For a low-income economy like Nepal, small and medium enterprises (SMEs) are not a peripheral industry; they constitute its very backbone. SMEs create jobs, sustain livelihoods, and drive production and exports. A 2020 study by the United Nations Economic and Social Commission for Asia and the Pacific (UN ESCAP) estimates the jobs generated by SMEs at around 1.75 million. According to the same study, SMEs’ contribution to the country’s GDP stands at 22 percent, while the latest National Economic Census suggests SMEs account for two-thirds of Nepal’s manufacturing potential. They also dominate Nepal’s production of exports.

But in Nepal’s towns and trading streets, the SME tale is ominously one and the same – a story of immense promise, but merciless neglect. Even though the sector is the backbone of the national economy, support from the government towards the sector is still disproportionally low. Most SMEs in the country, according to a 2019 study carried out by Nepal Rastra Bank, still struggle to access formal sector finance, paying higher interest but receiving lower loans. Most of them operate on inherited family assets, without any capacity to scale up as they do not have collateral that banks demand. Heavier rules, longer documentation and slow clearances are some other major hurdles for SMEs in Nepal.

There are, nonetheless, countries where the ecosystem that exists surrounding SMEs works with phenomenal effectiveness. In many of the world’s major economies, markets and institutions of the public sector have been reorganized to facilitate addressing the weaknesses of the SME segment as design issues that can be solved, rather than unavoidable burdens.

Countries like the United States, Canada, Germany, the Nordic nations, Australia, and increasingly India, in particular, have promoted some best practices in the SME sector that have helped nurture and sustain small firms through patient, predictable, and practical policy.

These countries are not approaching SME promotion as a handout to the weak, but as a cornerstone of innovation, employment, and resilience.

Their examples prove that when funds flow, regulation is eased, and competencies equal opportunity, small companies don’t remain small for long; they become the drivers that spur national economic progress.

Small and medium enterprises are not only significant in that they are too many, but also in that small improvements in finance, rules or access to markets can provide solid national gains. For instance, according to a press release dated 1 January 2025 by the Press Information Bureau (PIB) under the Ministry of Information and Broadcasting of the Government of India, more than 57 million MSMEs are currently registered under the Udyam portal, India’s official online portal for MSME registration and beyond. Similarly, according to an earlier press release dated 24 July 2024 by the PIB, MSMEs contributed roughly 30 % of GDP in FY 2022/23. Similarly, these entities are responsible for some 45 % of Indian exports, according to the same PIB release.

Conversely, emerging diagnostics classify Nepal’s official SME sector as smaller with more severe structural shortfalls. A paper titled “Expanding Access to Finance for Small and Medium Enterprises: An Analysis of Demand and Supply Side Constraints of Nepal” by J. Adhikari published in The Journal of Economic Concerns (Vol. 13 No. 1) found on the demand side and the supply side that SMEs face serious access to finance constraints. Moreover, International Finance Corporation (IFC) finds that in Nepal “access to finance remains a major constraint for 44 % of SMEs, and, according to the IFC investment summary, “SME finance gap is estimated to be around US $3.6 billion.”

Finance that understands small businesses

Finance access is the oxygen of any small firm. Nations that have done well in SME development have built financing arrangements that recognize the special challenges faced by small firms: no or minimal collateral, fluctuating incomes, and lack of market access. Where small businesses provide no collateral, lenders stall. What wealthier systems do instead is architectural.

In the US, the Small Business Administration (SBA) has developed a model of ‘shared risk’. By using its hallmark loan programs like the ‘7(a) Loan Guarantee Program’ and the 504 Loan Program, the SBA acts as a bridge between banks and small and medium entrepreneurs. By guaranteeing most of each loan (typically 75-85% on average), it also encourages lenders to lend to small businesses that would otherwise be turned down. These programs have actually enabled SMEs to access capital when they cannot qualify for standard bank loans.

In recent years, this tool has unlocked billions of dollars of loans, demonstrating how carefully targeted government assistance can mobilize private lending.

Over US $30 billion in 7(a) loans were guaranteed by the SBA alone during 2024, with advantages to over 58,000 small firms, according to the SBA Annual Report, 2024. The SBA is mainly a crowd-in risk-sharing agency: the agency supported 103,000 financings and increased its annual capital portfolio to US $56 billion in FY 2024—a 7 % increase from FY 2023, according to the SBA’s 2024 Capital Impact Report.

According to the official Government of Canada website (ised-isde.canada.ca), the world’s second largest country follows the same pattern with its ‘Canada Small Business Financing Program (CSBFP)’, where it shares risk with lending institutions to encourage them to lend to small business and new start-ups. The banks, credit unions, and other institutions lend to small businesses directly under the CSBFP and the Government of Canada guarantees up to 85% of the loan value in case of default by the borrower. Complementing the CSBFP are ‘export and innovation grants’ that reduce the cost of scaling up and help SMEs compete in foreign markets.

Germany’s approach is more institutionalized. Its state development bank system led by KfW provides patient, long-term capital to small and medium-sized family enterprises — the famous Mittelstand, the country’s group of small and medium-sized, frequently family-run, firms that form the backbone of its economy. These banks, often cooperating closely with domestic cooperative lenders, make long-maturity, low-interest loans to SMEs. Local cooperative lenders’ participation is structured such that credit choices consider insights into the economy at the local level. Rather than saturating markets with cheap credit, Germany is interested in smart credit: long-term loans secured with productivity improvements, green reform, and R&D. These observations are backed by credible sources like KfW’s own website, a policy article titled “Germany’s Mittelstand: Foundations of Economic Strengths and Innovation” published in the thediplomaticaffairs.com on November 3, 2024 and the OECD’s Financing SMEs and Entrepreneurs 2024 Report.

The message is simple: good SME finance is as much about architecture as it is about money — risk-sharing structures, development banks, and open channels from microcredit to growth capital.

India has an independent Small Industries Development Bank of India (SIDBI) and linked mechanisms to finance MSMEs. Established in 1990, SIDBI is the flagship financial institution for the development, financing and growth of MSMEs in India. According to its website, SIDBI acts as a refinance bank (indirect lending through commercial banks and non-banking financial corporations – NBFCs) as well as a direct lender for special schemes. SIDBI refinances part of the loans these institutions disburse to MSMEs. For example, a local co-operative or a small bank lending a small scale producer can see part of that amount repaid by SIDBI at lower interest rates. This reduces lenders’ cost of funds and makes them more willing to grow their SMEs lending portfolios. SIDBI, in 2024, had cumulative refinance and direct lending to MSMEs of about US $40 billion, according to its Annual Report, 2024.

Besides this, according to its website, SIDBI also co-manages the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) jointly with India’s Ministry of MSME. This fund offers a guarantee of 75-85 percent of the loans extended by banks to small businesses with no collateral. It is a model based on the US SBA 7(a) Loan Programme, but adapted to suit India’s size and credit culture. A press release dated 11 August 2025 issued by the PIB said up to early 2025, over 10 million guarantees have been approved under CGTMSE. A section of the release reads, “As on 31.07.2025, the CGTMSE has approved 1.22 crore number of cumulative guarantees worth INR 10.50 lakh crore.”

On the other hand, Nepal’s SME finance system remains excessively dependent on traditional commercial lending with little large-scale guarantee structure or clear mission portfolio channeling patient public finance into SME upgrading. According to a press release dated 2 February 2024, the IFC finds a US$3.6 billion gap, while media reports quoting the Nepal Rastra Bank point out high non-performing loans (9 % for agriculture & SMEs) as of March 2025, nearly double the overall banking sector average of 5.2%, pointing to more underlying structural weaknesses. The moral Nepal can take from the experiences of the above nations is that a multi-layer structure—small collateral-light loans, guarantees for bank lending on a part-guarantee basis, and a mission-oriented public bank for patient longer-term investments—is capable of compressing the finance gap short of open-ended subsidies.

Regulation that empowers, not exhausts

If finance is oxygen, then regulation is the air-pressure in which companies operate. Too high crushes initiative, and too low generates anarchy. The best performing economies strike their balance with simplicity, proportionality, and digital ease. Everywhere around the world, countries that have consistently streamlined business regulations, digitalized compliance frameworks, and synchronized regulation with access to finance have built robust SME sectors — and therefore more robust economies.

SMEs are the actual engines of jobs, innovation, and common prosperity. But in most of the developing world, they remain held back by mountains of red tape. If it takes an avalanche of bureaucracies, licenses, and cryptic regulations to begin or run a small business, entrepreneurs are discouraged, informality is ingrained, and productivity is stifled.

Countries that have succeeded in easing regulatory strain – from America and Germany to the Nordic countries and India – share a common prescription: simplicity, clarity, and trust in business.

In America, federal and state-based reforms made it easy to open and expand a small firm. Small business owners can open accounts online, pay taxes online, and access advisory services under the SBA. In the US, SME registration is largely a one-time process, in stark contrast to Nepal’s cumbersome system that demands annual renewals through multiple agencies. Most American businesses register once with their respective state’s Secretary of State and obtain a federal Employer Identification Number (EIN) – both permanent steps that do not require renewals, according to the US’s Internal Revenue Service (IRS) guidance.

However, to remain in ‘good standing’, a business typically must file annual or biennial simple periodic reports to update ownership or address details, which are compliance filings, not re-registrations. The business remains continuously valid until dissolved or inactive. At the federal level, only firms operating in regulated sectors such as aviation, finance or healthcare must register with specific agencies, and even those registrations are typically one time.

Local governments may require sector-specific business licenses, for example, for restaurants or contractors. But such renewals are limited and digital. These requirements are meant to keep public records updated – not to create bureaucratic hurdles – and most states have made the process fully online, quick and low-cost. More importantly, small firms avail credit also through more tailored schemes such as the Paycheck Protection Program (PPP) that played such an important role in supporting America’s firms during the COVID-19 pandemic. These tools illustrate how accessible rules and accessible finance can complement each other to support small firms to grow and navigate shocks.

Another perspective comes from Canada’s experience. According to Canada’s federal government website (Canada.ca), Ottawa has introduced “regulatory sandboxes” — supervised environments under which startups, particularly those in fintech and clean tech, can test products under lighter, monitored regimes. The approach encourages innovation without compromising on oversight.

Canada has also made regulatory processes more streamlined and facilitated digital compliance frameworks. But even there, advocacy groups point out that redundant provincial and federal laws continue to burden small firms – a reminder that reform of the regulatory system must be continuous, not sporadic.

Germany’s renowned Mittelstand flourishes in a climate of long-term finance and settled regulation. Proportionate, settled regulatory regimes ensure that compliance costs do not suffocate innovation. The synergy of financial support, regulatory stability, and institutional trust has empowered German SMEs to become world exporters without losing their local identity.

Scandinavian countries are a poster child for digital simplicity and user-driven government. In Sweden, Denmark, and Finland, company leaders have among the lowest compliance challenges in the world. With digital-first platforms, entrepreneurs can register a business, obtain tax numbers, and file returns in minutes, not days. Government platforms are designed based on the ‘user journey’, ensuring maximum convenience for entrepreneurs, not bureaucrats. This produces a compliance culture imparted through simplicity, not coercion. These observations are strongly backed by official documents like the OECD “Digital Government Review of Sweden: Towards a Data-Driven Public Sector”, “Nordic Smart Government & Business (NGS&B), “Digital Government Factsheet – Finland” by the European Commission, the “How to Set up a business in Finland” page of the official website Business Finland (businessfinland.com), the “Starting a business” page from the Danish Tax Agency (SKAT), and Danish platforms like “Business in Denmark (virk.dk).

Australia is another case in point. Its “Business.gov.au” portal is a one-stop portal for registration, licensing, and grant searching, cutting red tape. Its tax policy is likewise SME-friendly: concessions for small business, R&D tax offsets, and instant deductibility of assets do not penalize smaller firms for their size. This institutionalized convenience shows that regulatory design can be engineered as a growth driver, not a drag.

India’s recent reforms provide perhaps the most relevant model for Nepal. Long notorious for red tape from the bureaucracy, India has taken concrete steps toward reducing impediments for small business. Implementation of the Udyam registration system, online GST filing, and digital one-stop portals helped millions of informal businesses turn formal.

According to the Udyam Registration portal, simplified tax slabs and composition schemes have reduced micro-entrepreneurs’ compliance costs. Complementary initiatives such as the Government e-Marketplace (GeM), the Raising and Accelerating MSME Performance (RAMP) program, invoice discounting platforms like Trade Receivables Discounting System (TReDS), and MSME grievance redressing processes have built an enabler ecosystem that connects regulation with credit and market access. They show collectively how even a humongous informal economy can be gradually integrated into the formal economy.

In all these examples – from the Nordic nations to North America and India – the guiding philosophy remains the same: the state as a facilitator, not an obstacle. Basic digital interfaces, graduated rule-of-compliance, and unambiguous taxation make the state a growth partner, rather than a gatekeeper.

The most successful economies have realized that ease of regulation is not deregulation, but intelligent regulation i.e. simplifying rules, making them transparent, and being capable of adjusting.

Nepal is still far behind in these areas. In Nepal, registering an SME often requires approaching multiple agencies – the Company Registrar’s Office, the Department of Cottage and Small Industries, local municipalities and tax offices – each demanding a separate documentation and fees. Renewals are annual, not automatic. Entrepreneurs continue to have to contend with dispersed regulations at federal, provincial, and local levels. Registration processes are often manual and opaque, with varying requirements across jurisdictions. Lack of a comprehensive digital business registration platform has left many microenterprises unregistered, excluding them from access to credit and state support. Banks themselves are averse to lending to SMEs due to bad documentation and bad legal certainty.

As a result, the majority of small businesses stay stuck or worse still, in the informal economy. To change this narrative, Nepal requires reforms that marry convenience with incentives. It should develop a one-stop digital portal for registration and counsel, such as India’s Udyam, making it convenient and rewarding to be formal. Rolling out regulatory sandboxes for fintech, agritech, and clean tech can ensure innovation without sacrificing regulation.

Having a regular “burden-reduction” review mechanism across ministries would ensure that redundant or outdated rules are scrapped on a routine basis. Most importantly, such regulatory reforms have to be accompanied by selective financing instruments, ranging from credit guarantees to concessional lending facilities in the manner of Germany’s KfW or India’s SIDBI.

The global evidence is unequivocal: when regulation is simplified, predictable, and transparent, small business flourishes. Regulatory ease is not circumventing the law; it is shortening complexity. It produces trust between the state and entrepreneurs, allowing rules to guide rather than hinder business.

For Nepal, accepting these lessons is both required and achievable. Through smart digital infrastructure, well-aligned governance, and convergent financial programs, the country can unleash the full potential of its SMEs, turning thousands of small business owners into the job-propelling, innovation-spurring, national growth engine. To be concluded…