A woman weighing onions on a hand scale. A tailor working from a single sewing machine in a converted room. A mobile tea seller set up where the foot traffic is best. These microentrepreneurs are a familiar sight along the busy streets of Kathmandu. But despite their visibility on the streets, they are almost entirely invisible in official statistics. Policymakers know surprisingly little about these microentrepreneurs and their businesses, including who runs them, how they perform, and what would help them grow.
A new World Bank report draws on two new enterprise surveys to shed light on this largely understudied sector. The report makes the case for a differentiated policy approach for the close to 1.5 million Nepalis working in formal and informal microenterprises, who outnumber those working in the country’s small and medium firms combined.
Most informal microenterprises are survival strategies, not growth engines
The data paints a clear picture of who runs these businesses and why. Most owners launched their firms not out of entrepreneurial ambition, but because they had no other option. Many operate at a monthly profit below the minimum wage — meaning their earnings largely reflect their own labor, not any return to capital or business acumen. The average informal microenterprise employs just 1.5 people, typically the owner and a family member. Only 8 percent have even a single paid worker. Nearly half of these businesses are owned by women, many of whom operate from home to balance their care responsibilities.
These are not businesses looking to grow. They are households using self-employment as a coping strategy in an economy that has not generated enough decent wage jobs to absorb them.
The productivity gap is real — but formalization is not the fix
Formal microenterprises in Nepal produce roughly six times more output per worker than informal ones. That gap holds across every sector. But the data offers a striking counterintuitive finding: 68 percent of formal microenterprises were formal from the day they opened. Firms that register early do so because they already have the capacity to benefit — not because registration unlocks that capacity. The 32 percent of firms that start informally and later formalize accumulate fewer productive capabilities early on and carry that disadvantage even after they register.
Formal microenterprises in Nepal produce roughly six times more output per worker than informal ones. 68 percent of formal microenterprises were formal from the day they opened.
This matters enormously for policy. The instinct to formalize everyone —driven by the idea that if you lower the fees and cut the paperwork, growth will follow — rests on an assumption the data does not support. For the overwhelming majority of informal firms operating at subsistence, the barriers to growth are not procedural. They run deeper: low human capital, limited assets, minimal growth aspirations, and above all, an economy that offers too few alternatives.
For the majority of informal firms operating at subsistence, the barriers to growth include low human capital, limited assets, minimal growth aspirations, and above all, an economy that offers too few alternatives.
That said, reforms to lower the costs and barriers to formalization remain critical — just for different reasons. Simplifying registration, reducing compliance costs, and strengthening incentives for formality matter for firms that have the capacity to benefit from the transition, and to ensure that new productive firms can enter the market formally from the start.
Not all informal firms are the same
The informal sector is not homogeneous, and this is where the policy story gets more precise. About 22 percent of informal firms show genuine productive potential. The analysis identifies a group that closely resembles formal firms in capability — the kind of owner who keeps accounts, negotiates with suppliers, and wants to expand — even if they do not yet match them in performance. For these firms, targeted support — easier access to credit and technology, intensive business coaching, stronger market links, and accessible pathways to formalization — could make a real difference.
The 22 % firms with potential need targeted support — easier access to credit and technology, intensive business coaching, stronger market links, and accessible pathways to formalization.
For the much larger group at or near subsistence, the goal shifts entirely. The priority is not to make every one of them grow, but to reduce their vulnerability. Measures to boost the resilience of this category of microentrepreneurs include income support, basic risk coverage, light-touch business training to improve their earnings incrementally, childcare for the many women who run these businesses from home, and clearer pathways into wage employment when opportunities arise.
The bigger picture
The prevalence of informal subsistence enterprises in Nepal reflects something larger than any single policy can fix: weak growth in formal wage employment and limited opportunities for upward mobility. Economy-wide reforms that improve the business environment, strengthen access to finance and infrastructure, and attract investment are the most powerful lever for reducing subsistence informality — not because they will transform informal firms directly, but because they will create more and better jobs that make informality less necessary.
Economy-wide reforms that improve the business environment, strengthen access to finance and infrastructure, and attract investment are the most powerful lever for reducing subsistence informality.
We recently marked the Micro-, Small and Medium-sized Enterprises Day, which was an opportune time to recognize the truths that sit side by side: these millions of tiny firms support people left out of quality formal wage employment. Getting policies right means seeing them clearly enough to ask not what they should be, but what each of them actually needs.
Getting policies right means seeing the micro businesses clearly enough to ask not what they should be, but what each of them actually needs.
READ MORE: https://blogs.worldbank.org/en/endpovertyinsouthasia/what-nepal-s-smallest-businesses-reveal-
