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Small and medium-sized enterprises (SMEs), that form the backbone of our economy, is expected to play a greater role in the development of our economy in the coming years as the market expands and becomes more competitive and Sri Lanka shifts away from a concrete economy towards a manufacturing and service driven economy.

Therefore growing a diverse and competitive Small and Medium Enterprises (SME) sector would be one of the critical factors towards achieving sustainable economic growth.
 

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"One of the main challenges that SMEs still face is access to financing and working capital to grow their businesses and to attract skills"

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Some advanced economies have succeeded in this regard because SME form a fundamental part of their economies. In such economies, SMEs comprise more than 98 per cent of the total establishments and contribute more than 65 per cent of employment.

Globally, SMEs contribute more than 50 per cent to the Gross Domestic Product (GDP) in developed countries. Further, SMEs also constitute 95 per cent of registered firms in the world. Specifically in the European Union, SMEs 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, SMEs constituted more than 50 per cent of the non-farm private GDP and created 75 per cent net new jobs in the economy.

Based on the above statistics, it is therefore very apparent that SME have been largely recognized as the backbone of an economy and play a significant role to generate employment, nurture a culture of entrepreneurship, and support large-scale industries and open new business opportunities.
 

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"As per government estimates, around 80 per cent of businesses in Sri Lanka that falls under SMEs contribute over 50 per cent to the country’s GDP"

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Therefore, it is clear that promoting the SME sector is essential in the nation’s stride towards broadening the sources of growth and sustaining the growth momentum.

SMEs 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 organizations’ 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 of less than Rs. 600 million and 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 the government’s efforts in promoting balanced regional development and developing the rural economy. The SME sector is an ideal platform for the government to invest and support to reduce the gap between the haves and the have-nots.

As per government estimates, around 80 per cent of businesses in Sri Lanka that falls under SMEs 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 SMEs to the economy when compared with the GDP contribution in other countries.


Challenges for SMEs
Since independence, successive governments in Sri Lanka have taken various steps towards developing the SME sector  (1) by improving access to finance, (2) technology support, (3) more access to information, (4) support for skills development, (5) better infrastructure, (6) SME networking opportunities, (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 SMEs still face is access to financing and working capital to grow their businesses and to attract skills.
The reluctance of the SMEs to use state-of-the-art technology is also identified as another drawback for SME development. Unlike in other countries in the region, the adaptability 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.

Recent state interventions designed to motivate SMEs to expand their scale through technological advancement has helped many SMEs to become more competitive and venture into new markets oversees.


Way forward
However, despite the positive policy reforms and initiatives introduced, there are still many constraints that impede the growth of the SMEs.
As mentioned above, the main problem that SMEs face is accessing adequate and timely financing on competitive terms, particularly longer tenor loans. 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 SMEs have made it difficult for lenders to be able to assess risk premiums properly, creating differences in the perceived versus real risk profiles of SMEs.

Thirdly, most SMEs 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 the economy and as globalization intensifies, lack of innovation and talent hurts the productivity and the competitiveness of Sri Lankan SMEs. Thus, mentoring and supporting SMEs 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 marginalized sections of our 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 and NBFI sector. Going forward, the government would need to support the SMEs to build capacity and identify new markets using our oversees representation, financial institutions would have to be more forward-looking, innovative and develop new business models to position themselves to support small and medium enterprises in Sri Lanka, the challenge for SMEs would be to identify market trends early, innovate and find new markets to export.

  (The writer is a former Bank Chairman)