DIGITISING Nepali Economy

DIGITISING Nepali Economy

Nepal Clearing House Limited (NCHL), in the month of Poush (December/January), reported that monthly transactions on its connectIPS, an electronic payment system, reached Rs 12.05 billion. The size of the transaction highlights two things. Digital payment is growing in acceptance among ordinary Nepalis and people are getting connected to the broader fintech (financial technology) disruptions taking place the world over. 

Aided by the monumental growth of smartphones and rising internet penetration, many Nepalis, particularly from the urban areas, are now able to order goods and services and make payments online, which was considered a dream a decade earlier. 

The Himalayan nation over the last few years has been gripped by the catchphrase, ‘Digitisation’. So much so that many areas from information and communication, banking services, payments, education, healthcare, shopping or entertainment are going digital one way or the other. 

Discourse related to digitisation of trade, commerce and industrial activities and governmental services have also gathered momentum to give new propulsion to the country’s economic growth engine, fostering in an environment conducive to innovations. Similarly, the flourishing startup scene has also been heavily influenced by the use of technology. 

The Fintech Disruption 
Though Nepal is still a distance away from joining the information technology (IT) race like its neighbours China and India, and other emerging and developing countries of the world, the recent developments in information communications and technology (ICT) sector suggest that there is big potential in the country.

For instance, though fiat money i.e. cash is still the most preferred, but digital payments in retail transactions are growing in popularity. 

Currently, over a dozen digital wallets and e-payment systems are operational and around 40 applications of new companies are said to be in the process of review at the Nepal Rastra Bank (NRB). 

Started in 2009, the digital wallet eSewa is the pioneering online payment gateway in Nepal with the largest subscriber base; it crossed the mark of two million subscribers and 25,000 merchants in November 2019. Khalti is another major digital wallet in the country with over 900,000 subscribers. According to its co-founder Amit Agrawal, around 100,000 are active users who use the mobile app at least once in 90 days. IME Pay and Prabhu Pay are the other major digital wallets. 

With the increasing competition, Nepali fintech firms are coming up with innovative ideas to making their services easier and convenient for consumers. Cellcom Pvt Ltd, an IMS Group Company, in September last year launched the CellPay digital payment system which is different than existing digital wallets. It gives its subscribers the freedom to make payments from their bank accounts directly without requiring them to load money into their CellPay accounts. 

“Nepal is transitioning into a cashless society. Many people no longer go out of home to pay their utility bills and instead use e-payment services. The use of scratch cards for mobile recharges has gone down. Nearly 18 percent of the total banking transactions has already moved from cash and cheques to online,” observes Allen Bailochan Tuladhar, founder and CEO of Unlimited Technology Pvt Ltd. 

The Nepali IT industry veteran, who has worked in different areas of the IT business in the last three decades, is now working in the area of Money over Internet Protocol (MoIP), a new concept in cashless transaction popularised by Ukrainian-born IT entrepreneur Alex Mashinsky, one of the inventors of voice over internet protocol (VoIP). 

Tuladhar’s company Unlimited Technology has joined the e-payment market race by launching a new system called e-dheba. “As the tech world becomes bigger and more vibrant, financial institutions can harness it to expand their capacities and offer a host of new services that they currently can’t,” he says. 

Realising its importance, Nepal Rastra Bank (NRB) has also become active in the area of digital payments. “To further facilitate digital payments, we are working on a national gateway/switch, which has also been announced in the Monetary Policy. We are really committed to this project and have also set up a dedicated team for this,” informs Bam Bahadur Mishra, executive director of NRB. “To operate such a switch on a national scale is no easy task as it requires us to make a record of all the payment systems operating nationwide. But, we still plan to complete this herculean task within a year,” he adds. 

The central bank in September 2019 launched the Real Time Gross Settlement (RTGS) to facilitate transfer of money by banks. “It is a big milestone for digital transactions. It is cheaper for banks and transfers of money can be made almost immediately. So, Nepal Rastra Bank (NRB) is pushing for more digitisation of the country’s financial system,” says Mishra. 

Despite the promising scenario, there are, however, problems. “While the scope of digital payment systems are much broader, these services are only taken as a means of utility payments such as mobile SIM recharge, balance top-up and paying electricity, water and phone bills and buying movie tickets,” says Amit Agrawal, co-founder and director of Khalti digital wallet. According to Agrawal, the slow pace of e-readiness in the country is holding back the potential of fintech.

Balkrishna Joshi, president of Machnet Technologies Inc points out the lack of necessary infrastructure. “In Nepal, the biggest gap I have seen is the lack of a consolidated digital banking platform,” he says, adding, “Private companies make different platforms for themselves. But we do not have an integrated industry-wide system. The services being provided by the Nepal Clearing House Limited (NHCL) is a good step forward in this respect but they need to be scaled up to have a greater impact. And a major hurdle still remains which is the know-your-customer (KYC).”   

The E-commerce Revolution in the Making
It was in 2001 when Bal Krishna Joshi started thamel.com as e-commerce portal to allow Nepalis living abroad to send gift items to their families and friends in Nepal. However, it took more than 15 years for the electronic retail business to gather momentum in the country. Particularly, the last half decade has seen a shift in the shopping habits of Nepalis, with educated urban consumers finding e-commerce platforms easier and cost effective, and hence more convenient to search and purchase goods and services. 

Currently, Daraz is the largest online marketplace for buyers and sellers of goods in the country. After its acquisition by the Chinese e-commerce giant Alibaba in May 2018, Daraz, which also operates in Pakistan, Bangladesh, Sri Lanka and Myanmar, has seen its Nepali market grow multifold. Platforms such as Sastodeal, Smartdoko, Nepbay and Muncha are the other major digital retail marketplaces operating in Nepal. 

Similarly, the classified online marketplace Hamrobazzar has also gained prominence in the past decade. Meanwhile, different types of online delivery services, supplying restaurant and homemade food, liquor, vegetables to medicine have come into existence over the last couple of years. Foodmandu Foodmario, Metrotarkari, Cheers and Online Ausadhi are some of these e-commerce sites. Along with this, Social media is also being used as online storefronts by small traders and providers of various types of services to boost their business. 

New doors of opportunities are being opened in e-commerce as shown by the growing popularity of ride-sharing services despite the various legal hassles in their way. The Nepali startup Tootle, which started its services in January 2017, has now 35,000 registered bikers who provide transportation service to the platform’s 300,000 users. 

“This is reflective of the overall ride-sharing market which is growing,” says Sixit Bhatta, co-founder and CEO of Tootle.  “We were not only a startup but we were also introducing an entirely new business in Nepal – a business of ride-sharing,” he adds. 

Around 4,000-5,000 users have been using Tootle services daily. Meanwhile, Tootle’s rival Pathao, a Bangladesh-based ride-sharing platform, is said to be providing services to around 15,000 users on a daily basis.  

The sky rocketing growth of smartphone users is propelling the growth of online marketplaces. “As 90 percent of our customers use our platform through an app, we see that smartphone access is one of the biggest factors for the growth in the e-commerce market,” shares Lino Ahlering, managing director of Daraz Nepal. According to a 2018 Ncell report, 52 percent of subscribers of Ncell use smarphones. It is estimated that 50 percent of mobile services subscribers are smartphone users, up 35 percent from 15 percent in 2013. 

Though it is difficult to determine the exact size of the Nepali e-commerce market due to the lack of authentic data, estimates put the size of the Nepali e-commerce market at USD 25-30 million. 

The Connectivity Boom
In today’s world where connectivity is the main driver of economic growth, telecommunications and internet services have transformed the lives of ordinary Nepali citizens to a high degree fueling the Himalayan nation’s digital economic ambitions.

Nepal is the only country in the entire South Asia region with over 100 percent mobile penetration rate. As per the latest MIS report published by the Nepal Telecommunications Authority (NTA), the mobile penetration stands at 141.48 percent as of October 18, 2019.

This unreasonably high penetration rate of mobile services is also due to the multiple subscriptions of mobile services by a single user and inclusion of inactive SIM cards in the report. However, the NTA data clearly indicates Nepal has made big strides in terms of increasing access to modern telecommunication services. 

Similarly, internet penetration rate in Nepal currently stands at 71.52 percent with the highest share of mobile data (55.39%) followed by fixed broadband services (15.33%). The internet penetration rate, which was 63 percent in 2018, has grown significantly in the past decade; the rate was just nine percent in 2011. 

Internet prices, however, have cast a dark shadow over this bright outlook of growing access to internet in Nepal. At present, Nepal has the highest internet prices among the South Asian nations. The Inclusive Internet Index 2019, published by the British magazine The Economist, ranks Nepal in 72nd spot. India, which has observed a sharp decline in internet prices over the last few years due to the hyper-aggressive strategy of Mukesh Ambani’s Jio Network, lies in 47th position in the index followed by Sri Lanka (58th) and Bangladesh (71st).

According to the report, Nepal’s position is due to the high cost of internet services; the country ranks 84th in the Affordability sub-index where India is at 10th spot which shows the country has the most affordable internet. Even Pakistan, which ranks 77th overall in The Inclusive Internet Index 2019, is the 47th most affordable country in the world in terms of cost of internet.

“Cellular data prices are still unaffordable to a huge chunk of our population and not everyone has access to Wi-Fi connectivity. So, internet still remains a luxury to many people,” says Suman Rayamajhi, chief financial officer (CFO) of Smart Telecom. “And this, in turn, is preventing the growth of many other related sectors like digital payments and e-commerce,” he adds. 

 Rayamajhi stresses on the need to have cheaper internet to expand digital markets. “This means that there will be a growth in demand and foreign companies will come and invest here. Businesses like Airbnb and OYO already operate in Nepal. An expanded market will also entice other companies to come in. We will have a company like BYZU’s enter our education system and a technology like Hospital Management System will come up in our healthcare industry,” he opines. 

Exploring IT Services Export Potentials 
In a bid to prioritise the export of IT Enabled Services (ITEs), the government in 2016 revised the Nepal Trade Integration Strategy (NTIS) to promote Business Process Outsourcing (BPO), IT engineering and other IT services as earmarked sectors with high export value for Nepal.

BPO has been one of Nepal’s major areas in the IT business. It began to grow during the early 1990s when the country embarked on its journey towards economic liberalisation. The lack of authentic data makes it difficult to determine the actual size of this business. Nonetheless, it is estimated that the total annual turnover of Nepali BPO industry is thought to be between Rs 6-10 billion. 

Offshore development centres like Deerwalk Inc, Cotiviti Nepal (formerly Verscend Technologies), Pioneer Solutions along with Leapfrog Technology, Yomari Inc, Brain Digit IT Solutions and Cloud Factory are the flag-bearers of the Nepali BPO industry. Similarly, there are some 500 call centres and over a dozen medical transcription companies are also active in Nepal.

BPO firms operate in different fields of IT such as commercial software development, big data, data analytics, e-commerce, web design, healthcare data solutions, management information system, database management and animation, among others. 

Past studies have suggested the government to focus on promoting BPO and ITEs for significant economic gains. A 2007 World Bank report titled ‘IT and IT-Enabled Services Industry in Nepal: An Assessment and Prioritized Recommendations’, states that Nepal can export up to USD 1.1 billion ITEs and create jobs for 40,000 Nepalis.

According to Sunaina Ghimire Pandey, managing director of General Technology Pvt Ltd, there are more than 400 companies active just in the field of software development in the country. “While many are registered and working in noticeable ways, some firms are hidden from the public eye. The software industry has flourished and big investments are coming into this sector,” she says. 

BPO is a major global industry which has significantly grown over the years. Yet Nepal has not been able to capaitalise on the opportunities. “The size of the global Business Process Outsourcing (BPO) market reached USD 1.034 trillion in 2019. If we could have been able to bring a small portion of BPO transactions in the country, then there would have been a huge employment generation. The Nepali private sector cannot do it alone,” says Pandey.

She adds, “We need to work collaboratively, such as forming IT firms in public-private-partnership (PPP) modality to harness the available opportunities in BPO business.” She feels that the government needs to form an official body like IT Board with authority in areas like investment facilitation, marketing and promotion of Nepali IT sector across the world, among others.

Encouraging the BPO sector is also important to create formal employment opportunities for IT graduates and other professionals who are well-versed in different kinds of IT related work. It is estimated that there are 4,000-5,000 people working as BPO freelancers in Nepal who mostly work from their homes.

“They are out of the tax net and their income is not counted as formal earnings as they mostly receive money as remittances. The government can offer them some incentives to bring their activities into the formal economy,” suggests Pandey. According to her, this can also be implemented for people who are engaged in creating content for social media sites such as Facebook and video sharing site YouTube. 

Machnet Inc President Joshi shares similar views. “Today’s generation is tech-savvy and we need to facilitate their life and work by implementing pragmatic policies,” he says adding that thousands of people in Nepal work in the cloud ecosystem and earn money and if there are no policies to govern their activities, such people won’t have documented sources of income.

The All-important Openness
Unlike in many developed, emerging and developing economies, Nepal’s digital transformation has not been an easy one. This is because the way forward for Nepali IT entrepreneurs or those who aspire to become entrepreneurs is fraught with challenges. 

It is hard for many companies to gain the confidence of consumers when they launch new products or services. There is a lack of openness among ordinary citizens as well as people in the government, and one of the reasons behind this is the low level of digital literacy in the country. 

The government’s initial response to the outcry of the transport syndicates last year to ban the ride-sharing services, serves as an example in this regard. “I believe that such debates largely stem from confusion over our operations which are only natural. All big innovations throughout history have faced such resistance,” mentions Tootle CEO Bhatta. “The world over, people are suspicious of new developments.” 

Though the authorities later softened their stance after Prime Minister KP Sharma Oli took a positive approach towards the new transport platforms, the issues regarding the legality of such services are yet to be resolved. The government has yet to even start the process of amending the Motor Vehicles and Transport Management Act, 1993 to formally allow ride-sharing platforms to operate. 

Highlighting on the need for policies to encourage, facilitate and foster innovation and the digital economy, Joshi says, “In terms of developing a digital ecosystem, technology is not the problem, policy is. Not allowing Nepalis to use PayPal is a policy limitation, not a technological one.”