A project proposal on:

Overview of SMEs Practices in Chitwan,Nepal

Prepared for:

Prof. Dr. Kundan Dutta Koirala

Course Facilitator
Business research Methodology
Boston International College

Prepared by:

Amir Tamang

MBA-III Trimester

Boston International College

NOVEMBER 8, 2017

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Abstract:

This report is part of my academic research of third trimester of MBA that focuses on small and
medium enterprises (SMEs) and their current status, and contribution in the economy, present
key issues, challenges and opportunities of SMEs in Chitwan. It provides a relatively broad
literature review of the challenges, prospects and government efforts towards SMEs. Yet, it
empirically evaluated the challenges, prospects and government efforts so far and the influences
they have on SMEs in chitwan,Nepal.

The paper will be based on data drawn collected from the SMEs owners of chitwan and evidence
drawn from the report of Department of Cottage and Small Industries, Chitwan, chamber of
commerce and industry Chitwan, Economic Survey, data available from Federation of
Handicraft Association of Nepal, and various relevant articles.

Introduction:

SME is a very small business that produces goods or services for cash income. In general, they
have limited access to capital, have few employees, and are often home-based. In most
developing countries in general and the least developing countries like Nepal in particular the
private sector is made up mainly of small businesses. While foreign investment is important, the
majority of investment in developing countries comes from domestic sources. Most small and
medium enterprises operate informally, outside the official regulated systems. Small and
Medium-sized Enterprises (SMEs) are often considered the heart of a developing country’s
entrepreneurship – the source of most of its new employment and productive investment,
mobilizing and using local resources , raising the income level of the rural populace and the
basis for its growth and elimination of poverty.

Since the late 1980s, Nepal has shifted to an open market regime. As a result, barriers to
international trade have been substantially reduced. Nepalese SMEs have been affected by this
change and are finding it increasingly difficult to compete with imported products in the
domestic and in the international markets for exportable goods. Nepal’s development plans and
other commerce related policies have been promising different incentives for SMEs, but lack of
awareness, lapses in policy declaration and problems in actual implementation of the policies
have largely prevented SMEs from getting any significant benefit. Most SMEs can only
insufficiently utilize their market opportunities. They have no access to information on market
developments, prices, exports and financial possibilities.

Most of the Chitwan SMEs are involved in processing and manufacturing of food items,
consumer and household goods, and textiles and related products. Cash Crop farming, Rice,
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pulses, oil and flour mills, dairy, soft drinks, fruit juices and processed products, noodles,
biscuits and light snack products, chocolates and candy, mineral water, dried vegetables, and
some other household utilitarian and consumption goods have dominated SMEs activities in
Chitwan.

Statement of the problem:

SMEs can play the role of being the “engine of growth” in our country, both in terms of
employment generation and improving production. This is vindicated by a recent IFC study that
suggests there is a $2.5 billion untapped market for SME lending in Nepal. Currently, about
1,500 small and medium enterprises are operating in Chitwan, Nepal, providing employment to
25,000 people, however, 25 percent of these businesses do not have formal banking relations
with financial institutions. This sector presents an opportunity to the country to harness local
competitive advantages for achieving economic growth.

Despite immense opportunities in the country’s SME sector, it is still challenged by lots of
constraints in resource mobilization. SMEs in Chitwan still employ traditional management
practice; they have low capital base, outdated and inefficient production process, technology,
and poor information and knowledge about business opportunities and marketing. Moreover, by
giving utmost priority to the safety of loans, banks and financial institutions tend to give
preference to lending funds to category “A” corporate borrowers over SMEs who do not have
sufficient wherewithal to provide securities to the banks. Current lending practices coupled with
rapid fluctuations in the interest rate market has inflated the perception of risk in the SME sector
so banks and financial institutions seek higher returns in their investments in SMEs. This then
increases the cost of starting up new businesses.

These reasons have led to SMEs finding it difficult to raise capital for growth and expansion.
However, due to the importance of SMEs in the Nepali economy there is an urgent need to cater
to their needs and encourage external financing in SMEs.

Other constraints of SMEs is unavailability of market. At present, geographical distribution of

export assistance is not adequate. So, the product of SMEs at remote has no opportunity to gain
access to international market. Therefore, measures need to be taken for enhancing the rural
SMEs access to international market. The policy bias in favour of the larger businesses and
against smaller businesses have created void in which growing enterprises find difficulties. Such
problem in policy design should be solved through appropriate measures.

Studies show that the lack of resolution, government will and political stability in Nepal has
been the discouraging factors for the development of SMEs in Nepal. Establishment of SMEs is
easier in Chitwan, since the SMEs are based on the agricultural products. However the
distribution of the SMEs products has been difficult work due to the lack of transportation.

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Research Objective:

The purpose of this article is to evaluate the challenges and prospects of SMEs in a sustainable
and competitive advantage or disadvantage of its growing importance in Chitwan’s economy.
This is an exploratory research. Attempt will be made to explore the present situation of the
micro enterprise and small industries. Specifically, the purpose of this study is:

1. To evaluate the present existing status of the SMEs in chitwan.

2. To evaluate the prospects of SMEs growth and development in Chitwan.
3. To evaluate the extent the challenges of SMEs affect its growth and development in
Chitwan.
4. To appraise the extent of government efforts in the growth and development of SMEs in
Chitwan.
5. To assess the contribution of Small and Micro enterprises for the economic development of
Chitwan.
6. To assess the major issues and challenges facing by SMEs in Chitwan.

Research Questions

In order to address the aforementioned problems, seven research questions guided the study:

1. What are the present existing status of the SMEs in Chitwan?

2. To what extent are the prospects of SMEs growth and development in Chitwan?
3. To what extent do the challenges of SMEs affect its growth and development in
Chitwan?
4. To what extent do government efforts determine SMEs growth and development?
5. What are the government initiatives and policies for supporting SMEs in Chitwan?
6. What are the contribution of Small and Micro enterprises for the economic development
of Chitwan?
7. What are the major issues and challenges facing by SMEs in Chitwan?

Hypothesis

Hypothesis testing is the use of statistics to determine the probability that a given hypothesis is
true. The following hypotheses directed perceptions towards SMEs problems and challenges:

H1: The challenges of SMEs significantly affect their growth and development in Chitwan

H2: Government efforts significantly affect SMEs growth and development in Chitwan

H3: The prospects of SMEs significantly affect their growth and development in Chitwan.

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Literature review

After the year 1990, the situation of SMEs has seen a series of change in numbers, policies,
products and publicity. The open economic policy adapted by the developed, developing and the
least developed countries has brought effective impacts in small and medium enterprises. SMEs
and the products of SMEs in Nepal are interrelated.

The twin processes of globalization and liberalization, combined with rapid advancement in
information and communication technologies, are creating new dynamics of production,
enterprise development and international competition. The new government in Nepal which has
been established after the establishment of Loktantra-the outcome of the People’s Movement,
should show concern about promoting SMEs. It can also help achieve a more equitable
distribution of the benefits of economic growth and thereby help alleviate some of the problems
associated with uneven income distribution thereby helping in social and economic
transformation within the enterprises sector in the economy, the vast majority of entrepreneurs
are informal micro and small enterprises.

SMEs in Chitwan are confronted with several challenges. These challenges stand as barrier
against effective growth and development of SMEs. The factors can be categorized into eight
and can have devastating impacts if not properly handled. Figure 1 shows details of the
challenges.

the
economy

infrastruct
lack of Challenges
of SME's
ual
finance
facilities

political
issues

Fig1. Some of the challenges of SMEs in Chitwan

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Economy

The economy of Nepal is marred with corruption in all aspects and corruption has continued to
pose serious menace to the survival of SMEs in Nepal. Nepal has been ranked 122th out 180
countries ranked in Corruption Perception Index (CPI)-2017. Corrupt practices appear to spread
throughout, from high ranking officers, who collect material inducement to disburse government
approved funds to micro, small and medium scale enterprises, down to office assistants, who
declare files missing if not submitted with tips. The high cost of doing business in Chitwan
imposes economic dimension of challenges encountered by SMEs.

Infrastructural Facilities

Nepal is a small landlocked country having area 147181 square km with length about 500 miles
and wide 100 miles. Inadequate and disproportionate development of the physical infrastructure
like transportation, communication, electricity is also a major issue which has retarded the
overall development of SMEs. Majority of the rural areas in Chitwan have not been integrated
into the mainstream of the economy because basic infrastructure including road, electricity,
communication have not yet reached out to these areas. We have been facing the severe problem
of energy crisis including huge burden of load shedding despite the huge hydroelectricity
potential within the country. Failure to match demand with adequate production and supply of
electricity has adversely affected all sectors of the economy.

Political

This country is a democratic country with elections and multi parties and all but it has so much
political instability. Nepal’s political situation is very unstable, we have Governments changing
once a year, and hence no good economic development can occur. The present political situation
in Nepal does not allow for favourable and conducive environment for SMEs to operate.
Unfavourable policies, laws and delays in the implementation of the national budgets stall proper
planning of SMEs in Nepal. The constant change of power from one administration to another in
the political his of Nigeria has prevented against the success of SMEs.

Lack of Finance

The budgetary allocations set aside to assist and that are available for SMEs growth and
development for Chitwan,Nepal is very small. Funds provided for SMEs are too small for proper
planning for the take-off of SMEs. The condition of the SMEs remains a thing of concern.
Under-funding and systemic corruption makes the matter worse. Inadequate funding of SMEs
stands as one of the major factors working against effective SMEs, planning and
implementation.

Despite other constraints faced by the SMEs, they regarded access to finance as their biggest
constraint. The reason can be attributed to the following reasons why financial institutions are
reluctant to cater to SMEs.

i. SMEs usually lack proper audited financial statements and collateral to secure loans.

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ii. The cost borne by financial institutions in providing smaller sized loans is relatively higher as
due diligence costs are at par with larger sized loans

iii. SMEs generally require long term capital financing, whereas banks seek short term deposits
to increase their liquidity position. This leads to a difference in the demand of the SMEs and
what the financial institutions can supply.

iv. Financial institutions go for risk-averse companies from where they can easily raise their
interest payments.

Other Challenges

Lack of managerial experts is another problem facing by SMEs in Chitwan. Many SMEs lack
the basic skills, techniques and aptitude to successfully operate a business. The managerial skills
and talents necessary for planning, organizing, directing and controlling both the human and
material resources are essential components of effectively running a business outfit. SMEs are
unable to employ and maintain highly skilled workers because of their small sizes and the
limited capital available. Skilled personnel like accountants and managers that are meant to be
employed by SMEs are not engaged partly due of financial problems. This has resulted in poor
accounting and financial management practices experienced by SMEs in Chitwan.

Government Efforts in the Growth and Development of SMEs in Chitwan, Nepal

Governments in Nepal have consistently made efforts towards the growth and development of
SMEs in the country. However, in spite of these efforts, the expected results in terms of solving
the challenges of facing SMEs still persist. Government has realized the importance of the
SMEs, various supportive programs have been carried out through government agency and non-
governmental and private sector. Bank and financial institutions, cooperatives also conducted
micro finance program which ultimate goal is to encourage deprived and target community to
start micro enterprise activities and empower them financially. The efforts of governments can
be identified as:

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 Program & Organisation Coverage Duration
Department of Cottage and Small 75 Districts, each From 1957 to date
Industries
Micro Enterprise Development 36 Districts, with total continued
1997 to 2006
Programme beneficiary
Poverty Alleviation Fund, GoN 40 Districts 2006 to date
(MEDEP) / UNDP number exceeding 40,000.
Gramin Bikash Bank ( Micro Credit 5 Development Regions 1992 to date
Private
Bank) Sector Microfinance Bank, Almost all districts to date

ooperatives

Fig 2. SMEs Support Programs in Nepal

Department of Cottage and Small Industries regularly organizes various training program to
initiate small scale business in Chitwan . Every year such types of training program being
conducted and numbers of potential entrepreneurs participated different sort of training.

Research Methodology

Research Design

The study attempts to describe the outcome of the challenges, prospects and government efforts
so far and the influences they have on SMEs growth and development in Chitwan,Nepal. The
research design use to carry out this study will be based on descriptive research design. It will
deal with statistical data and the main aim of the report is to find out the current situation, issues
and challenges facing by SMEs in Chitwan district. For this study primary and secondary data
will be collected. .

Population and sample

Population refers to the industries of the same nature and its services and product in general.
Sample on the other hand is the representative part of population selected from it with the
objective of investigating its properties. There are around 1500 SMEs in Chitwan, out of these,
50 SMEs will be selected as the sample. All together 50 questionnaire will be distributed for the
research purpose.

Sources of the data

The primary data for the study will be collected from the SME’s owners with the help of
questionnaire. Similarly the secondary data will be collected from secondary sources like report
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of Department of Cottage and Small Industries, Chitwan, chamber of commerce and industry
Chitwan, Economic Survey, data available from Federation of Handicraft Association of Nepal,
and various relevant articles.

Data collection techniques and data analysis tools

This will be a study for which information will be obtained through SMEs owners of Chitwan
and various secondary sources like document, report and articles. Questionnaires will be
distributed to the SMEs owners to collect the primary data. The instrument (questionnaire) used
for data collection was designed by the researcher and validated by experts in the measurement
and evaluation. Secondary data will be taken from Federation of Handicraft Association of
Nepal, Department of Cottage and Small Industries and publication of Ministry of Finance.

The questionnaire will comprise four sections: section 1 will contain information on respondents
demographic data (age and gender); section 2 will emphasize challenges of SMEs in Chitwan;
section 3 will talk about variables relating to government efforts towards promoting SMEs in
Chitwan; while section 4 will deal with issues of prospects of SMEs in Chitwan. The statistical
analyses in this study will be carried out using SPSS version "23". T-test (t) analysis will be use
in testing hypotheses 1, 2, and 3. While One-Way Analysis of Variance (ANOVA) will use to
determine if differences exist in respondents’ opinion on the variables.

Study Limitation

 Among 1,500 SMEs in Chitwan, Only 50 SMEs will be observed during the research
period. So the research may not represent the whole picture of SMEs of Chitwan district.
 Department of Cottage and Small Industries, Chitwan, chamber of commerce and
industry Chitwan may not be willing to part with all the information with them.
 SMEs owners may not be willing to part with all the information with them.

Study Timeline

The total time for the research has been scheduled for twelve weeks. First two week has been
scheduled for the study of subject area and literature review. Designing questionnaire will take
one week so that research directions and finding will get proper march between them. Similarly
the next two weeks are set for distributing questionnaires and following three weeks is scheduled
for collecting the data. Following two weeks are set for the analysis of data and concluding the
findings and finally the last two week is scheduled for preparing the final report.

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The given figure represents the Gantt chart for the study timeline.

Activities Weeks

2 4 6 8 10 12

Literature
review

Questionnaire
design

Questionnaire
distribution

Data
collection

Data analysis

Final report

Fig 3. Gantt chart for the study timeline

References

International Labour Office in Nepal (2003).A Report on Micro and Small Enterprise Policy
Review in Nepal Kathmandu, International Labour Office.

Rajkarnikar, P.R. (2009). Trade Facilitation and SMEs in Nepal. Regional Policy Forum on
Trade Facilitation and SMEs in Times of Crisis, 20-22 May 2009, Beijing, China

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Lamichane,R.(n.d.). What is stopping the SME Sector. Retrieved from entureplus.com.np/what-
is-stopping-the-sme-sector/

Singh, S.M. (n.d.). Micro and Small and Medium Enterprises in Nepal: -Ways to Grow
and Globalize. Retrieved from https://nepalmynepal.wordpress.com/2015/11/19/micro-and-
small-and-medium-enterprises-in-nepal-ways-to-grow-and-globalize/

Micro, small and medium enterprises boom. Retrieved from

https://thehimalayantimes.com/business/micro-small-and-medium-enterprises-boom/

Bajracharya, Puskar. (2007). Regional development strategy. Kathmandu: ADBNPC

Canadian Cooperation Office (CCO)-Nepal. (2012). A target evaluation of micro enterprise

development programme. Kathmandu: CCO- Nepal

Karki, Bir Bahadur. (2011). Doing business and role of Government for entrepreneurship
development, The journal of Nepalese Business Studies, Vol. VII No. 1 Dec. 2010/2011.

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