By Dinesh Weerakkody Growing a diverse and competitive Small and Medium Enterprises (SME) sector is considered as one of the critical factors towards achieving sustainable economic growth. Some advanced economies have succeeded in this regard because SMEs form a fundamental part of their economies. In such economies, SME comprise more than 98 per cent of [...]

The Sundaytimes Sri Lanka

SME : Backbone of an economy


By Dinesh Weerakkody

Growing a diverse and competitive Small and Medium Enterprises (SME) sector is considered as one of the critical factors towards achieving sustainable economic growth. Some advanced economies have succeeded in this regard because SMEs form a fundamental part of their economies. In such economies, SME comprise more than 98 per cent of the total establishments and contribute more than 65 per cent of employment. Globally, SME contribute more than 50 per cent to the Gross Domestic Product (GDP) in developed countries. Further, SME also constitute 95 per cent of registered firms in the world. Specifically in the European Union, SME constitute 99.8 per cent of all firms and employ around 76 million people representing around 67.4 per cent of total employment in 2010. In the US, SME constituted more than 50 per cent of the non-farm private GDP and created 75 per cent net new jobs in the economy. Based

Papaya grower in Vavuniya North cleaning the trees

on the above statistics, it is therefore very apparent that SME have been largely recognised as the backbone of the economy and play a significant role to generate employment, enhance quality of human resources, nurture a culture of entrepreneurship, support large scale industries and open new business opportunities. Therefore, it is clear that promoting a viable SME sector is essential in the nation’s stride towards broadening the sources of growth and sustaining the growth momentum. SME are defined differently by different countries based on different parameters such as number of employees, business turnover, capital investment, etc. Different definitions are also being used by different organisations within the same country to define SME for different purposes, which is common in our country as well. However, according to the recent guidelines issued by the Central Bank of Sri Lanka (CBSL), SME are defined as enterprises that have an annual turnover less than Rs 600 million and its borrowings below Rs 200 million.

Enormous potential

The SME sector has enormous potential in generating high level of socio-economic benefits to a developing country with a low level of investment. However, according to the Department of Census & Statistics of Sri Lanka, ‘investment to generate employment’ or ‘investment per employee’ is said to be the lowest in small-scale industries compared to large entities. Nevertheless, SME sector’s contribution is paramount to support Government’s efforts in promoting balanced regional development and developing the rural economy. The SME sector is an ideal platform for the Government to build human capital to a level where the potential benefits of a state-led SME drive could be fully realised. As per the Government estimates, around 80 per cent of the businesses in Sri Lanka that falls under the SME umbrella, contribute over 50 per cent to the Gross Domestic Production (GDP) of the country. Of the total employment in the country, SME accounts for a share of 35 per cent. Hence, these statistics reveal that there is immense potential to enhance the present level of contribution made by the SME to the economy when compared with the GDP contribution in other countries.

Challenges for SME

Since independence, successive Governments in Sri Lanka have taken various steps towards developing the SME sector which are: (1) improving access to finance, (2) transfer of technology, (3) access to information, (4) skill development, (5) infrastructure development, (6) SME networking, (7) linkage formation, (8) improvement of advisory services, and (9) business development drives to support the growth of the SME sector. Yet, one of the main challenges that SME owners still face is access to financing and working capital to grow their businesses. In this backdrop, the Commercial Bank of Ceylon has supported the growth of the SME through numerous interventions. The bank has channeled 54 per cent of its lending towards SME in the past years and also has partnered with many institutions for capacity building within the SME sector. Furthermore, Commercial Bank’s partnership with the International Finance Corporation (IFC), which is the financial arm of the World Bank, has enabled the bank to increase its focus on providing capital to SME, in order to further expand businesses and to set up new ventures. In order to further strengthen SME banking capability and to support capacity building within SME, the bank has embarked on capacity building of SME projects by jointly organising capacity building programmes with the Central Bank of Sri Lanka (CBSL). The reluctance of the SMEs to use the state-of-the-art technology is also identified as another drawback for SME development. Unlike in other countries in the region, the adoptability of SME in Sri Lanka to latest technology is very much limited to lack of know-how, high investment cost, less accessibility to finance, etc. The Commercial Bank’s intervention in motivating SME to expand their horizons through technological advancement has helped many SME to become more competitive and explore new markets. As an environmentally and socially responsible corporate citizen, Commercial Bank with the assistance of the IFC, designed a Social and Environment Management System to ensure that all SME, which are financed by the bank comply with the country’s social and environmental regulations. A recent IFC survey revealed that the contribution made by the Commercial Bank towards the development of the SME sector from 2009 to 2011, had helped to create around 330,000 employment opportunities for men and women in many parts of Sri Lanka.

Way forward

However, despite the positive policy reforms and initiatives recently introduced by the Government, there are still many constraints to the growth and competitiveness of the SME. As mentioned above, the main problem that SME face is accessing adequate and timely financing on competitive terms, particularly longer tenor loans, which have been exacerbated by the current global financial crisis. Secondly, policy and regulatory issues, institutional weaknesses in the absence of good credit appraisal and risk management/monitoring tools, the absence of collateral arrangements and lack of reliable credit information on SME which has made it difficult for lenders to be able to assess risk premiums properly, creating differences in the perceived versus real risk profiles of SME. Thirdly, most SME have limited access to larger markets in terms of market linkages, transport, telecommunications, and information exchange which seriously undermine the demand for their products. Lastly, with the opening up of economy and as globalisation intensifies, lack of innovation hurts the productivity and the competitiveness of Sri Lankan SME. Thus, mentoring and supporting SME entrepreneurs to build capacity would be critical for their growth and development, since the SME sector is instrumental in achieving inclusive growth which touches the lives of the most vulnerable and marginalised sections of society, including women and other disadvantaged groups. Furthermore, they also go a long way in checking rural-urban migration by providing villagers and people living in rural areas with a sustainable source of local employment. Therefore the key thing amongst all these economic factors would be the new developments in the banking sector. Going forward, banks would have to be more forward-looking, innovative and develop new business models to position themselves to cater to these requirements.

(The writer is the Chairman of the Commercial Bank of Ceylon)

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