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Micro and Small enterprises in Nepal could do lot better in a more economically free environment

Press Release

Kathmandu, Oct 20, 2014: Micro and Small enterprises in Nepal could do lot better in a more economically free environment, shows the findings of a study conducted by Samriddhi Foundation on Kirana Pasals (small retail stores selling groceries and fast moving consumer goods whose services are used by a vast majority of Nepali people) in Kathmandu Valley. Samriddhi Foundation shared a first of its kind report on how Economic Freedom translates into the day to day lives of micro and small entrepreneurs in Nepal, taking the example of Kirana Pasals. The study (which was conducted from April – September 2013) focused on identifying some key hurdles in the growth of these independent businesses run by entrepreneurial and hardworking people.

Part of the research, two hundred and sixty eight Kirana Pasal  owners were interviewed to capture valuable information, insight and stories on the impediments they face to grow their enterprises. The report reveals that regulatory environment pertaining to registration, taxation and standardisation are immediate areas of concern. The report also highlights the fact that laws and regulations that are applicable to KiranaPasal s are scattered across several acts, regulations and rules; and are enforced through several government agencies, which makes it difficult for these entities to be operating in a fully legal manner.

The report shows that taxes are also something which further suppresses the growth of Kirana Pasals, especially those that are registered. Thus the report highlights the need to reform the tax code by reducing tax rates and simplifying it to widen the tax bracket. This would help Kirana Pasals operate legally and consequently access finances and other resources to grow.

The report also recommends rethinking the current standards applicable to Kirana Pasals and fixing practical and acceptable standards in consultation with the Kirana Store owners and consumer groups. Access to finance was another issue of concern for Kirana Pasals wanting to grow. According to the report, capital available from micro finance institutions (which most Kirana Pasals use) are limited and often more expensive than loans from commercial banks and other financial institutions. Since most owners/manager of Kirana Pasals have limited capital and little formal education in business, documents like business plans, balance sheets, rental contract, letter of approval from municipality, tax documents, asset valuation, etc.  are hard to produce.

Finally, barriers to exit were also considered as barriers to growth as when entrepreneurs fail, they have to have an opportunity to wipe the slate clean and start again. This is almost not an option for retailers such as Kirana Pasal  owners in Nepal as exiting formally is extremely difficult. The report makes recommendations to address the aforementioned impediments to the growth of Kirana Pasals and the recommendations together help increase Economic Freedom in Nepal.

Download the full report here
Download the summary of the report here
Sarita Sapkota

About Sarita Sapkota

Ms. Sapkota is the Coordinator of Communication and Development at Samriddhi Foundation and was previously engaged with the Foundation as a Research Associate for more than three years. She is a graduate of political science and also contributes articles for Samriddhi's column at The Himalayan Times' Perspectives supplement.

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So why don’t kirana pasals grow? – One finding

m_IMG_6776Ever noticed how the ubiquitous Kirana Pasals (mom-and-pop stores), always stay put, selling the same things, retaining the same size, same location for years and years, never growing into some mini-marts or the likes? One needs very little capital and the stores can be operated without much expertise in management or technology making it a luring business for the lower and middle class families. But despite toiling for over 14 hours a day, year in and year out, they just don’t seem to grow. Turns out, registration, which is the first step towards gaining a legal status for any enterprise is one of the contributing factors.

In Nepal, Kirana Pasals fall under the purview of fifteen different Acts and six government agencies. These stores need to be registered at four different institutions – municipality or VDC, Ministry of Commerce and Supplies, Ministry of Industry and Ministry of Finance. Ambiguous drafting of laws and regulations complimented by lack of easy access to the information pertaining to these statutory requirements results in huge costs in terms of financial resources, time and energy. Given the volume of business that these stores carry out and the access to information, figuring out the range of approvals and documentations required to operate under full compliance of these central, regional and local laws becomes costly. The related authorities do not share the information on registration of a kirana pasal with each other, therefore requiring an entrepreneur to deal with each institution separately.

When people open up an enterprise, there is a propensity to grow. Some entrepreneurs voluntarily and some without knowing all regulatory compliances, however, end up operating in the informal environment. Growth in kirana pasals means making a transition into a bigger store, preferably a mini-mart, selling imported goods, hiring employees, using modern technologies and so on. To be able to deliver these services, entrepreneurs need to invest additional capital. Therefore, growth in this business means having easy access to finance. The very fact that these entrepreneurs operate informally bars them from accessing finance. As a result, they cannot grow. Growth for informal enterprises also means that they become more visible to monitoring institutions and this provides perfect disincentive to not grow beyond a certain size.

World over, Kirana Pasals have contributed largely to mobilizing human resource, availing several vital goods to local markets, fostering competition and reducing the income and social inequalities. At a time when brain-drain has been popularly viewed as a major hindrance to Nepal’s growth, kirana pasals signify entrepreneurial spirit in people. But operating under informal environment means that these enterprises cannot grow; their property rights cannot be secured by the law; they cannot access finance and can never rise above subsistence. Big informal economy also means that the country loses out on garnering domestic revenue. Something as simple as registering the store poses serious challenges to the formalization and expansion of the business itself.

The best move in favor of these entrepreneurs would be, then, to shorten the registration process. While we have been clamoring for one-window policy for foreign investments, the same could be applied for kirana pasals – go to one office in town, submit your application and you are formalized and good to go. All the institutions whose purview the kirana pasals fall under need to develop a mechanism of sharing information between themselves as they have better understanding of the regulations. Less cumbersome regulatory procedures incentivizes micro and small entrepreneurs to join the formal economy thus opening up an avenue for them to grow.

Akash Shrestha

About Akash Shrestha

Akash Shrestha is Coordinator of the Research Department at Samriddhi, The Prosperity Foundation where his focus areas are petroleum trade and public enterprises. He also writes newspaper articles, blogs and radio capsules, based on the findings of the studies conducted by The Foundation.

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Shop(s) next door

kirana pasalFor anyone living in Nepal, it is all but normal to run to the shop next door quite often—need a kilogram of sugar, one match-stick box or a month long supply of essentials like rice, oil, biscuits and what not—you name it and those Kirana Pasals have it. I call it the shop(s) next door because the Kirana Pasals in urban areas exist in almost every house facing the street and it might not be an understatement to say that people like you and me run to these next door shops every now and then even for something as small as a one rupee worth of wrapped happiness—a chocolate.

Given this ‘deep’ significance of Kirana Pasals, has it ever occurred to you as to why year in and year out these shops go on and never really grow? Yes, most of these shops add new products, perhaps a few more sacks of rice but what I am taking about is a slightly different idea of growth—what my idea of growth entails is that these micro enterprises expand into medium or large-sized operations, like department stores or supermarkets. In saying so, I am not advocating for every shop next door to become a Bhat-bhateni (too wishful!). That said, why don’t they really grow can be attributed to a few causes—inability to access finance, regulatory hurdles or just a sense of content with a small shop (subjective to who the owner is, of course).

Talking about difficulties in terms of access to finance, it is important to understand that such shops are started with an investment of around NRs. 200,000 which mostly comes across in the form of savings and support from friends and family. Such shops are mostly run by a single individual who is both the owner and the manager. The fact that these shops have no elaborate book keeping or formal accounting and that the lines of separation between the owner and the business entity are slightly blurred makes it a little more difficult for formal financial institutions like banks to invest in such ventures, and hence the hindered growth. And minus the investment, there is not much that can come up from meager savings or even friends and family for that matter.

Now that access to finance has been a problem, what are the solutions? As banks have associated risks investing for the expansion of the shops, cooperatives can be a way out. If the insurance industry regulations are eased up, the risk associated with this sector would also be minimized. This would then provide an incentive for commercial banks to enter this market and provide loans on the basis of business plans rather than on collateral.

As much as such shops form a major part of our largely informal economy, these also have the do-gooder spirit as they create a healthy labor market, reduce income and social inequalities, and provide vital goods and services to local communities and markets. These overarching good deeds aside, I wouldn’t know how to survive minus the endlessness of these stores that make buying of goods so easy and efficient. So we do need to understand that these need to grow and not close down unnoticed, right?

Keep posted for I intend to write more on these Shop(s) next door in the upcoming posts!

Anita Krishnan

About Anita Krishnan

Krishnan holds dual degrees--in law and sociology. Currently, she works as a Research Associate at Samriddhi, The Prosperity Foundation.

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Secured Transaction Act to be finally implemented!

Lock and chainThe recent move by the government to implement the Secured Transaction Act from mid-March has eased the access of acquiring loans for people who do not have fixed asset. As per the Act prospective borrowers can now secure loans against collateral of movable assets like gold, silver and even cattle. Small farmers and business owners in the past have deterred from taking loans from commercial banks as the paperwork and formality were very rigid and involved asset valuation among other things which was a costly process both for banks and borrowers.

Small loans transaction was mostly conducted through informal means, cooperatives and micro finance which meant paying high interest rates. With this Act, farmers and small business owners can now access loan as per the banks interest rate minus the hassle of paperwork and shorter loan delivery time. Furthermore, the Act also regulates multiple borrowing because the collateral has to be registered with a registry office that would update banks and financial institutions about the borrowers’ loan other Bank and Financial Institutions ( BFIs) as well (Kathmandu Post, 2014, February 8).

The Secured Transaction Act is one of the many policies needed to ease the access to finance in terms of loans in Nepal. But the Act alone won’t be enough. Easing the process of opening up bank accounts and also easing other monetary transactions are as much a need. One way of doing this could be through mobile banking initiatives and improving the micro-credit sector in Nepal.

About Astha Joshi

Astha completed her undergraduate degree in Politics, Philosophy and Economics (PPE) and is working as a research assistant at Samriddhi, The Prosperity Foundation.

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