With a total forest area coverage of about 39.6 percent as at the end of 2002, Nepal is extremely rich in many forest-based resources such as high value timber, medicinal and aromatic plants, fuelwood, grass, fodder, leaves, wildlife, hunting resorts and forest-based tourism. To manage its resources, Nepal has been successfully applying a community-owned forest management approach with the establishment of 13 079 community forest users groups, representing more than a third of the country's total population of 23 million.
Although community forest users groups are emerging as grassroots-level organizations to conserve, manage and utilize the forestry resources, these vast resources are still largely unutilized. Furthermore, there is a tremendous potential for establishing and developing environmentally friendly forest-based small-scale enterprises. With 30 percent of the population in 2004 still living below the national poverty line, the government has recognized that not only is forest conservation and management by the community essential, but also the sustainable utilization of forest resources by poor and socially excluded rural families through the development of small-scale enterprises for poverty alleviation.
Until now, private sector entrepreneurs have been averse to investing in forest-based small-scale enterprises. The development of such enterprises faces many issues and challenges:
There are a number of formal and semi-formal financial institutions in Nepal, some of which solely provide microfinance services and others that also provide additional services. In mid-January 2004, the total number of microfinance institutions and microfinance programmes was 2 861, of which 2 800 were represented by savings and credit cooperatives. The total disbursed microcredit reached 727 000 households, which is only 45 percent of the estimated families living below the national poverty line, or 17.1 percent of the total households in Nepal. With a remaining 55 percent of poor households still unserviced, the country's potential demand for microcredit appears very high.
Parbat district is one of the 75 districts of Nepal, lying in the hills of the Western Development Region. The total population of the district is around 157 826, with 53.8 percent female. The altitude ranges from 1 700 to 10 700 feet above mean sea level, and the total area is 536.86 km2. The district is characterized by great ethnic and caste diversity.
Agriculture is the mainstay of Parbat district, on which 90.82 percent of the population depend. The local economy is also heavily dependent on remittances and pensions, which amount to 38 percent of the total district GDP. Agriculture and livestock activities represent 64.5 percent of the total district production, followed by forest production (mostly non-wood forest products) at 11.5 percent. Data show that the vast forest resources available are not being fully utilized economically.
Although there are several bank and NGO microfinance institutions and credit cooperatives operating in Parbat district, together with informal financial organizations and groups, very few microfinance institutions provide credit to small-scale enterprises, virtually only three government-owned banks. It is important to underline that the lack of microfinance is clearly not the only hindrance to the development of such enterprises and the uplifting of Parbat's poor. For an long-lasting impact, provision of microcredit alone is not enough, but should be accompanied by appropriate forest sector policies, information and accessibility to market linkages, basic communication infrastructure, and business capacity building and skills training.
The major constraints in accessing microcredit are the lack of collateral available to forest micro-entrepreneurs and the risks linked to great uncertainties regarding government sector policies, the small-scale market and the supply of raw materials. Because of the limited access to funds other than their own savings and family sources, small-scale enterprises commonly finance their commercial activities through money lenders or local business community groups (Dhukuti). Money lenders usually charge extremely high interest rates, much higher than commercial rates; their loans are small and usually given to locally well-known and better-off people. Dhukuti also usually charge higher interest rates than microfinance institutions and have to auction their lending funds to ration their limited resources.
A number of donor-funded and government-supported projects are working in the district for poverty alleviation, several of them being active in the area of microfinance. As a result, many small-scale enterprises are being established by poor households with the support of enterprise development and financial services. The experience of two major innovative programmes targeting poor forest-dependent communities in Parbat district are described below: the Micro Enterprise Development Programme and the Livelihoods and Forestry Programme.
MEDEP is a government initiative with support from the United Nations Development Programme, which started in 1998 and covers 20 districts, including Parbat. The programme has adopted a comprehensive business development services approach to micro-enterprises, targeting families living below the poverty line. MEDEP starts with entrepreneurship development, followed by market study, skills development, microcredit, access to appropriate technology and business counseling, linkages to market, and development of the subcontracting system.
MEDEP provides microcredit through special partnering arrangements with the Agriculture Development Bank of Nepal (ADBN), building on the bank's existing network of branch and sub-branch offices. Microcredit is provided on a cost-sharing basis of 30 percent contribution of MEDEP and 70 percent by ADBN, and is managed jointly by both partners.
For accessing microcredit, MEDEP has developed simple procedures and guidelines to be followed by micro-entrepreneurs:
A simple credit operation guideline has been prepared for and implemented by the district level offices. MEDEP has also made computers available to the ADBN Branch Offices to link them to its management information system for reporting and monitoring purposes.
To manage credit risk, the mechanisms followed by MEDEP and ADBN in Parbat are:
In the past five years since its inception, MEDEP has made significant achievements in Parbat district. The programme has identified approximately 673 micro-entrepreneurs, exceeding the original target of developing 600 and creating employment in the rural areas of the districts. Around 36 percent (242) of the enterprises created were forest-based, which is a significant achievement considering that there is no lending quota or target for them. The forest-based small-scale enterprises supported were mostly based on non-wood forest products such as beekeeping (98 entrepreneurs), bamboo and nigalo crafts (45 enterprises), lapsi processing (33 entrepreneurs), allo processing (33 enterprises), ketuky (agave plant) processing (7 enterprises), soap manufacturing (6 enterprises), chiraito cultivation (1 enterprise), incense stick-making (1 enterprise).
The total microcredit disbursed from the ADBN Branch Office in Parbat as of September 2004 is around 2.9 million Nepalese rupees (NR), equivalent to US$39 800, already exceeding the total amount allocated to the district by the programme (NR2.7 million or US$36 980). This has been made possible thanks to the recycling of the repayments, which are over NR1.8 million, and the interest generated by the loans. The average loan size is approximately US$60, and the recovery rate is high at 95.8 percent.
The total amount disbursed to forest-based small-scale enterprises is around NR1.1 million (US$15 300), or around 38 percent of the total loans approved, and their interest rate is 12 percent. These enterprises register an excellent recovery rate of 99.7 percent, which is higher than the rate for non-forest based enterprises (93.7 percent), showing a very good prospect for promoting forest-based enterprises in the district.
Since there are a large number of small borrowers, the operating costs of ADBN are high. MEDEP supports the bank by providing the district Enterprise Development Facilitators and Officers with the salary, travel, daily allowances and other logistic support needed to select enterprises and entrepreneurs, develop and review their business plans, and monitor business operations and loan management. MEDEP is providing its support on a grant basis since it only works with households below the poverty line.
In terms of financial sustainability, detailed calculations show that even after including the present MEDEP subsidy of the salaries and other overhead costs to ADBN, the net profit is still high at around 4 percent, including a provision of 1 percent for default risks. The model appears sustainable even after the phasing out of MEDEP. This is particularly significant because most of the microfinance institutions in Nepal are not making a profit but are actually making losses, and every year the government allocates funds to rescue them.
MEDEP has identified the following key factors behind its success in Parbat district:
Selection of proper target beneficiaries with adequate business potential is the most important factor for the success of the forest-based small-scale enterprises, as is shown in the case study on the sal leaf-making enterprise called Gupteshwar Samudayik Ban Upabhokta Samuha, established by one of the Community Forest Users Groups in Parbat. This enterprise, formed with the support of MEDEP and the L ivelihoods and Forestry Programme, was operational for only one month before closing down. The reasons identified behind its failure include the inadequate market assessment before setting up the enterprise and difficulties in the provisioning of sal leaves.
Supporting the capacity of poor forest households to efficiently run their enterprises, as well as training and linking with appropriate technology institutions are fundamental in enhancing forest households' capacity to efficiently utilize microfinance and ensure the repayment of loans.
LFP is a ten-year programme funded by the UK Department for International Development and implemented by the Ministry of Forest and Soil Conservation of Nepal. It aims to reduce vulnerability and improve the livelihoods of rural poor people by promoting a more equitable, efficient and sustainable use of forest resources. The programme started in 2001, building on a previous community forestry project, and covers 15 districts including Parbat. Focusing on community forest management, LFP is working with the Parbat District Forest Office and Community Forest Users Groups, also providing financial assistance to these Groups for developing small-scale enterprises.
LFP and Parbat District Forest Office follow a sequential order in providing business development services to targeted beneficiaries. The assistance starts with subgroup formation, followed by a feasibility study, business creation training, business plan preparation, skills development training, implementation, networking and reporting. In addition to capacity building, LFP provides financial assistance (seed money) to Community Forest Users Groups for developing micro-enterprises to support poorer households. These Community Groups then provide microcredit to their members at 10 percent, with priority given to poor people to establish micro-enterprises.
The procedure for small-scale enterprises to access loans from LFP/District Forest Office takes into account the following:
LFP in Parbat district has provided a total of NR458 156 (US$6 300) microcredit to 331 entrepreneurs. More than 66 percent of this sum (NR304 000 or US$4 200) has been provided to 210 forest-based entrepreneurs.
Unfortunately, since LFP has not maintained records on repaid, outstanding and default amounts, it is not possible to assess the microfinance performance of the programme, its profitability and its sustainability prospects.
At present, economic sustainable use of forests is still at an initial stage in Nepal, and several Community Forest Users Groups seem to be interested in obtaining technical and management skills to develop small-scale enterprises. Awareness of the potential of forest resources for poverty reduction is increasing, which will certainly boost the demand for microfinance services in the future.
The MEDEP approach of developing micro-entrepreneur groups and facilitating their access to microfinance, and the LFP approach of taking advantage of existing Community Forest Users Groups to provide microfinance services to their members, can be successful mechanisms in overcoming many of the constraints faced by small-scale enterprises. Some concerns may arise in the case of LFP, where lack of financial performance data undermines a complete assessment of the microfinance scheme. However, t he positive performance of MEDEP shows that using groups for the delivery of microfinance services can be done in a profitable and sustainable manner in Nepal, even in rural hilly areas with difficult accessibility such as the Parbat district, as confirmed by ADBN's participation in the programme with its own resources.
It should be emphasized that microfinance is just one aspect of developing small-scale enterprises. Effective business development services, such as training in entrepreneurship, technical and managerial skills, market promotion and linkages, and appropriate technology transfer are essential for the success of these enterprises, and therefore for their credit repayment performance.
Provision of microcredit under MEDEP and LFP is limited by the programmes' allocated resources, and loans are not easily accessible to community households other than MEDEP and LFP target groups. Another concern is what will happen after programme completion. For the longer term, it will therefore be important to develop linkages between the micro-entrepreneur groups or Community Forest Users Groups, and microfinance institutions, building on the proven success of initiatives such as MEDEP.