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Unit V

Institutional Support to Entrepreneurship in Nepal

The Support Concept


Financial Support Agencies
Commercial Banks
Finance Companies and Cooperatives

Need for Institutional Support:


Institutions can be government, non-government,
cooperatives and private organizations.
Institutional support can be promotional, supportive
and facilitative.
Such support is needed to solve and mitigate various
problems faced by entrepreneurs.
Availability of support and facilities makes the
business environment conducive and enabling for
entrepreneurs.
However, the main problems that confront
entrepreneurs are:
Poor access to capital and credit.
Scarcity of raw materials: Unreliable supply
sources for inputs.
Marketing problems: Poor access to market and
tough competition. Lack of market information.
Lack of opportunities for competency
development.
Lack of access to appropriate infrastructure: It is
very costly to develop by entrepreneur.
Poor access to information, research and
extension services
Lack of supportive policies and incentives.

Institutional support to entrepreneur is mainly


needed in the following areas:

1. Capital Resources:
Entrepreneurs lack adequate capital resources.
New ventures do not get easy access to capital
market instruments.
Loans from formal financial sector such as
commercial banks, cooperatives and other financial
institutions are needed to finance new ventures.
The cost of such credit tends to be low compared to
informal sector.
International NGOs also provide concessionary loans
to target entrepreneurs.

2. Raw Material Supply:


Easy availability of raw materials facilitates
entrepreneurial growth.
New ventures, especially those based on new
technology, require raw materials from foreign
sources.
Entrepreneurs of such ventures lack time, experience
and foreign exchange resources to import the needed
raw materials.
Institutions are needed to take care of raw material
supply for entrepreneurs.

3. Marketing Outlets:
Entrepreneurs lack skills, experience, information and
resources to market their finished products.
Many new ventures fail because they fail at the
marketing front.
Institutions are needed to provide marketing outlets
for the products of entrepreneurs.
They establish emporiums, organize trade fairs and
exhibitions to market the products of cottage and
small industries.
NGO also carry out the function of marketing the
products of entrepreneurs.

4. Competency Development:
Entrepreneurs need to develop their self-
competency.
They need to develop the skills of their employees.
Various education and training programmes are
needed for updating and upgrading competencies.
Such programmes are expensive.
Entrepreneurs lack capabilities and resources to
organize them.
Institutions are needed to cater for competency
development needs of entrepreneurs.
Various government institutions provide training and
development programmes at no cost or highly
subsidized cost.
NGOs also provide training programmes.
Private organizations are also active in skill
development but their programmes tend to be costly.

5. Infrastructure Availability:
Entrepreneurs need infrastructural facilities.
They can be industrial sheds, transport,
communication, power, water, waste disposal etc.
Such facilities need huge resources to build.
Entrepreneurs do not posses huge resources to build
infrastructure.
Institutions are needed to build infrastructure.
Government institutions, supported by foreign aid,
undertake the task of infrastructure development.
E.g. government of Nepal has established Bhaktapur
Industrial District exclusively for the establishment of
cottage and small industries.

6. Access to Information, Research and Extension


Services:
Information is power.
Research is the source of inventions and innovations.
Extension services provide knowledge about
technological and other developments in the
industrial environment.
Entrepreneurs lack resources to build facilities for
information, research and extension services.
Institutions are needed to supply relevant
information to entrepreneurs.
Institutions also conduct research and provide
extension services relevant to entrepreneurial
activities.
Government institutions are important to fulfil such
needs.

7. Policies and Incentives:


Entrepreneurs need supportive policy environment to
survive and grow.
Government institutions are the source of policies.
The Industrial policy of Nepal has reserved cottage
and small industries for Nepalese citizens.
The legal framework enacted by the government
generally carries various incentives for
entrepreneurial activities.
Special packages are provided to revive sick
industries or start new ventures.

Financial Institutions
The establishment of Nepal Bank Ltd. 1937 marks the
beginning of financial institution in Nepal.
This was followed by Nepal Rastra Bank in 1956,
Nepal Industrial Development Corporation in 1956,
RastriyaBanijya Bank in 1966, and Agricultural
Development Bank in 1968.
Financial institutions in Nepal were all government
owned institutions till 1984.
They consisted of Nepal Rastra Bank, 2 Commercial
Banks, 2 Insurance Companies, 2 Development Banks,
1 Employee Provident Fund and 1 Credit Guarantee
Corporation.
The liberalization policy of the government in the
early 1980s opened up the door for private sector
initiative in the financial sector.
In Nepal, 31 commercial banks, 87 development bank,
79 finance and 21 micro-credits are in operation.
The commercial banks accounted for about 70% of
total financial system assets.
The two development banks (ADB and NIDF) account
for 8%.
The finance companies account for 4%.
Rural development banks focus on poor rural women.
Loan disbursement by commercial banks increased
more than four-fold between 1994 and 2003.
Similarly, for Agricultural Development Bank, it
increased four-fold over the same period.
Employees Provident Fund also has performed well.
But the performance of Nepal Industrial
Development Finance has been poor.
Banking financial institutions support entrepreneurs
in Nepal.
In July 2009, commercial banks had advanced 39% of
their total loans to industrial sector.
Similarly, Agricultural Development Bank had
advanced 32% of its total loans for agro-industries
and agro-business.
Nepal Industrial Development Finance had advanced
62% of total loans to manufacturing industries.

Institutional Finance
Finance is important for start up and growth of new
ventures.
Entrepreneurs lack adequate finance.
Both government and private financial institutions are
important sources of institutional finance for
entrepreneurs.

1. Commercial Banks:
Commercial banks can be government-owned,
privately-owned or jointly owned by government and
the private sector.
They provide both short and long-term loans to
industries.
They are the prime source of meeting working capital
needs.
Commercial banks collect deposits form public, invest
in loans and overdrafts, sell and purchase bills, open
letter of credit for export and import, provide bank
guarantee, deal in foreign exchange and invest in
stocks and bonds.
They also implement directed credit programmes for
specific target groups.
In the past, commercial banks extended little credit
to cottage and small industries due to their low
creditworthiness and high risk.
However, central banks have directed them to invest
in cottage and small industries.
The rate of interest is concessional for this sector.

2. Development Banks:
They are specialized financial institutions.
They work as development finance institutions.
They take high risk by providing loans for venture
capital.
Development banks cater to the needs of
entrepreneurs for industry, agriculture, import-
export, cottage and small industries, cooperatives.
Development banks perform both financial and
promotional functions.
i) Financial Functions:
Mobilize deposits from national and international
sources.
Provide loans to industries and other enterprises.
Perform merchant banking functions and
underwrite share issues.
Purchase equity and debentures of industries,
including investment in venture capital for
entrepreneurs.
Provide guarantees and refinance facilities.

ii) Promotional Functions:


Carry out market and investment research
Carry out technical and economic research of
industries
Provide technical, managerial and financial
services
Attract foreign investment
Develop capital market

3. Finance Companies & Cooperatives:


They accept fixed and saving deposits.
They provide loans to industries and individuals.
Cottage and small industries find them simple to get
loans.
Their functions are:
Collect fixed and saving deposits. They provide
higher rate of interest.
Provide term loans to small businesses, industries
and individual. They charge higher rate of interest.
Provide hire purchase loan.
Perform merchant banking functions.
Invest in stocks and bonds.
Provide lease finance for properties and
equipment leasing.