Giving Small Businesses a Boost in Bhutan

Entrepreneurialism has a vital role to play in Bhutan's economic development, and loans can increase the chance of small business success.

Wangdue, Bhutan - Kinley Wangde grew up on a dairy farm. He has known since childhood how to produce good-quality milk and cheese, but for years he was not able to put those skills to use. He was a potato farmer who scratched his tiny income out of the earth.

The 43-year-old farmer, who lives in a village about 30 kilometers from the western Bhutanese city of Wangdue, no longer depends solely on periodic income from growing potatoes. He has been able to realize his dream of becoming a dairy farmer.

Wangde benefited from the $15 million ADB-supported Micro, Small, and Medium-Sized Enterprise Sector Development Program, which provides loans to entrepreneurs, farmers, and small businesspeople. It is also helping to overhaul the way the country encourages and regulates business opportunities.

Job Diversity and Growth

Bhutan has experienced growth in gross domestic product averaging about 7% a year since the 1980s, mainly on gains from hydropower and its related sectors. However, poverty remains a significant social and economic problem.

"The economy depends on a narrow base for growth, raising serious concerns about the long-term prospects for economic development and employment in the country," said Chia-Hsin Hu, an economist for the financial sector of ADB's South Asia Department. "Bhutan needs to diversify economic activity to generate employment; raise income levels for the poor; and achieve stable, sustainable, and broad-based economic growth."

Micro, small, and medium-sized enterprises are an important part of the diversification of the economy, according to government figures.

About 93% of newly established businesses are in this group. In 2006, there were an estimated 16,557 micro, small, and medium-sized enterprises in Bhutan.

The Cost of Doing Business

Small businesses have suffered a variety of constraints that the project is working to address, including the absences of a clear vision, an integrated policy, and a long-term strategy to develop businesses at this level. The country also has a complex and time-consuming business formalization process, with a multitude of licenses required, many of which are overlapping, duplicative, and burdensome.

The World Bank's Doing Business report for 2007 ranked Bhutan 79th out of 175 countries for ease of starting a business. Forming a company can involve 10 procedures, take 62 days, and cost 16.6% of annual per capita income, according to the report.

The ADB program provided a $6 million grant to establish an integrated policy, strategy, and institutional framework for the development of micro, small, and medium-sized enterprises.

The grant has enhanced business laws and regulations, strengthened business-support infrastructure, and improved enterprises' access to market-based funding.

Another $9 million grant is being used to extend credit to smaller enterprises, support their development, and facilitate program implementation.

"As in other developing countries, limited access to financing is a major constraint in doing business. It is more so in Bhutan, particularly for micro and small businesses," said Hu. "The constraint is mainly due to extremely high collateral requirements and low banking intermediation."

Moving Markets

For potato-farmer-turned-dairy-farmer Wangde, the program worked as designed. He borrowed 200,000 ngultrum (around $4,400) in 2006 to purchase 10 brown Swiss cows and a calf, and to fence his 1.2-hectare pasture. Since Bhutan's commercial banks do not lend to farmers, his only other option for obtaining the capital to buy the cows would have been to borrow from local lenders at a high rate of interest.

The dairy business has doubled Wangde's income, and made it easy to repay 20,000 ngultrum (around $460) every 6 months. He was able to pay for a new roof on his home and to buy modern appliances. He could also afford to send one of his children to private school.

"The dairy income is daily and steady. People come to me to buy milk and cheese," he said. "I had to transport the potatoes to market. With dairy farming, the market comes to me."

 

 
This page was generated from http://www.adb.org/features/loans-fuel-small-business-powerhouses?ref=countries/bhutan/features on 02 March 2015