Ficker of Hope

First published in the Kathmandu Post on 20th Feb, 2011

The Easy Way Out

The barber shop at New Baneshwor that I visit every fortnight looked quite different when I went there for a haircut recently. There were no signs of familiar faces, and the current crew of barbers, except the owner, looked completely new to me. As I waited for my turn to come, I asked the owner nonchalantly about the whereabouts of those faces familiar to me. He replied, with a hint of frustration, that they had moved to “Qatar”. As I sat down for my haircut, he told me that he had had to replace two departing barbers with new members from his hometown near Janakpur.

I then remembered a conversation that I had with one of the barbers a few months ago. At that time, he, along with one of his colleagues, was mulling setting up a barber shop of his own in Ghattekulo. He was also processing his visa for Qatar as a backup option if things did not work out as planned with his new venture. I then presumed that things must not have worked out for him; and, as a result, he along with his colleague must have decided to move to Qatar for better opportunities. I did not know much about that barber, but from the fair bit of conversation that I had with him over the last one year, I found him to be quite entrepreneurial. He had everything planned out about the barber shop; he had found a place for a rental of Rs 8,000 per month, he had a colleague as a partner, and he was willing to risk his existing job and give his new venture a go.

I don’t know what materialized that made him scrap his venture and move to Qatar. But I do know that Nepal has lost out on an entrepreneur, irrespective of the size of his business. As I moved out of the barber shop that day, it made me think about the pervasiveness of the foreign employment culture in Nepal and its effect on the Nepali economy.

Nepal is a remittance dependent economy. Everyone who follows our economy knows this fact. According to the World Bank’s data, Nepal now ranks as the fifth highest remittance receiving country in the world (this ranking is based on the share of remittance in the country’s Gross Domestic Product). Remittance has had a lot of positive influence. According to academic research, it has helped reduce the headcount poverty rate in the country. It has been providing much needed foreign currency reserves and, given Nepal’s perennial trade deficit, has helped to maintain our external sector stability. It has also helped the money transfer business to flourish;

many people have made billions out of the remittance business. Not only that, it has also provided much needed liquidity to the financial system.

Having said that, incidents such as the one I mentioned above makes one introspect about the long-term impact of migration on the Nepali economy. Initially, mass migration to the Gulf countries and Malaysia, where a majority of Nepali migrant workers reside, I believe, transpired because of the Maoist conflict. At the height of the conflict, Nepali youth started to migrate overseas fearing for their lives. The conflict also resulted in closure of industries and stifled employment opportunities within the country, which exacerbated migration as Nepali youth had to earn a livelihood and support their families.

However, this has persisted for a long period of time. Going to Dubai or Malaysia is now so entrenched in the Nepali youth’s psyche that they don’t even think about giving it a go here. Yes, there are still a lot of problems in Nepal. Employment generation is not adequate, and there is a wide mismatch between demand and supply of workers. Having said that, it’s not as bad as it was during the height of the conflict.

However, because this migration culture is so pervasive that most Nepali youth have an established mindset of going abroad as they perceive that there are no opportunities here. They want to take the “easy” route and fly out of the country. I am not saying that working in Dubai or Malaysia is easy. Nepali workers toil hard for minimum wages. However, once someone has that idea of going abroad in mind, it’s easier for them not to give their best at what they are doing here.

Going forward, the danger then is that Nepali youth, while growing up, will inculcate this “growing up to go to Dubai” approach to their lives. Having seen their uncles or cousins or brothers make that journey, they might as well take that “easy” plunge. The loss to our nation will be their entrepreneurial skill and strong work ethics.

This article was first published on 7th Feb, 2011 in The Kathmandu Post

Permanent Link: http://www.ekantipur.com/2011/02/07/business/the-easy-way-out/329241.html

The missing market

In Nepal, we have commercial banks that provide funds to big enterprises, and we have microfinance institutions that provide funds to small entrepreneurs. In between, there are other financial institutions, segregated by the class structure of Nepal Rasta Bank (NRB), who are catering to the financing needs of entrepreneurs who lie between the above mentioned extremes. Some of the commercial banks have also set up a separate department to cater to the financing needs of small and medium-scale enterprises, so called SME lending; however, their lending via such schemes is miniscule if one compares it to their total lending portfolio.

A bulk of the lending via these financial institutions is on the basis of collateral. Without collateral, there isn’t a good chance of getting loans even if you have a great business plan. If a young enterprising person has a great business idea and needs seed capital to start the business, then there is a slim chance that this person will be able to start the business without providing adequate collateral or initial equity to meet the required debt-to-equity ratio.

And this is where, I believe, there is a huge missing market in terms of our financial system. We don’t have a developed system that provides seed capital to enterprising people. As a result, many innovative business ideas and sound business plans don’t get translated into actual businesses.

One of the ways to bridge this is through venture capital (VC) firms or private equity (PE) funds or other investment funds that invest in new and innovative businesses without seeking any collateral or initial equity from the entrepreneurs. There are two areas where a VC firm or a PE fund can help, either to start a new enterprise by providing seed capital or to expand an existing enterprise by providing necessary funds for expansion.

VC firms or PE funds are necessary as they recognize the concept of sweat equity—value attributed to the creator of an enterprising idea—and fosters innovation and entrepreneurship. If I have a good business plan and if I am able to convince the fund manager of a PE fund that my business plan does indeed make adequate returns, then the PE fund will provide the necessary seed capital to start the business. And they will do that even if I don’t provide any initial equity or put up collateral for a share of a certain percentage in the company. In the process, I get value for my “sweat equity” through the equity sharing structure with the fund.

As of now, we don’t have a proper system in place that recognizes the value of “sweat equity”. Many readers of this column might argue that the Nepali economy hasn’t reached a stage to support the establishment of VC firms of PE funds and these types of investment firms will emerge as the Nepali economy starts to pick up a higher growth rate. Even some of my friends with whom I discuss these ideas feel the same way. However, I beg to disagree with such a viewpoint. There are a couple of reasons for my disagreement.

First, when someone talks about a VC firm or a PE fund, he or she often associates it with either providing seed funding to technological companies (to some extent this is understandable as the growth of major tech firms in Silicon Valley is largely due to VC firms) or the leveraged buyout that engulfed the global financial market during the late 1980s. However, VC firms and PE funds work in areas above and beyond just technology and finance—from agriculture to energy to medicine. It’s just that technology and finance happen to be glorified ones.

Second, again when someone talks about a VC firm or a PE fund, he or she associates its promoters with individuals with a high net worth. Yes, founders of VC firms or PE funds have predominantly been high net worth individuals. However, there is a growing trend of the association of banks (ICICI Venture in India) and development partners (though funds such as Small Enterprise Assistance Fund) to cater to the private financing requirement in developing and emerging economies.

Third, I believe that there is a huge need for VC firms and PE funds in a developing economy like Nepal as they foster innovation and provide employment opportunities. They foster innovation because entrepreneurs are able to translate their business plans into tangible businesses. And when these businesses grow and expand in size, they provide employment. Even though a majority of businesses funded by VC firms or PE funds fail, those who succeed deliver long-term value to the economy.

First published on 24th January in The Kathmandu Post.

Permanent Link: http://www.ekantipur.com/the-kathmandu-post/2011/01/23/money/the-missing-market/217601.html