1. Introduction: Credit Dilemma of Nepalese SMEs

Small and medium enterprises (SMEs) are the cornerstone of Nepal’s economy, playing an indispensable role in its development and the welfare of the people. However, despite their importance, SMEs in Nepal face serious obstacles in accessing finance, which is called the “credit dilemma.” This dilemma not only constrains the growth of individual enterprises, but also limits the overall economic potential of the country.

1.1 Role and Importance of SMEs in Nepal’s Economy

SMEs contribute significantly to Nepal’s gross domestic product (GDP), accounting for 22%¹, and provide employment for approximately 1.8 million people.¹They form the basis of the industrial sector, which accounts for about 13.5% of GDP, while the contribution of the manufacturing industry, where SMEs also have a significant share, is 5.3% of GDP.²These enterprises play a key role in maintaining economic stability, fostering innovation, and building efficient value chains, especially in sectors such as trade, services, small-scale manufacturing, agro-processing, and tourism. Given their widespread presence and contribution, the challenges faced by SMEs, especially in access to finance, assume macroeconomic significance. The sustainable development of this sector is directly linked to Nepal’s overall economic health and growth prospects.

1.2. Assessing the current gap in SME financing

Despite their economic importance, Nepalese SMEs face a severe funding gap, with estimates ranging from $1 billion³up to $3.6 billion.⁴According to UNESCAP, the average financing need for small businesses is $18,000, while for medium-sized businesses it is $350,000.³An alarming fact is that only 16% of startups in Nepal have access to bank financing.7For 44% of SMEs, access to finance is the main obstacle to development4, while 61% of SMEs are either partially (17.7%) or completely (43.6%) limited in access to formal sources of credit.7These figures clearly demonstrate the scale of the “credit dilemma,” which is not just a temporary shortage of funds, but a systemic problem that seriously limits the growth potential of a large part of the Nepalese economy.

1.3. Key challenges faced by SMEs in accessing finance

Access to finance for Nepalese SMEs is hampered by a complex set of interrelated challenges:

• Limited access to capital: This is a fundamental problem that hinders investment in new technologies, expansion of operations and entry into new markets.³
• High collateral requirements: Traditional financial institutions often require significant collateral, which many SMEs, especially those in the early stages of development or without significant tangible assets, are unable to provide.⁷Banks’ lending decisions in Nepal are largely based on the assessment of collateral rather than on the viability of the project itself or the business model.¹²
• High and variable interest rates: Make borrowing expensive and create significant financial risks for SMEs, making long-term planning difficult.⁹About 75% of Nepalese firms report that changes in interest rates expose them to financial risk.⁹
• Low level of financial literacy and business skills among entrepreneurs: Many SME owners lack sufficient knowledge of financial management, business plan preparation and the necessary legal and financial documentation to obtain loans. There is also a lack of awareness of available business development services (BDS) that could help them improve their competencies.³
• Bureaucratic procedures and long loan approval periods: Complex and lengthy loan application processes at banks increase transaction costs for SMEs and delay the receipt of vital funds.⁸
• Perception of SMEs as high-risk borrowers: Banks often view SMEs as high-risk borrowers due to their lack of formal credit history, lack of transparency in financial reporting, weak legal documentation, and statistically lower survival rates than larger companies.³
• Lack of awareness or unwillingness of SMEs to pay for business development services (BDS): Even if there are BDS providers that could help SMEs become more “bankable”, entrepreneurs are often unaware of them or unwilling to bear the costs of these services.³

These challenges are systemic. For example, low financial literacy of SMEs³leads to them submitting poorly prepared applications and financial documents to banks. This, in turn, reinforces banks’ perception of SMEs as high-risk borrowers.³, which forces banks to increase collateral requirements and interest rates, or to refuse to provide loans altogether. Thus, a vicious circle is formed, from which SMEs will find it difficult to escape without external support and a change in approach both on the part of the enterprises themselves and on the part of financial institutions.

Interestingly, the “credit dilemma” is not just about an absolute lack of funds. Research shows that even those SMEs that have access to bank loans still cite “access to finance” as one of the main obstacles to their development.⁹This suggests that the problem lies not only in the lack of credit as such, but also in its terms: the volume of financing may be insufficient for expanding operations or investing in research and development.⁹, and interest rates are too high and volatile, which eats up a significant portion of profits and leaves no resources for further growth.⁹

Despite the significant contribution of SMEs to the country’s economy¹, the huge funding gap that remains³ indicates a systemic underestimation of their potential, both by financial institutions and perhaps by government policies that do not always effectively address the root problems. This financial starvation of the SME sector translates into lost opportunities for the entire Nepalese economy in the form of lost jobs, lost goods and services, and lost tax revenues.

1.4. Special challenges for women-led businesses

Women-led businesses face even greater barriers to accessing finance in Nepal. An estimated 52% of women SME owners have difficulty accessing loans.⁴Although the government has initiated subsidized loan programs specifically for women entrepreneurs, and these programs are popular (the number of borrowers under the Women’s Entrepreneurship program has increased significantly¹³), there are concerns about their effectiveness and possible misuse of funds.¹³The gender dimension of the “credit dilemma” requires special attention and the development of targeted support programs that take into account the specific barriers faced by women in business, including cultural stereotypes, limited access to property (which could serve as collateral) and a lack of support networks.

Table 1: Contribution of SMEs to Nepal’s Economy

This table clearly demonstrates the economic importance of SMEs and the scale of the problem of their financing, emphasizing the relevance of this study.

2. Analysis of the effectiveness of government programs to support SMEs

The Government of Nepal has been making efforts to support the SME sector for a number of years, recognizing its importance for the national economy. The main instrument of such support has traditionally been subsidized lending programs implemented through the banking system with the active participation of the country’s central bank, Nepal Rastra Bank (NRB).

2.1. Overview of the main existing and new state programs

The key measure of state support is the establishment by NRB of mandatory standards for commercial banks to lend to priority sectors. In particular, banks must direct at least 15% of their loan portfolio to SME financing, 15% to agriculture and 10% to energy.¹⁴The total SME lending volume under these initiatives is estimated to be approximately NPR 500 billion.¹⁴

The subsidized loan programs were officially launched in the financial year 2075/76 (2018/19).¹⁵Their main objective is to stimulate entrepreneurship, create jobs and promote economic growth, with a special focus on supporting youth, women entrepreneurs and returned migrant workers. These programs cover various areas such as “Educated Youth – Self-Employment”, “Women’s Entrepreneurship”, “Projects for Returned Overseas Migrant Workers” and “Commercial Agriculture and Livestock”.¹⁵

As part of the budget for the fiscal year 2025-26, Nepal’s Ministry of Finance has announced an allocation of NPR 730 million for a subsidized loan program for startups. These loans will be provided at a preferential rate of 3% per annum.¹⁷The budget also provides tax incentives for businesses in the IT, hospitality and tourism sectors. A major new development is the exemption of start-ups with an annual turnover of up to NPR 100 million from paying income tax for the first five years of their operations. ¹⁸These measures demonstrate the government’s intention to strengthen support for innovative and fast-growing SMEs.

2.2. Performance evaluation

An analysis of the effectiveness of government programs to support SMEs reveals both certain achievements and significant problems.

Achievements achieved:

• Growth in the volume of preferential lending: There has been a significant increase in the total volume of concessional loans disbursed, from NPR 10.66 billion in FY 2017/18 to NPR 259.55 billion at the end of FY 2021/22.¹³This indicates that the programs are being scaled up and that more financial institutions are being involved.
• Increasing Women’s Participation in Entrepreneurship: The number of borrowers under the Women’s Entrepreneurship program has grown from 796 in FY2018/19 to an impressive 84,001 in FY2021/22.¹³This growth indicates the demand for the programme and its potential to stimulate women’s economic activity.
• Positive experiences of individual entrepreneurs: There are examples of successful use of subsidized loans to start and expand businesses. For example, entrepreneurs in the pig and poultry farming sectors note that subsidized loans helped them increase their income and reinvest funds in the development of their farms.¹⁹

Identified problems and shortcomings:

Despite the positive aspects, the effectiveness of government SME support programs is marred by a number of systemic problems:

• Concentration of loans among large borrowers: Banks and financial institutions (BFIs) tend to lend to larger, more established businesses under preferential lending programmes. This is explained by the desire to minimise administrative costs and credit risks, but this approach contradicts the stated objectives of programmes aimed specifically at supporting SMEs and may exacerbate inequalities in access to finance.¹³
• Misuse of funds and potential abuse: There are serious concerns, particularly with regard to loans to women entrepreneurs, that the funds may be misused. For example, there may be cases of formal transfer of business ownership from men to women in order to obtain a preferential loan without actually creating a new or developing an existing women’s enterprise.¹³Research also shows that borrowers who receive small loans are more likely to use them for consumer needs rather than for business development.²⁰
• Low coverage in strategically important categories: Lending volumes for areas such as Council for Technical Education and Vocational Training (CTEVT) training, youth self-employment and higher education loans remain unsatisfactorily low.¹³For example, under the FY2025-26 startup lending program, out of 5,250 submitted applications, only 1,314 projects were selected for further evaluation.²¹, and under another similar program, only 76 people were able to receive preferential loans.¹⁶This indicates problems either in the design of the programmes or in the mechanisms for their implementation and information to potential beneficiaries.
• Government debt to banks: One of the most pressing issues is that the Nepalese government has outstanding debts of 15 billion Nepali rupees to banks participating in the subsidized loan program.¹⁶This situation has led many financial institutions to suspend issuing new soft loans for fear of further defaults by the state. This directly undermines the sustainability of the programs and the availability of financing for SMEs.
• Reduction in the number of beneficiaries and volumes of lending: In recent years, there has been an alarming downward trend in both the number of beneficiaries of subsidized loans and the total amount of funds disbursed. Thus, if in FY 2079/80 (2022/23), 147,000 borrowers received subsidized loans worth 213 billion Nepalese rupees, then in the current financial year, these figures have dropped to 103,000 beneficiaries and 91 billion Nepalese rupees, respectively.¹⁶This may be a consequence of both the aforementioned government debt and the increase in the number of defaults on previously issued loans.
• Lack of clear budget planning for continuation of programs: Despite official statements of intent to continue subsidized lending programs, the lack of specific and sufficient budgetary allocations for these purposes in the coming years creates an atmosphere of uncertainty and calls into question the long-term viability of these initiatives.¹⁶
• Problems with loan repayment and the “culture of default”: A decline in loan repayment rates has been observed following the introduction of interest rate subsidy schemes.¹³Moreover, Nepal has historically had a problem with a “culture of default” on soft loans, where borrowers perceive them as a form of government grant rather than a financial obligation to be repaid.¹³This not only increases the risks for banks, but also undermines the very idea of ​​sustainable lending.
• Disadvantages of program targeting: Often, soft loan programs fail to reach their true target audiences, such as the rural poor, artisanal producers and micro-enterprises.¹³Instead, the benefits may accrue to larger, better-informed players.

These problems point to systemic shortcomings in the design, implementation, monitoring and evaluation of state SME support programs. The gap between the declared goals (support for youth, women, job creation)¹⁴) and the actual distribution of resources and their use (concentration among large borrowers¹³, low coverage of some categories¹³) suggests that there is a need for a serious re-evaluation of current approaches. The mechanisms for implementing programmes may be ineffective, or there may be problems with the selection criteria, allowing better-trained or better-connected players to receive a disproportionate share of support.

The problem of program sustainability caused by government debt to banks¹⁶, is critical. If banks do not receive timely and full compensation for subsidies, their motivation to participate in government programs decreases sharply, which inevitably leads to a reduction in available financing for SMEs. This turns the programs from a development tool into a source of financial problems for the lenders themselves.

Moral hazard associated with the “culture of no return”¹³and a decrease in the level of loan repayments¹³, also poses a serious threat. If subsidized loans are perceived as grants, this undermines financial discipline, reduces the efficiency of borrowing and makes the entire SME lending system unstable.

Considering that some programs have been implemented for about five years¹³, there is a need for a comprehensive assessment of their real impact. It is important to analyze not only the quantitative indicators of issued loans, but also qualitative changes: how many sustainable jobs were created, what is the contribution of financed enterprises to GDP, what is their survival rate and profitability. Only such an analysis will allow us to draw reasonable conclusions about the effectiveness of public investments.

2.3. Experience of entrepreneurs and opinions of industry associations (FNCCI, CNI) regarding government programs

Feedback from direct market participants – entrepreneurs and their associations – is an important indicator of the effectiveness of government programs. Entrepreneurs who managed to obtain subsidized loans generally assess their impact on their business positively. This is especially true for those who considered the possibility of labor migration – for them, the preferential loan became an incentive to start or expand their own business in their home country.¹⁹The programs helped to purchase equipment, increase livestock numbers, or expand crop areas. However, entrepreneurs also note that the effect of preferential loans can be offset by other economic factors, such as rising prices for raw materials and supplies (for example, poultry feed¹⁹), which eats up some of the benefits received.

The Federation of Nepal Chambers of Commerce and Industry (FNCCI) has repeatedly expressed concerns about the state of SMEs and the effectiveness of support measures for them. In particular, in the post-COVID period, FNCCI warned that about half of the SMEs could be on the verge of closure if the government does not extend loan repayment periods and provide additional support measures such as tax incentives and promotion assistance.²²FNCCI consistently emphasizes that SMEs are the backbone of the country’s economy and face serious challenges in accessing not only financing but also markets.²³

The Confederation of Nepalese Industries (CNI) regularly conducts studies on the state of the industrial sector, analyzing indicators such as the level of capacity utilization, revenue dynamics, and the dependence of enterprises on credit resources to replenish working capital.²⁴These data, although not a direct assessment of government programs, indirectly reflect the overall financial health of SMEs and their need for affordable financing. For example, data for the first quarter of FY 2081/82 (October 2024 – January 2025) showed that enterprises, on average, operated at 60.26% of their capacity, and the share of borrowed funds in working capital was 38.72%.²⁴The decrease in this indicator compared to the previous quarter (41.34%) may indicate both an improvement in the companies’ own cash flow and a reduction in the availability of loans.

The opinions of industry associations and the experience of entrepreneurs emphasize that government programs, despite good intentions, do not always meet the real needs of businesses or encounter problems in implementation. It is important not only to provide financing, but also to create comprehensive conditions for the development of SMEs, including access to markets, support in improving the quality of products and services, as well as a stable and predictable economic environment.

Table 2: Key Government SME Financing Programs in Nepal

This table systematizes information on government initiatives, allowing comparison of their goals, mechanisms and results, as well as identifying common problems characteristic of the government support system for SMEs in Nepal.

3. Innovative fintech solutions as a catalyst for access to finance

With traditional bank lending still challenging, financial technology (fintech) represents a promising avenue for expanding Nepali SMEs’ ​​access to vital finance. The country’s burgeoning fintech sector, supported by rising digital penetration and regulatory initiatives, has significant potential to overcome many of the barriers faced by small and medium enterprises.

3.1. Overview of the Emerging Fintech Sector in Nepal and its Potential for SMEs

Nepal’s fintech ecosystem is in a state of rapid formation and growth, fueled by the increasing number of internet and mobile users and regulatory support from Nepal Rastra Bank (NRB), which recognizes digital financial services (DFS) as a key enabler of financial inclusion.²⁵Initiatives such as the Nepal Fintech Festival 2025 are evidence of the growing interest in the sector and its potential to address the challenges of SMEs.³¹Fintech solutions offer faster, more flexible and often less expensive ways to access finance than traditional banking products, which is especially relevant for SMEs previously excluded from the formal financial system.

3.2. Digital lending

Digital lending is becoming an increasingly important tool for SME financing in Nepal. A prominent example is the platform in the telephone, which offers unsecured short-term loans of up to NPR 200,000 through mobile banking apps. The entire process, from application to receipt of funds, is fully automated, requiring no visit to a bank branch or paperwork.³²Initially, the service was focused on individuals with salary accounts in partner banks, but over time it expanded its activities to QR merchants and other account holders, making it accessible to a wider range of micro and small entrepreneurs.³⁴Foneloan has partnered with a number of leading Nepalese banks and its technology backbone is F1Soft International, one of the fintech pioneers in the country.³⁴

A key element in the success of digital lending is the use of alternative data and innovative credit scoring models. In Nepal, research is actively underway to develop locally adapted credit scoring models using machine learning technologies (such as ADA, DT, ET, RF, XGBoost) and data analysis from digital platforms including Foneloan.²⁸This approach is particularly important for assessing the creditworthiness of borrowers who do not have a traditional credit history or sufficient collateral, which is typical for many SMEs. Artificial intelligence (AI) is used to analyze large amounts of data, including non-traditional sources (e.g. transaction data, mobile usage), to more accurately predict risks and make credit decisions.²⁸Research shows that the use of such models can significantly reduce the proportion of non-performing loans (NPLs).³⁶Thus, digital lending combined with alternative scoring directly solves two main problems of SMEs: lack of collateral and formal credit history.

3.3. P2P Lending and Crowdfunding

Peer-to-Peer (P2P) lending and crowdfunding are relatively new but very promising concepts for the Nepalese financial market. These mechanisms can become an important alternative source of funding for SMEs and start-ups, especially for those who have difficulty obtaining traditional bank loans due to strict collateral requirements or lack of a long credit history.⁵

There are already examples in Nepal of Nepali startups using international crowdfunding platforms such as Kickstarter and GoFundMe to raise funds.³⁹Local initiatives are also emerging, for example, based on the infrastructure of the ESewa payment system.⁴⁰The international platform Kiva is also active in Nepal, having financed more than 5,300 loans worth over $160,000 through its team.⁴¹Availability of P2P cryptocurrency exchange platforms such as Remitano (offering P2P exchange of BTC for Nepalese rupees⁴²), indirectly indicates interest in P2P mechanisms in the country, albeit in a specific segment.

However, the development of a full-fledged P2P lending and crowdfunding market in Nepal is hampered by the lack of a clear and tailored regulatory framework. Nepal Rastra Bank (NRB) published a concept note on P2P lending and crowdfunding in January 2024, which analyses their relevance to Nepal and the need for appropriate regulation.⁶The existing Securities Act 2007 does not allow non-broker intermediaries to engage in capital raising activities, which is a direct obstacle to the operation of many crowdfunding models and P2P platforms.⁴³The Securities Exchange Board of Nepal (SEBON) issued the Specialized Investment Funds Regulations in 2019, which theoretically paves the way for private equity and venture capital funds to invest in SMEs, but the licensing process for such funds has been extremely slow.⁴⁴The lack of clear regulatory guidance from SEBON on crowdfunding remains the main barrier to its establishment and growth.⁴³Thus, while P2P lending and crowdfunding have the potential to democratize access to capital for SMEs, their development is directly dependent on the creation of a favorable and clear regulatory environment.

3.4. Supply chain finance and invoice discounting

Cash flow management issues caused by long payment terms from large customers are a common problem for SMEs. Fintech solutions in the field of Supply Chain Finance (SCF) and invoice discounting can offer effective tools to solve these problems.

In Nepal, the platform InvoiceD positions itself as the country’s first invoice discounting solution. It enables SMEs to receive up to 90% of the value of their outstanding invoices within 24-48 hours, thereby improving their liquidity without the need for debt financing.⁴⁵This is especially relevant for companies working with large clients on deferred payment terms.

At a global level, there are more comprehensive platforms such as IBSFINtech’s VNDZY⁴⁶ and solutions from Surecomp (RIVO™, DOKA-NG™) ⁴⁷, which offer automation of supply chain finance processes for banks and large corporations. Although their direct application for Nepalese SMEs is not obvious from the materials presented, they demonstrate the general development trends of this fintech segment. A local example is TradeSmart by CAS Nepal, which offers an automated trade finance platform aimed at banks.⁴⁸

These solutions enable SMEs to convert receivables into working capital, which is critical to maintaining operations, purchasing raw materials, and fulfilling new orders. The development of such platforms in Nepal can significantly ease the financial burden of many SMEs.

3.5. The Role of Payment Systems and Digital Wallets (eSewa, Khalti) in Supporting SME Business Operations

A well-developed digital payment infrastructure is the foundation for the introduction of more sophisticated fintech products, including various forms of lending and financing. In Nepal, leading digital wallets such as in Sewa and Khalti, play a significant role in supporting SME business operations.

in Sewa, being one of the pioneers of the market, serves more than 8 million users and 350,000 merchants.⁴⁹The platform enables SMEs to accept digital payments, thereby expanding their customer base, reducing the risks associated with handling cash and optimizing operational processes.⁴⁹eSewa also offers special features for businesses such as Merchant Link, which makes it easy to manage personal and business accounts through one app, and has even launched a lending program for its agents, a move towards providing financial services.⁴⁹

Khalti also provides a wide range of payment services and business solutions, including payment gateways, school fee payment tools and corporate services.⁵⁰Both platforms actively promote financial literacy and the involvement of the population and businesses in the digital economy.

The success of these payment systems demonstrates the readiness of Nepalese society and businesses to use digital financial instruments. This creates a favorable environment for the adoption of fintech solutions in the field of lending, as users are already familiar with digital transactions and trust these platforms. Having such an active user and merchant base reduces the barriers to adoption of new credit products offered through the same or integrated digital channels.

3.6. Problems and barriers to widespread adoption of fintech solutions

Despite significant potential, widespread adoption of fintech solutions for SME financing in Nepal faces a number of significant challenges and barriers:

• Low levels of digital and financial literacy: This problem is particularly acute in rural areas and among certain groups of the population. Lack of knowledge and skills to use digital financial instruments limits their availability and effectiveness.²⁵
• Insufficiently developed digital infrastructure: Uneven internet coverage, especially high-speed internet, and limited access to smartphones and other digital devices in remote areas hinder the widespread adoption of fintech services.²⁷
• Gaps in the regulatory framework and its slow updating: The lack of clear and modern rules for new fintech models (P2P lending, crowdfunding, use of alternative data for scoring) creates legal uncertainty and hinders investment and innovation in the sector.²⁶
• Cybersecurity and data protection issues: As digital transactions grow, so do the risks of cyber fraud and personal data leaks. Ensuring a high level of security and protection of user data is critical to gaining and maintaining trust in fintech platforms.²⁵
• Lack of trust in new technologies: Some of the population and entrepreneurs are still wary of new digital financial instruments, preferring traditional methods.²⁷Overcoming this barrier takes time, educational programs, and demonstrating the reliability and benefits of fintech solutions.

The emergence and development of fintech solutions such as Foneloan³² and InvoiceD ⁴⁵, is a direct response to the inability of the traditional banking system to fully meet the needs of SMEs for fast, affordable and flexible financing. If SMEs face high collateral requirements from banks and complex bureaucratic procedures¹⁰, fintech platforms offer alternative approaches such as unsecured loans with fast approval based on alternative data analysis.²⁸This creates new funding channels that bypass traditional barriers.

The potential of artificial intelligence and alternative credit scoring to expand financial inclusion is enormous. Developing credit scoring models based on AI and analysis of data obtained from mobile operators or through transaction history on digital platforms²⁸, could revolutionize the process of lending to SMEs, especially those businesses that were previously “invisible” to the banking system due to the lack of a formal credit history. This is not just a technological innovation, but a powerful tool for expanding financial inclusion and supporting entrepreneurship.

However, despite technological readiness and the presence of successful examples in other countries, the development of promising areas such as P2P lending and crowdfunding in Nepal is hampered by the lack of a clear and adapted regulatory framework.⁶This highlights the critical role of the regulator not only as a supervisory body, but also as a catalyst for innovation, capable of creating conditions for the safe and effective development of new financial instruments.

Finally, the symbiotic relationship between the development of payment systems and lending cannot be underestimated. The success of digital wallets such as eSewa and Khalti⁴⁹, creates a fertile ground for the development of digital lending. The presence of experience in using digital transactions among the general population and businesses and a certain level of trust in these platforms reduces barriers to the adoption of credit products offered through the same or integrated digital channels.

Table 3: Overview of Fintech Solutions for SME Finance in Nepal

This table provides a structured overview of the current status and potential of various fintech verticals in Nepal in the context of SME finance, helping to identify the most promising solutions and existing gaps.

4. Regulatory environment and development prospects

Successfully addressing the “credit dilemma” of Nepalese SMEs is impossible without an active and thoughtful role of government regulators. Nepal Rastra Bank (NRB) and the Securities Board of Nepal (SEBON) are key institutions that shape the rules of the game in the financial market and can both stimulate and constrain the development of innovative approaches to financing. International cooperation also plays an important role by bringing capital and best practices into the country.

4.1. Role of Nepal Rastra Bank (NRB) in Formulating SME Support Policy and Fintech Regulation

Nepal Rastra Bank (NRB), as the country’s central bank, plays a multifaceted role in supporting SMEs and developing the fintech sector. On the one hand, NRB has traditionally used monetary policy and prudential regulation instruments to encourage banks to lend to SMEs. Such measures include setting targets for lending to priority sectors, including SMEs (at least 15% of the banks’ total loan portfolio), and introducing preferential terms for loans to SMEs, such as capping the maximum interest premium at 2% for loans up to NPR 20 million and applying a reduced risk weight (75%) while calculating banks’ capital adequacy for such loans.¹⁴

On the other hand, NRB actively promotes digitalization of the financial sector, understanding the importance of digital financial services (DFS) in increasing financial inclusion. The bank has developed and is implementing strategic documents such as the Retail Payment Strategy and the National Payment System Development Strategy.²⁵NRB encourages the use of mobile banking, e-wallets and QR payments.²⁵

An important step towards supporting fintech innovation was the launch of the Digital Finance Innovation Hub at NRB in March 2025.³⁰This platform is designed for testing new payment instruments and solutions by fintech companies in a controlled environment, which is essentially a precursor to a full-fledged “regulatory sandbox”. This approach allows for testing innovations, assessing their risks and potential before launching them on the wider market.

In addition, the NRB is exploring the prospects of introducing a central bank digital currency (CBDC)²⁵and in January 2024, published a concept paper on P2P lending and crowdfunding, analyzing their applicability in the context of Nepal and the need for developing special regulations.⁵These initiatives demonstrate the NRB’s commitment to adapting the regulatory environment to the rapidly changing technological landscape. However, the pace of these regulatory innovations must match the pace of development of the market itself, so as not to become a brake on progress.

4.2. Securities Board of Nepal (SEBON) Initiatives in Alternative Financing

The Securities Board of Nepal (SEBON), as the securities market regulator, plays an important role in developing non-bank financing channels, which may be particularly relevant for start-ups and innovative SMEs seeking equity or debt capital outside the traditional banking system.

In 2019, SEBON issued the Specialised Investment Fund Regulation, which formally paved the way for the establishment and operation of private equity, venture capital and hedge funds in Nepal.⁴⁴These instruments could become an important source of “smart money” for growing companies. However, in practice, the licensing process for such funds has proven to be extremely slow. As of August 2022, three years after the regulation was adopted, only one fund had received a license to operate.⁴⁴This slowness creates barriers to the inflow of investment into promising SMEs.

In terms of crowdfunding, SEBON’s position and the existing legislation create even more uncertainty. The current Securities Act 2007 does not allow non-broker intermediaries to engage in capital raising activities.⁴³This provision effectively blocks the development of most crowdfunding models, especially equity crowdfunding. At present, SEBON has not presented a clear regulatory framework or consultation document on crowdfunding.⁴³, leaving this potentially important source of funding for SMEs in a grey area.

Thus, the regulatory policies of NRB and SEBON have a dual impact. On the one hand, NRB actively promotes digitalization and targeted lending to SMEs through the banking system.¹⁴On the other hand, the slow updating of legislation on P2P lending and crowdfunding by both regulators⁴³and delays in licensing alternative investment funds by SEBON⁴⁴hold back the development of important non-bank financing channels. If regulators declare their support for innovation and SMEs, but this is not followed by the rapid adoption of specific regulations and their effective enforcement, many initiatives risk remaining on paper, and the market is deprived of incentives for development.

4.3. Prospects for cooperation between banks, fintech companies and government agencies

Effective collaboration between traditional financial institutions, innovative fintech startups and government regulators is key to creating synergies and scaling successful SME financing solutions.

Nepalese bankers generally recognize the need for digital transformation and are open to collaborating with fintech companies. Surendra Raj Regmi, Vice President of the Nepal Bankers Association (NBA) and CEO of Global IME Bank, has repeatedly reiterated the banking sector’s commitment to developing mobile-enabled digital transactions and adopting cutting-edge solutions such as AI-powered chatbots for customer service.³¹Global IME Bank is also actively collaborating with the International Finance Corporation (IFC) to improve its digital services and explore embedded finance models.⁵⁷Former CEO of Nabil Bank, Gyanendra Prasad Dhungana, also stressed on the priority of expanding SME financing, addressing liquidity issues and the bank’s strategic shift towards SME lending and business process innovation.⁵⁸(although he left his post in March 2025⁶⁰).

However, as fintech evangelist Neil Cross notes, despite the high level of collaboration in the Nepalese fintech community, there are cultural barriers and a strong hierarchy within traditional banks that can hinder the rapid adoption of innovation.⁵⁵Banks often prefer the “own everything” model (own branches, ATMs, IT systems) instead of active partnership with fintechs, fearing loss of control or integration difficulties. In addition, strict procurement procedures in banks can exclude promising but young fintech startups that do not meet formal criteria (for example, profitability or length of existence on the market) from potential partners.⁵⁵

However, cooperation between banks and fintechs is becoming not just desirable, but a necessary condition for survival and development in the digital economy. Fintech companies offer flexibility, speed and innovative solutions, while banks have a large customer base, public trust and developed infrastructure. Partnership allows combining these strengths and offering SMEs better and more accessible financial products. SMEs require fast and convenient financial solutions; fintechs can provide them, but they often lack scale and customer trust; banks, in turn, have these resources, but can be slow in introducing innovations. Thus, the synergy is obvious.

4.4. The impact of international cooperation (IFC, World Bank, SDC, etc.) on the development of the financial sector for SMEs

International financial institutions and development agencies play a significant role in supporting Nepal’s SME-focused financial sector. Their activities include providing capital, technical expertise, and assistance in implementing global best practices.

The International Finance Corporation (IFC), a member of the World Bank Group, is a key partner. IFC makes direct investments in Nepalese banks to target SME finance, such as a $56 million investment in Global IME Bank to support gender and climate finance for SMEs.⁴IFC also provides advisory support to Nepal Rastra Bank in developing and implementing strategies for the development of digital payment systems.²⁵and actively collaborates with the Nepal Bankers Association on sustainable finance and financial literacy issues.⁶²

The Swiss Agency for Development and Cooperation (SDC) funds the Udaya programme, which aims to improve SME access to capital and business development services in Koshi province. An important component of this programme is the establishment of a provincial SME risk mitigation mechanism, which is a guarantee fund for participating financial institutions.³

The Invest for Impact Nepal (IIN) programme, jointly funded by British International Investment (BII), Dutch development bank FMO and SDC, also aims to accelerate investment by international financial institutions (DFIs) in Nepal and support SME development through various channels.¹¹

The active participation of international organizations in financing and providing technical assistance indicates that the domestic capital market and the level of expertise in Nepal may still be insufficient to independently address the entire range of problems facing SMEs. This creates both opportunities for attracting additional resources and knowledge, and certain risks associated with possible dependence on external donors. The effectiveness of international support largely depends on its close coordination with national priorities, the needs of local businesses, and the potential of existing institutions. It is important that international initiatives contribute to the creation of sustainable domestic mechanisms for supporting SMEs that can function after the completion of donor programs.

Successful development of fintech and improving SME access to finance in Nepal requires active “change champions” in both the public sector (represented by forward-thinking officials in the NRB, Ministry of Finance and other departments) and the private sector (represented by innovative bankers, leaders of fintech startups and active industry associations). Some successful initiatives, such as the development of Foneloan³⁴or Global IME Bank’s investments in artificial intelligence⁶³, show that such leaders are capable of moving the market forward. However, achieving systemic change requires a broader coalition of such “champions” and a coordinated effort from all stakeholders.

5. Conclusion and strategic recommendations

An analysis of the current SME financing situation in Nepal reveals a complex picture, with a significant gap between SME capital needs and availability. The “credit dilemma” of Nepalese SMEs is driven by a combination of factors, including limitations of the traditional banking system, challenges in implementing government support programs, and the yet-to-be-realized potential of innovative fintech solutions. A systematic and coordinated approach is needed to overcome these challenges and unlock the potential of SMEs as drivers of economic growth in Nepal.

5.1 Key Findings on Nepalese SMEs’ ​​Credit Dilemma

The study confirms the existence of a significant financing gap for SMEs in Nepal, estimated at billions of US dollars.³Government support programmes, mainly in the form of subsidised loans, have demonstrated mixed effectiveness, with overall lending volumes growing and specific groups (such as women entrepreneurs) becoming involved.¹³), problems persist with the concentration of loans among larger borrowers, the misuse of funds, low efficiency in some segments, and the financial sustainability of the programs themselves due to the government’s debt to banks.¹³

The development of the fintech sector opens up new opportunities for SMEs, offering digital lending based on alternative scoring (for example, Foneloan³²), platforms for invoice discounting (InvoiceD⁴⁵) and a developed digital payment infrastructure (eSewa, Khalti⁴⁹). However, the widespread adoption of these solutions is hampered by regulatory gaps (especially in P2P lending and crowdfunding⁴³), insufficient digital and financial literacy of SMEs²⁵, as well as infrastructure limitations and cybersecurity issues.²⁸

Thus, the “credit dilemma” of Nepalese SMEs is not just a shortage of money, but a multifaceted problem that requires comprehensive solutions that involve both traditional financial institutions and government policies, as well as the development of an innovative fintech ecosystem.

5.2. Recommendations for improving the effectiveness of government support programs

In order for government SME support programs to become a truly effective development tool, the following steps must be taken:

• Improved targeting and monitoring: Introduce clearer criteria for selecting recipients of subsidized loans, shifting the focus to truly small, young and innovative enterprises, as well as enterprises in priority sectors with high potential for growth and job creation. Strengthen mechanisms for monitoring the targeted use of allocated funds, possibly by engaging independent auditors or using digital tracking tools. This will help prevent the concentration of resources among large players and reduce the risks of misuse.¹³
• Ensuring financial sustainability of programs: The government needs to ensure timely and full fulfillment of its financial obligations to banks participating in subsidy programs. This will restore the confidence of financial institutions and their willingness to actively participate in state programs.¹⁶The possibility of creating a special fund to guarantee payments of subsidies should be considered.
• Developing financial and digital literacy programs: Integrate mandatory components of training in the basics of financial management, business planning, and the use of digital financial instruments into SME support programs. This will increase the “bankability” of SMEs and their ability to effectively use the funds received.³
• Simplification of administrative procedures: Reduce bureaucratic barriers and timeframes for reviewing applications for government support. Consider creating a “single window” for SMEs where they could obtain all the necessary information and apply for participation in various programs.
• Moving from direct subsidies to risk sharing: Instead of direct and often ineffective interest rate subsidies, which can create a “culture of default”¹³, the state should make more active use of risk-sharing mechanisms with financial institutions, such as credit guarantee funds (similar to the Udaya program³). This would encourage banks to lend to SMEs, reducing their risks but maintaining the borrower’s responsibility.

5.3. Recommendations for stimulating the development and implementation of fintech solutions for SMEs

Fintech has enormous potential to address SME financing challenges and its development requires targeted support:

• Accelerating the development of the regulatory framework: NRB and SEBON should, as a matter of priority, develop and adopt clear and progressive regulations governing P2P lending platforms, crowdfunding platforms (especially equity crowdfunding) and the use of alternative data for credit scoring. Regulation should strike a balance between encouraging innovation and protecting consumer and investor rights.⁴³
• Active use of the “regulatory sandbox”: The NRB’s “Digital Finance Innovation Centre” is intended to become a fully-fledged “regulatory sandbox” where fintech startups could test their products and business models for SMEs in a safe environment with the support of the regulator.³⁰
• Development of digital infrastructure and literacy: Continue investing in expanding access to reliable and affordable internet across the country, especially in rural and remote areas. In parallel, implement national programs to improve digital literacy among the population and entrepreneurs.²⁷
• Support for the development of localized scoring models: Encourage research and development in credit scoring using alternative data relevant to the Nepalese context. Support the collection and safe use of such data.²⁸
• Encouraging bank-fintech partnerships: Create favorable conditions for cooperation between traditional banks and fintech companies. This may include the development of standard APIs for data exchange (as part of the Open Banking concept), co-financing pilot projects to integrate fintech solutions into banking services for SMEs, as well as holding joint educational events and hackathons.³¹

5.4. Proposals for improving the regulatory environment and coordinating the efforts of all stakeholders

Achieving a real breakthrough in solving the SME “credit dilemma” requires coordinated efforts from all market participants and an improvement in the overall regulatory and business environment:

• Establishment of the National Coordination Council for SME Financing: Establish a permanent interdepartmental coordination council with the participation of representatives of NRB, SEBON, the Ministry of Finance, the Ministry of Industry, FNCCI, CNI, as well as leading banking and fintech associations. The task of the council should be to develop a unified national strategy for SME financing, coordinate the efforts of various departments and monitor the effectiveness of the measures implemented.
• Ensuring regular dialogue and feedback: Establish a permanent and constructive dialogue between regulators, the financial sector and SME representatives to promptly identify emerging problems, discuss business needs and promptly adjust regulatory policies and support programs.
• Study and adaptation of international experience: Actively study and adapt successful international experience in the field of fintech regulation, SME support and creation of a favorable investment climate to Nepalese conditions. Particular attention should be paid to the experience of countries with a similar level of economic development and similar problems.
• Focus on human capital development: Recognize that the success of any financial programs and technological innovations directly depends on the level of financial, digital and entrepreneurial literacy. Investments in SME education and training should be an integral part of the national strategy.
• Development of data infrastructure: Support the creation and development of infrastructure for the collection, analysis and secure use of data that can be used for alternative credit scoring and more informed credit decisions. This includes both technology platforms and appropriate regulatory frameworks for data protection.

Resolving Nepal’s SME “credit dilemma” is a marathon, not a sprint. It requires long-term commitment, political will, flexibility in approach, and a genuine partnership between the government, the financial sector, and entrepreneurs themselves. Success in this endeavor will not only open up new opportunities for thousands of SMEs, but will also be a powerful catalyst for sustainable and inclusive economic growth across Nepal.trust. Ultimately, this is what this battle is about.f life of the people of Nepal.

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