Econ-ity » Blog Archives

Tag Archives: kirana pasals

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.

Published by:

When being INFORMAL comes with incentives

faulty incentives' systemNepal’s economy is largely informal; informal sector here comprises of a group of production units that form part of the household sector as household enterprises or equivalently, unincorporated enterprises owned by households. Much likely, such units have limited capital investment and are a subsidiary activity of the owner. Their activities are not regulated under any legal provisions and/or they do not maintain any regular accounts. In Nepal, a good chunk of production and consumption is contributed through such informal sector activities. The sector also contributes to much of the income generation through employment thus providing means of livelihood to millions of Nepalese. Kirana Pasals that are small mom and pop shops selling groceries and fast moving consumer goods form a major segment of this informal economy in Nepal.

What makes these shops informal can be attributed to an endless list of reasons—a primary reason being that informality to these shops means a much better deal than choosing to formalize their operations. Given, the informal sector helps during economic crisis. But the fact that the benefits of informal employment may not be sufficient to achieve an acceptable standard of living as informal employment rarely comes with social protection, good working conditions and adequate wages cannot be ignored for long. But in our case, the scenario of choosing informal as opposed the formal begs to not be changed until a few things are set straight.

First in the list being the registration of these Kirana Pasals. Such shops are required to register at four different places; these fall under the jurisdiction of six major government agencies and they are subjected to 15 major laws and policies. Given their size and monetary weaknesses, these shops have less capacity than larger firms to navigate through the complexities of regulatory and bureaucratic networks. When formalized, the government has rights to inspect them and close them down if regulations are violated—here regulations are manifold and are more often than not subjected to interpretation and discretion of the official thus allotted for the job. Generally, Kirana Pasal owners are aware of few of those laws that are applicable to their businesses but there always remain minuscule provisions and clauses which the businesses would not be in compliance with, simply because of the volume and scattered nature of those regulations, which keeps the business always on offence. And as De Soto rightfully said, “informal economy is a by-product of over regulation and bureaucracy in the formal economy” and unless we do away with such hurdles there seems to be not enough hope for such small ventures to grow or even formalize their operations.

Secondly, empirical results have demonstrated that firms rank taxation as among the most severe obstacles to the long-term success of their enterprises. Likely, the shops in Nepal (if formalized) face a disproportionate burden from tax in comparison to larger firms. Those with turn over greater than 2 million rupees or income greater than two hundred thousand rupees are eligible to pay VAT tax of 13% and Corporate tax rate for Private Limited Co., Limited Co., Partnership Firm in the retail sector – a total of 25%. In many cases, not having books or audited accounts may result into the amount of tax to be paid being established by the tax official based his judgment, making use of a variety of indicators, including the observed standard of living of the entrepreneur. This might result in very high tax rates for enterprises.

Thirdly, there are standards that shops have to abide by. As much as the shops would be willing to do so in the light of protection of consumer rights, here too, the inability to bring in efficient intervention leads to losses on the part of the shop owners.

With problems as such to be encountered in terms of wishing to bring the shop into the formal stream, it seems that it is in the light of their own well-being that most decide to cling to their informal operations. Until and unless the aforementioned hurdles are done away with, the shops will remain informal because being so has more incentives than choosing to be otherwise.

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.

Published by:

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.

Published by: