Covid-19 fund supports Nepalese economy

Micro, small and medium enterprises (MSMEs) create jobs and promote development especially in countries of the Global South. In Nepal, the number of MSMEs was 300,000 in 2018, not counting informal businesses. They generated more than 20% of the country’s GDP and created employment for 1.7 million people. Many of these enterprises were hit hard by the COVID-19 pandemic.

A study conducted by the United Nations Development Programme (UNDP) showed that MSMEs suffered monthly revenue losses of 95% during the pandemic and had to lay off three in five employees. A large number of Nepalese MSMEs have not yet received any loans from private banks which hinders their growth and poses major difficulties during crises.

In October 2020, the SDC together with the Dutch entrepreneurial development bank FMO and One to Watch, a private investment company, launched a programme to support such enterprises through a COVID-19 fund.

"This initiative used a dual financing scheme for the first time in Nepal," recalls Suman Joshi, director of One to Watch. "The aim of the programme was to retain jobs and support companies in overcoming the crisis."

The COVID-19 fund was based on two pillars. Firstly, banks were brought on board to extend loans to MSMEs. MSMEs rarely receive loans as the private financial sector considered them unattractive and high-risk. Secondly, technical assistance was extended for business development which made MSMEs more resilient to crises, saved jobs and promoted growth. "The programme," says Joshi, "was successful for three reasons: the rapid response of the SDC as the main donor, the openness of partner banks to the new approach, and the business development services."

Through the programme, 100 companies were able to access loans from private banks for one year. The loans were granted free of interest and collateral because the risk was borne by the SDC, and the companies repaid the loans on time. In addition, 40 companies received training in financial management, accounting and marketing. "The focus on support and advisory services proved successful. The partner banks received support in selecting the loan recipients, and the companies were assisted with business development services," says Joshi. Some criteria had to be met to apply for a loan: companies had to be operating for at least two years, employ at least 10 people and submit recovery plans. Priority was given to female-headed MSMEs that were willing to adopt digitalisation.

The COVID-19 fund helped to avert lay-offs of more than 1,400 employees and supported the 100 MSMEs in creating over 400 new jobs. The companies were able to revive and expand their business after the lockdown and gain the trust of the banks. The Naman Care Home, a care facility for elderly people, is one of the beneficiaries. Its financial reserves dwindled rapidly during the pandemic. The loan enabled the facility to ensure quality health care, improve protection measures, admit new residents and retain jobs. After repaying the loan, it received a second loan and was able to build up a solid relationship with the partner bank.

Leather Wings, a leather footwear manufacturer with 60 employees, also received support. "Thanks to the financial and technical support, we were able to recover from the crisis, continue our business activities and keep our staff," says director Suraj Dahal. Nupste Craft, a women-led company that employs marginalised women who produce handmade felted wool, also benefitted from the fund. It enabled the company to move onto bigger premises. It now employs 120 people which is twice as many as before the pandemic. The company has also developed a new marketing strategy with the inputs it received from One to Watch.

"We were pleasantly surprised by the willingness of the companies to invest in digitalisation, especially online payments and advertising on social media," says Joshi. The banks in turn have realised that the MSMEs are reliable customers. Apart from loans, banks now offer them training in financial management, accounting and marketing to strengthen their creditworthiness.

The programme ended in April 2022, but the learnings have been incorporated in a similar initiative that will be supported by the government of Koshi province with SDC assistance. "The success of the COVID-19 fund has shown that the demand for loans in Nepal has not yet been fully met," says Suman Joshi. “Blended finance and the support for business development have leveraged private sector investment in sustainable development."