Finance as an instrument
Not only Nepal but countries right and left dwell in an eternal anxiety about insufficient and unequal access to finance for business. In contrast, little has been said and done about the role of finance as an instrument that lubricates complex business transactions with buyers far and alien.
This is not to suggest that money as a catalyst is an entirely separate issue from money as a financier. But the landscape in which these two roles function is very different, and in ways that are not entirely justifiable. The first point to note is that catalyst money largely operates in the free market, while access to finance - especially that of the SMEs - is a topic wholly captured by the governments, NGOs, and the donors alike. A quick review of the bikase programs on private sector development will reveal it: the saga is inundated by matching grants of varying size, color and fit. In contrast, little is done about how best to mobilize market-based instruments that churn money faster so SMEs, can expedite their transactions, and hence, productions.
The root of the problem about finance is that lenders do not differentiate between firms selling for quality buyers from those dealing with the opportunists or in some cases the phantom buyers. There is no mechanism that rates firms' accounts receivables, nor is there a scope for credit-collection agencies who can buy good credit from firms to expedite their cash flow without compromising on the market rigor.
Factoring is a good financial instrument. Had it existed in Nepal, it might have been of particular interest to the businesses selling to credible buyers abroad. It allows suppliers to sell, rather than collateralize, factored receivables from quality buyers. This helps the cash flow, which is the lifeblood of every business: The faster a business expands, the more cash it will need for working capital to keep operations progressing seamlessly. Any hiccups in timing can generate troublesome cash flow snags which will harm the business.
In mature economies like the United Kingdom, use of factoring is as big as seven per cent of GDP. In emerging economies like China, use of factoring is currently growing by over thousand times in every three years. In almost all of the poor economies including Nepal, factoring is still almost unheard of.
Sadly, businessmen's woes at the moment are different: There is no one to arbitrate or insure transactions between the producers and their international buyers. If the buyer turns out to be unreasonably problematic, firms have little recourse to indemnification.
It is almost an array of small miracles that the Nepali firms dare and manage to do business with buyers far and alien under such uncertainties. Of course subsidized finance helps firms ingest some of these challenges, but there is a limit to which government and donors can go on subsidizing firms. Sensible thing is rather to help financial instruments sophisticate, so money flows where the mouth is. As the saying goes, money is a good servant and a bad master.
