Nepal Impact Investment Community 2 (NIIC2)

Nepal aims to graduate from a Least Developed Country status to a middle-income country by 2026. However, low productivity and high unemployment rates have led to large labour out migration and subsequent heavy reliance on remittances. Digital transformation represents an opportunity for a structural transformation of the economy. In Nepal, a rising pool of digital skills and tech start-ups, combined with the growth of small and medium enterprises (SME) in the tech sector, presents an avenue for improving overall economic efficiency and broadening Nepal's export-basket. However, SMEs in the tech sector face challenges, i.e., poor access to finance (debt and equity) and business development services. They represent a negligible portion of Nepali bank and financial institution's loan portfolio as banks have limited knowledge of this client segment.

Nepal Impact Investment Community 2 (NIIC2) is a digital economy focused fund which will facilitate debt and equity investment in digital economy catalysts SMEs in Nepal by attracting investors, i.e. development finance institutions, assisting banks to adapt their loan products to the needs of SMEs in the tech sector, and providing pre- and post-loan business development services to these SMEs. However, the capital requirement for high growth DEC SMEs is such that only debt investment does not suffice and needs to be complemented with equity. Therefore, NIIC2 through its equity fund will enable access to long term patient capital, in the form of equity, for high growth potential DEC SMEs.

Direct target group: Digital Economy Catalyst SME i.e. tech and tech enabled SMEs

Indirect target group:

• Commercial banks providing debt finance to DEC SMEs
• Development Finance Institutions looking for investment opportunities in Financial Institutions and Funds in Nepal
• Business development service providers addressing needs of DEC SMEs
• Women and men including those from discriminated group who will benefit from job creation and economic upliftment led by growth of DEC SMEs

Outcome 1: DEC SMEs access debt funding from a bank and strengthen business operations.

Outcome 2: Banks increase their lending in the DEC segment.

Outcome 3: Private Equity and Venture Capital make new equity investment in DEC SMEs to catalyse business growth.

Expected results:  

Output 1.1: Bankability of DEC SMEs improved.

Output 1.2: BDS services is accessible to DEC SMEs.

Output 2.1: Targeted bank has improved capacity to provide debt financing to DEC SMEs.

Output 2.2: Banks introduce new loan product for DEC SMEs.

Output 3.1: Equity fund mechanism for DEC SMEs is established.

Output 3.2. DEC SMEs receive catalytic equity investment.

Results from previous phases:   NIIC1 made equity investment in seven SMEs supporting these businesses with impactful funding. NIIC1 raised investments from high-net worth individuals, family offices and institutional investors i.e. Dutch Good Growth Fund, thus validating the interest of international investors to invest in SMEs in Nepal. The SDC supported COVID-19 MSME Fund Nepal highlighted the difficulty faced by DEC SMEs to access bank loan. Banks currently have not invested in developing their capacity to address the cash-flow based financing need of DEC SMEs. On the other hand, the preparation for the SDC financed Digital Innovation for Growth and Inclusion (DIGI) in Nepal highlighted the catalytic role that digital innovation by DEC SMEs can play for unlocking Nepal's growth potential and enabling access to basic services beyond the capital. The preparation of the SDC-funded project UDAYA has reinforced the need for pre and post loan business development services for SMEs to strengthen capacity to improve their business.

The multi-donor project Invest for Impact Nepal improves the enabling environment for investment by development finance institutions and attracts them to invest in Nepal. NIIC2 provide the vehicle that allows development finance institutions to effectively invest in Nepal.

DIGI Nepal's goal to facilitate digital innovation can be further strengthened by NIIC2, which enables access to debt and subsequently equity for innovative DEC SMEs.

The UDAYA project fosters access to debt finance for SMEs in Koshi Province. NIIC2 can facilitate access to equity for DEC SMEs who are unable to secure bank loan due to the nature of their business.