reason to take on additional risk in the SME market. Banks in countries with immature financial systems often face little competition and a low threat of entry  and can therefore earn handsome returns by lending to large public and private players.
• Banks incur higher administrative costs by lending to SMEs. The costs of lending to SMEs are relatively high, as loan sizes are small, and the transaction costs per loan are relatively constant.This reduces incentives for regular banks to lend to them. 
• Banks have difficulty providing long-term capital. Banks in developing countries are often reliant on short-term liabilities (such as deposits).
• Banks have limited information, skills and regulatory support to engage in SME lending.The countries often have weak accounting standards, and the SMEs have little to no accurate financial statements on their revenues, profits and  ability to pay . Furthermore, there is often little to no general market data available on the SME market and specific sub-sectors (e.g. default rates).This limits the potential for lending based on financial statements or small business credit scores.  Therefore, banks primarily engage in relationship-based or other forms of collateral-based lending, rather than cash-flow based lending. Banks tend not to provide financing for working capital to SMEs, which is cited by SMEs as one of the areas of greatest need. The lack of collateral for some borrowers and/or clear recourse legislation (e.g. ability to claim collateral) however, can complicate the possibilities to do collateral based lending (e.g. asset-based, real-estate or equipment lending). Finally, banks need specific skills to engage in the different forms of SME lending. A recent Dalberg survey showed that the difficulty in establishing credit-worthiness was a key barrier, with 80% of banks stating challenges in this area.Lack of these skills can lead banks to shun the SME market in its entirety,  and invest only in high-yielding sovereign government debt,  or  it can  translate into inadequate risk management, leading to lower repayment rates and returns. (Source:Dalberg)

Youth Employment in Nepal

Venture Fund in Nepal- Time has come

One more reason to advocate for Alternative Investment Act (Venture Capital Act) ?

This Morning I read a news- " Management of Hydroelectricity Investment and Development Company (HIDC) has bogged down in confusion as the government has not decided which of its agencies should oversee it—the Ministry of Energy or Nepal Rastra Bank (NRB.............The government established HIDC to fund large hydel projects and accelerate hydropower development in the country as lack of financial resources has been one of the major stumbling blocks. Though the HIDC has planned to get the go-ahead for its banking activity, its regulatory body has not been determined.................... The NRB legal department had advised against the central bank regulating HIDC. “As NRB’s regulatory job is to protect the interest of depositors, it is not necessary for it to regulate a company that does not collect public deposits,”

This confusion could have been resolved if we had a Venture Capital Act in the country 

My Suggestions

• Country needs a private equity /venture fund act 

• Strengthen SEBON and make it the regulator for  Alternative investment (VC, Private equity fund, debt fund, private equity in public enterprise)

•  Quasi state owned company like- Hydroelectricity Investment and Development Company  could be registered and run as a private equity fund  management company .The Ministry of Energy can be a General Partner or a LP 

• Categorize the type of fund and priority sector
• Provide incentives to fund that are working in high impact sector 
• Make it easy for Foreign Venture Fund to invest in Nepal Enterprise – SEBON should be  the regulatory body to give approvals not Department of Industries.
• I am against commercial banks opening VC fund

Highlights from the Nepal Business Forum Meeting

Here are the  few recommend for the government by the representative of the  private sector

• waive VAT in civil construction of hydropower projects, establish integrated testing lab to issue quality certification and lower corporate tax to foster business environment in Nepal.
• special action plan to develop herbs and herbal sector. 
• women entrepreneurship development sought creation of Small and Medium Enterprise (SME) Fund to enhance access to finance and establishment of Women´s Craft Village in Kathmandu.
•  Reduction in the number of holidays and reform labor laws, working group on export promotion and trade facilitation pushed for the implementation of SMEs loan and export cash incentives

SOurce: Republica,2012

Public private Partnership in Education Sector

Private investment in Education Sector ...... Should Nepal replicate the Indian model 

•  In India- "The human resource development (HRD) ministry, which oversees education, has sought expressions of interest from companies in joining the public-private partnership (PPP) project to open 2,500 schools over the next five years.Private entities will procure the land, and design, develop, operate and manage the schools, the HRD ministry said in a document outlining the proposal. The government will offer a 25% infrastructure grant and the recurring cost of education for students sponsored by it." 
• Of the private school population, about 7.1 million students pay less than Rs. 40,000 in annual fees, the firm said in a recent report.

(Souce:LiveMint) 

Condition in Nepal - Nepal has a poor record by international standards, but over the past decade significant progress has been made in terms of net primary school enrolment (81%[1]), and secondary education enrolment (46.6%[2]). However, the quality of education at the government-run schools has been discouraging. For example, in terms of SLC[3] examination 2004 results, the average passing rate for private schools students was 85% compared to 38% of students in public schools[4]. Similarly, while the majority of private schools had passing rates in the 80–100% range, less than 7% of public schools had such high passing rates.

Lack of quality education and educational reform in the public school system has drastically increased the demand for affordable private schools among the low income parents hoping for a better future for their children. The average monthly fee in the affordable private schools is usually under $16[1]. There are approximately 42,000 public schools and 11,000 private schools currently operating in Nepal. While the affordable private schools expand over time, the growth is slow due to a lack of available capital – expansion is only fuelled by the reinvestment of school profits.

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[1] Does PRIVATE SCHOOL COMPETITION IMPROVE PUBLIC SCHOOLPERFORMANCE?,Thapa,2011

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[1] Nepal Country Overview, World Bank,2011

[2] UNESCO Country program Document,2011

[3]  School Leaving Certification (SLC) is a standardized test and equivalent to 10th grade final examination, and the exam is administered by the government of Nepal every Year.

[4]  Does PRIVATE SCHOOL COMPETITION IMPROVE PUBLIC SCHOOLPERFORMANCE?,Thapa,2011

Credit Guarantee in Nepal

Development Credit Authority is planning to introduce its program in Nepal.My suggestion would be -rather then working  with a particular bank,it should develop a model that will increase the  effectiveness of  "deprived sector lending". The main problem is not lack of credit in the market- the challenge is to  develop an ecosystem that will help entrepreneurs to flourish and well as make them ready for capital and the accountability that come with it risk capital. ..................Nepal is suffering from the mis-matching between the capital provider and the entrepreneur....