Transforming Sri Lanka’s SME Landscape: A Roadmap to Prosperity

By Jonathan Alles, 
Managing Director/CEO - HNB 

SMEs have been an indomitable cornerstone of our nation’s economy. They make up 75% of all enterprises in Sri Lanka, in addition to generating 20% of all exports, 45% of employment and 52% of Gross Domestic Product. Unfortunately, despite having energized the aspirations of generations of Sri Lankans, today, our nation’s SMEs face a perilous existence and remain among the weakest equipped to face an increasingly uncertain future. 
Successive crises have reduced many SMEs to a daily struggle for survival – while many others have shut down all together. They have been grappling with subdued consumer sentiment, inflationary domestic conditions, high costs of production, and with it, complex administrative and operational challenges, and a prohibitive cost of finance stemming from high interest rates. 

For context, inflation went from 7% in 2021 up to 70% within a single year. Similarly, average weighted prime lending rate (AWPLR) increased from under 6% in 2021 to nearly 30% in 2022 taking any possibility of fresh credit almost completely off the table for enterprises large and small. Precluded from commercial borrowing to withstand such unprecedented disruptions, we have witnessed first-hand how many were compelled to scale-down operations due to no fault of their own. 
Several had strong business models and customer relationships, yet they struggled to find the working capital to revive operations and move ahead with otherwise readily available new business. But even this perfect storm may yet have its own silver lining.

Growing signs of resilience

The recent unveiling of a clear plan for Domestic Debt Optimization, accompanied by the green light for the second tranche of the IMF package have resulted in tangible improvements to the economic climate. 
Together with positive signals from holders of Sri Lanka’s International Sovereign Bonds (ISBs), these developments herald a long-awaited turning point in our nation’s long and difficult journey to a lasting economic revival. 
The effects are starting to reflect in the broader economy at a faster than expected pace, as evidenced by a steady ramping down of inflation down to 25.2% in May 2023, and 12% in June, before finally crossing into single-digit territory in July 2023. 

Subsequent to these developments, AWPLR has nearly halved to 15.6% and the CBSL has directed the banking sector to reduce rates further during the year while placing interest rate caps on pawning, cards and pre-arranged temporary overdraft facilities.  With these positive signals, we are also finally seeing space created for a return to normalcy on interest rates and some much needed breathing room for corporates and SMEs alike. At this crucial juncture, it is essential that all stakeholders in this nation’s economic revival use the time and resources created by this temporary reprieve to strategically reposition themselves towards the singular mission of expanding Sri Lanka’s export revenue. 
From our experience, it is clear that a new generation of tech-empowered SMEs will be the lynchpin to this ambitious transformation. 

From Micro to Macro – making SME’s a centerpiece of national economic revival 

As the first private sector bank to engage with Sri Lanka’s SME sector, HNB has served as a steadfast partner in the establishment of an SME eco-system that is only just beginning to tap into its full potential. Through groundbreaking initiatives like HNB Gami Pubuduwa, we have worked to build a strong and growing network of ambitious entrepreneurs across the island. 
Many of these enterprises have already transformed into formidable export-driven powerhouses in their own right, and now stand as remarkable examples of what can be accomplished when the right businesses are provided with structured, ethical finance, digital banking, e-commerce capabilities, and quality export facilitation. 

Guided by this vision, we are unwavering in our efforts to continually channel strategic support to fortify SMEs and entrepreneurs and spearhead the nation’s economic resurgence.
Accordingly, over the past year, HNB disbursed over Rs 100 billion, meticulously directed towards thousands of promising SMEs across the island. This diverse spectrum spans enterprises providing everything from vehicle repairs, to grassroots food and beverage brands, traditional apparel, arts and crafts, to tourism and hospitality, education, and even IT and professional service start-ups.
The initial phase of our engagement concentrated on safeguarding business continuity for those enterprises most affected by recent challenges. Leveraging HNB’s extensive digitalization of back-end processes, we undertook a comprehensive reassessment of our loan portfolio. 

This enabled us to extend opportunities for viable and genuine customers to recalibrate their payment schedules, and gradually even secure access to additional concessionary funding to help fund additional scale and capacity to consolidate their recovery and chase down new business opportunities. 
Looking ahead, our roadmap encompasses an even broader horizon, one that resonates with empowerment, innovation, and resilience. As we navigate the landscape of Sri Lanka’s economic transformation, we are steadfast in our mission to nurture SMEs, propelling them from micro entities to macro contributors leading the nation’s journey towards enduring prosperity.

Forging a national realignment to entrepreneurship  

To secure this vision, it is of utmost importance that the Government and policymakers maintain the hard-won economic stability that we have managed to re-gain up to this point. 
Reform is also critical. While big-ticket reforms to crack down on corruption, rationalize Government spending and modernize the public service will be fundamental to creating lasting stability, smaller reforms to build a more supportive system for SMEs is equally essential. This includes strategic efforts to improve the Ease of Doing Business in Sri Lanka. 
Simple steps like optimizing processes for registering a business, obtaining construction permits and electricity connections should take up as much space in the national debate as all of these other monolithic challenges. 

Sri Lanka’s banking industry will also have to continue their digital transformations to help shore up costs and more accurately prioritize resources to growth sectors. Simultaneously, we are collectively working to leverage all possible relationships with bilateral and multi-lateral development agencies to secure and expand access to concessionary financing.
Currently, HNB is an active stakeholder in these efforts, having already established vital funding lines through USAID’s Private Sector Development Project, PROPARCO, DEG and the Asian Development Bank. This in turn enabled vital resources to be channeled into SMEs, and Women-led businesses. 

A new generation of SMEs for a new global economic paradigm 

Similarly, we continue to forge partnerships with fin-techs like WEBXPAY and Appigo, and e-commerce platforms like Cord 360 to provide SMEs with affordable access to set-up their own thriving digitally empowered businesses. This includes integration of Enterprise Resource Planning (ERP) capabilities that are helping to foster a new generation of agile, export-focused SMEs.

However, while it is essential that we continue to scale up these vital efforts, there is another more challenging, but ultimately more rewarding transformation that will still be required and that is: a transformation of mind, culture, and attitudes. 
For too long, Sri Lankan parents have told their children to play it safe, and become professionals working for large corporates, banks, or take up law, medicine, engineering, accounting, or architecture. While all of these are noble and essential pursuits, an equally noble and vital calling to entrepreneurship that many of our youth hear but too often are stifled by a well-meaning but risk averse older generation. 

But now more than ever, Sri Lanka needs its entrepreneurs. Technological and scientific innovation is opening up the potential for entirely new economic paradigms. 
Many young, ambitious, and technologically savvy Sri Lankans are seizing unprecedented new opportunities targeting products for export into valuable global niches, and services that capitalize on the rise in remote-work to earn significant foreign currency salaries providing their know-how to companies across the globe. 

Meanwhile, globally artificial intelligence, and other potential STEM breakthroughs are pushing the envelope on truly sustainable, circular economies. We believe that Sri Lanka has the intellectual capital to plug-in to all of these emerging global opportunities, and leverage them to accelerate our nation’s economic revival. These conditions have the potential to create disproportionate value to SMEs and entrepreneurs that engage with these dynamics first and fastest. HNB will always stand with those who are bold enough to make the attempt.