Women Entrepreneurship Development Fund

The Ministry of Industry (MoI) will initiate homework on the Women Entrepreneurship Development Fund (WEDF) by the end of this week.

This year’s budget has allocated Rs 100 million for the setting up of the fund. MoI had formed a seven member working committee to prepare the draft of the fund’s working guidelines. The draft guidelines have proposed providing collateral-free loans up to Rs 300,000 to women seeking to start their own business.

Source:Kathmandu Post

Venture Fund for Nepali SMEs

There is a growing consensus between politicians, policymakers, development professionals and private sector representatives that a thriving private sector is the silver bullet for Nepal’s economic development. In a country like Nepal, the contribution of small and medium enterprises (SMEs) plays an instrumental role in the overall advancement of the private sector. SMEs are a major source of employment generation. These enterprises also spur innovation, productively and invigorate the local economy. A recent study shows that in a developing country, every dollar of investment in an SME has a multiplier effect, generating additional 12 dollar in the local economy.

According to some estimates, as of 2010, SMEs (excluding microenterprises) in Nepal employ approximately 57 percent of total work force. Despite SMEs being the major driver of economic growth and poverty alleviation, the contribution and challenges faced by SMEs have long been overlooked by both the government and leading private sector organizations. SMEs face constraints in terms of access to finance and markets, poor managerial skills and difficulties in negotiating the regulatory environment. 


Besides macro challenges like political instability and inadequate power, majority of SME operators single out access to finance as their biggest constraint. Research suggests that local financial institutions are often reluctant to cater to SMEs for various reasons. One, SMEs often lack adequate collateral and audited financial records required for bank loans. Two, the marginal cost of lending to SMEs is relatively high as loan sizes are small, and the due diligence cost is at par with large size loans. Three, SMEs primarily require long term capital and banks generally rely on short term deposits for expanding its loans and advances; thus, there is a mismatch between the nature of demand and supply of capital. 

Four, banks often seek business with predictable cash flow where interest payment can be covered with net income, whereas, SMEs usually have an unpredictable cash flow. Five, banks typically earn attractive returns in core geographical areas and sectors giving them less incentives to venture into new areas. For example, more than 60 percent of the credit from commercial banks flows into Kathmandu. Sectors like agriculture and tourism where SME activities are usually concentrated receive only 2.4 percent and 2.3 percent of the total credit provided by commercial banks. 

While banks are afraid to take risks in order to protect the financial interest of their depositors and shareholders, there is an urgent need to craft a strategy and devise an incentive structure that will encourage external financing in SMEs. Introducing the concept of venture capital will play an important role in the entrepreneurial ecosystem growth and can enhance access to finance. The objective of a venture capital investor (VC) is to inject equity or quasi-equity capital in small and medium companies, especially in their early stages when banks are reluctant to fund them because of their uncertain and erratic cash flows. VC invests capital in return for a partial long term ownership of the business. 

Unlike banks, VC does not base its investment decision on the monetary value of the collateral but on intangibles like feasibility of the business model and capability of the entrepreneur. Recognizing that capital is not the only ingredient required to run a business successfully, VC also assists its investee with hands-on management, monitoring and governance. The areas of support include strategic decision making, structuring management teams, daily operations, market access, relationship and network building—areas where SMEs often lack expertise. Hands-on support in critical areas increases the survival rate and thereby, the return on investment. One major difference between a loan and an equity investment is that bank loans are ‘upside restricted’. This means, even if the invested company is extremely successful and the returns are high, the bank will only get its principal and interest back. On the other hand, a VC firm investing in equity will get returns proportionate to the size of its investment.

Historically, the concept of venture capital financing was limited to high growth technology companies in developing countries, but the trend is gradually changing. It is estimated that there are close to 200 SME venture funds operating in emerging and frontier markets like Nepal, investing approximately US $7 billion in sectors like agriculture, healthcare, tourism, microfinance and technology. Nepal is still, however, waiting for its maiden venture fund.




ime and again, the idea of introducing venture capital funds for Nepali SMEs has found a voice in the financial world, entrepreneurial focused forums and parliamentary halls of Nepal. In 2011, during a Constituent Assembly sub-committee meeting for amendment of Banks and Financial Institution Act, lawmaker Sapana Malla proposed that banking and financial institutions should allocate at least 5 percent of their total loan exposure for venture capital to encourage entrepreneurs. However, little progress was has been made in this regard. In recent years, a growing number of investors, both domestic and foreign, are interested in setting up a venture capital fund exclusively for Nepal. But due to red tape-ism, lack of regulatory clarity and proper incentives, investors are either waiting on the sidelines or putting off their plans. 

In the spirit of Nepal Investment Year and to harness the true potential of Nepali entrepreneurs through a flourishing venture capital industry, the government and central bank need to act decisively to devise a clear strategy on venture capital investment. Issues like fund raising, investment criteria, investment routes, capital gains taxes, dividend and repatriation laws should immediately be addressed. The regulatory, legal and tax environment should be investment friendly and should protect the interests of both the investor and the investee. In addition, in tune with best international practices, foreign venture capital investors (FVCI) should be treated as foreign institutional investment (FII) and not as foreign direct investment (FDI). Once registered with the concerned authority (still not clear who the apex regulator is in Nepal), FCVI should have access to hassle-free investment without requiring additional approvals. Currently, FDI needs approvals from department of industries and Nepal Central Bank during all the phases—investing, repatriating dividends and disinvestment. 

If proper incentives and mechanisms are put in place, the SME sector has the potential to attract a huge inflow of risk capital, managerial and technical expertise and the best and brightest business minds, including thousands from the Nepali diaspora. This could invigorate the entrepreneurial culture that in the long run will lead to sustainable and inclusive development of the Nepali economy. 

By:Shabda Gyawali

Source:My Republica

Collateral free loans from co-operative

The Youth and Small Entrepreneurs Self-Employment Fund (YSESEF) is all set to release funding to central cooperative associations along with commercial banks to implement the highly prioritised Youth Self-Employment Fund (YSEF).

The YSESEF has planned to call central cooperative associations to submit their proposals by mid-July with a clear roadmap stating the types of businesses the cooperatives under them could do in the areas of production, service and small industry, their financial capacity and adequate basis for loan recovery.

The government has decided to move the programme ahead on a massive scale through government-owned banks and other banks with large government investments as private sector banks have been reluctant to participate in it.

“The plan to go through central cooperative associations is intended to reach out to as many needy people as possible as government-owned banks are not present as extensively as would be desired,” said Binod Kumar Guragain, executive director of the YSESEF. “We will make central bank cooperatives responsible for recovering loans issued to cooperatives associated with them.”

Earlier, sanctioning of loans to cooperatives promoted by leaders of political parties had drawn protests from the Youth Association of Nepal which is affiliated to the CPN-UML. “We are not directly providing loans to individual cooperatives under the new mechanism, the central association will do that,” said Guragain. “We may provide loans directly to individual cooperatives too only where there are no central cooperatives.”

The YSESEF has also revised its regulations to enable lending to cooperatives by clearly mentioning that they will also be vehicles for lending to implement the YSEF. Guragain said that the decision was taken after officials of various cooperative associations related to tea, coffee and milk sought funds to implement the YSEF through them. The cooperative associations will have to sign an agreement with the YSESEF to get funds. They have to provide a guarantee that the collateral-free loans will be repaid as per the repayment table, according to the conditions proposed by the YSESEF.

Central cooperative associations have to submit monitoring reports to the YSESEF every three months. They have to disclose in the proposal the potential volume of production in a certain area and endorse the proposal on monitoring and recovering loans by their board of directors.

The YSESEF has planned to propose an interest rate of 6 percent for wholesale lending while the central cooperative associations will have to provide credit to the cooperatives under them at 12 percent.

Source:Kathmandu Post 

blessing in disguise

So today, I read a new that due to restriction by Rastra Bank to issue new licenses to open Class A,B and C  financial institution,more and more promoters are interested in opening  Class D (Microfinance) institution.

The article say-So far the central Bank has received 45 applications.Currently,there are 23 MFIs operating in the country.

This makes me wonder whether restriction on setting up large scale banks are a good startergy to increase financial inclusion?