Report And Case Studies

Microfinance for small scale tree and forest products enterprises in Nepal

Author: Surya B. Binayee, Indu B. Sapkota, Bhishma P. Subedi and Laxman Pun
Publisher: ANSAB
Language: English
Date of Publication: December 2004
Number of Pages: 33 + 10
Price: Free

With 39.6% forest coverage and rich biodiversity, Nepal is promoting community-based forest management. Community forestry has been successful to protect over 1 million hectares of forests with over 13,000 community forest user groups in which more than a third of its total population of 23 million is involved. According to HMGN statistics in 2004, about 30% of the population lives below the poverty line. Among other forest resources, NTFPs are a part of livelihoods in Nepal, especially for the poor in mountains. In 2002, Nepal exported NTFPs worth over Rs. 2,546 million. A tremendous potential exists to develop small and micro-enterprises in forestry sector by linking it to microfinance services. As of mid January 2004, Rs. 24,715 million is disbursed as micro-credit to 727,000 households, which is only 45% of the estimated households below the poverty line, but not all households reached are below the poverty line.

To identify the opportunities and constraints of forest-based small and micro-enterprises and analyze the scope of microfinance in enterprise development, Parbat district, which is successful to develop many forest-based micro-enterprises, was chosen for a case study. Parbat is located in the hills of western development region of Nepal and the population of the district is 157,826 with a total GDP of Rs. 3,366 million; 90.8% of population is dependent on agriculture and the district is heavily supported with the foreign employment and pension (37.9% of the total GDP). Forestry sector, mostly NTFPs contributes 11.5 percent to its domestic GDP, which still seems to be underutilized given the vast resources of the district.

Although there are several banks, micro-finance institutions, NGOs, saving and credit groups in Parbat, a few provide credit to forest-based enterprises. MEDEP and LFP play major role in promoting forest-based enterprises in Parbat. With the support of MEDEP and a total micro-credit of Rs. 2.9 million, a total of 673 micro-enterprises have been established, of which 240 are forest-based. Similarly, with a total of Rs 458,156 micro-credit flow through CFUGs, LFP has supported to establish 73 micro-enterprises, of which 33 are NTFP-based. The total amount of micro-credit investment needed in forest-based enterprises in the district is estimated to be Rs. 23 million. Despite these efforts and micro-credit flow, the gap in demand and supply of micro-finance services is enormous. Providing micro-credit to forest-based enterprises, mostly located in rural mountains, is rather challenging due to high management cost, little experience and knowledge in forest-based enterprises, and unclear and restrictive policy provisions.

The major constraints faced by the poor entrepreneurs in accessing micro-credit is the lack of collateral and the risks associated with the forest-based enterprises, such as controlling government policy, uncertainty in supply of raw materials, difficulty in access to technology and market information. However, micro-finance is not the only constraint in enterprise development. Provision of entrepreneurship development and capacity building programs, appropriate technology, market information and linkages, and policy incentives should be accompanied with the micro-finance to promote the enterprises. In addition, linkages of CFUGs, saving and credit groups, and other MFIs to micro-entrepreneurs is required to broaden the scope of forest-based enterprises to poverty reduction while promoting sustainable forests management. It is evident from the study that the selection of right entrepreneurs and enterprise options, provision of business development services, and continuous follow up and counseling are a key to the success of enterprise development programs.