The Role of MSMEs in Nepal’s Transition to Sustainable Practices

Introduction

Micro, small, and medium enterprises (MSMEs) are a fundamental part of economies globally, especially in developing countries where smaller businesses dominate the economy. MSMEs account for 90% of businesses worldwide and play a crucial role in local production, distribution of goods and services, while also fostering innovation. In countries like Nepal, where MSMEs represent approximately 95% of registered businesses and provide 45% of all jobs, their impact is even more pronounced, driving both economic growth and job creation. In Nepal, MSMEs mainly operate in the informal sector, and often face significant barriers to growth due to a lack of knowledge and guidance. High interest rates, inadequate institutional support, and other challenges further limit their access to financial capital. Despite these barriers, they continue to play a critical role in Nepal’s economy by opening new markets and creating employment opportunities. Beyond economic impact, MSMEs also have the potential to drive positive environmental change, such as facilitating the transition to a circular economy. By collectively advocating for incentives related to waste reduction and recycling, MSMEs can influence policymakers and contribute to creating a more supportive environment for sustainable practices.

The Risk

While the linear economy provides practicality and ease, it is a system which fails to prioritize environmental needs. It is not only the environmental harm that the linear economy causes which is problematic, but it also leads to supply issues and price fluctuations. By transitioning to the circular economy, smaller businesses would potentially be able to minimize the impact of these problems. However, this will not come without complications. There will be significant challenges for MSMEs if they choose to turn their back on the ‘take, make, waste’ economy. One of the main challenges is that market and consumer awareness of circular practices is low, and existing infrastructure, such as the waste management systems, would not adequately support the shift. MSMEs are often also hesitant about the risks and uncertainties of adopting new business models, and many are deeply entrenched in traditional practices. Furthermore, the longer returns on investment of circular business practices is something which will concern smaller businesses, who generally stay away from bigger, more risky investments. This is because they already have a limited cash flow and owners fear disrupting their day-to-day operations. One more challenge of ditching the linear economy is that MSMEs, particularly those in more isolated areas, will face logistical challenges in recycling and will lack waste management infrastructure further complicating this transition. Overcoming these obstacles will require strong collaboration and targeted support from various stakeholders, but the benefits would be mutual. 

The opportunities  

The circular economy aims to address supply challenges by increasing resource efficiency, reducing dependency on raw materials, and enhancing supply chain resilience through practices such as recycling, reusing, and local sourcing. For an MSME in Nepal, optimizing material use and reducing waste can help reduce reliance on raw materials, easing the strain on the country’s limited natural resources. As a landlocked nation, Nepal stands to benefit from the circular economy by maximizing the use of existing resources, which can create more stable and sustainable production systems, especially in times of geopolitical shocks and economic uncertainties. 

However, while MSMEs in Nepal may be positioned to align with circular economy principles, they face significant barriers, including limited infrastructure and market access. Despite these obstacles, their potential for driving employment and innovative nature could enable them to take a leading role in promoting more sustainable practices. By fostering collaboration, networks of MSMEs could work together to establish shared recycling facilities, resource exchange programs, and cooperative waste management systems that enhance efficiency. Vietnam’s textile industry is one example which shows how small enterprises can collaborate effectively to tackle common challenges by sharing resources and expertise. In doing so, they have created closed-loop systems for recycling fabric waste, reducing both costs and environmental impacts. Yet, in Nepal, participation in recycling schemes remains limited, with most MSMEs focusing only on high-value materials such as metal and paper, which are often downcycled, reducing their quality and value. In agriculture, for instance, a small or medium-sized farm might convert by-products into organic fertilizers or animal feed, turning potential waste into valuable resources. Achieving this shift would demand substantial changes, but the potential benefits could reshape the sustainability and resilience of local economies. 

Way Forward

To encourage MSMEs to transition away from the linear economy, it is essential for the government and other institutions to foster a positive perception of the circular economy by emphasizing its comprehensive benefits, beyond just environmental advantages. As Nepal moves toward its goal of becoming a developing country upon its LDC graduation in 2026, it is unrealistic to expect the government to fully finance the shift, given the socio-economic progress achieved through the linear model. However, there are more practical ways in which the government and private sector can support MSMEs in this transition. Capacity-building programs that equip business owners with the skills and knowledge to implement circular practices will be critical. Establishing clear policy guidelines and incentives will create an enabling environment for MSMEs to thrive within the circular economy. Additionally, investing in and upgrading recycling infrastructure will be key to cultivating a ‘robust recycling culture’ nationwide, supporting sustainable business operations. 

With the 2030 Sustainable Development Goal deadline approaching, MSMEs will play a pivotal role in ensuring Nepal meets its sustainability targets. As Nepal continues to undergo urbanization, the demand for innovative solutions in urban waste management is growing; this provides opportunities for MSMEs to develop circular economy initiatives tailored to the needs of cities. Collaboration between MSMEs, larger companies, and government bodies should be encouraged to facilitate resource and knowledge sharing, making circular value chains more accessible. This would encourage MSMEs, with their proximity to local markets and inherent flexibility, to develop business models that balance sustainability and profitability.