Unlocking potential of micro, small and medium enterprises essential to economic recovery

Sri Lanka needs to urgently capitalise on the potential of micro, small and medium enterprises. Creating growth and productivity in the small business sector is an investment in our wider economy – Pic by Shehan Gunasekara

Sole proprietorships account for 63.1% of all businesses in the country,1 and account for 27.1% of national employment.2 Their contribution to the Sri Lankan economy is significant, and subsequent lockdowns due the pandemic have had an adverse impact on these small businesses. 

At present, we are unable to map out as to how many small businesses would be completely put out of business, but given that the Department of Labour has estimated (from a survey of 2,764 establishments) that 52.15% or 764 of firms, employing under one to 15 employees have closed down,3 it is likely that small businesses have also been hit hard.  

However successive Sri Lankan governments have failed to strategise on the potential of these enterprises to Sri Lanka’s economic development. Emerging markets such as Vietnam have been able to capitalise on the potential of these businesses to accelerate economic growth4.  Any hope of inclusive economic growth for Sri Lanka’s post COVID recovery can only then be achieved if we utilise this sector, unlock their potential and empower them to grow, compete and thrive. While there is a lot of work to be done in terms of policy reform in this area, there are a few low hanging fruits, namely rehauling the business registration process, and bridging the digital divide. 

In the form of a multi-part series, the Advocata Institute in partnership with LIRNEasia will provide an in-depth analysis of these two vital policy tools to empower Sri Lanka’s small businesses. 

Sri Lanka’s business ecosystem  

According to the listing operation of Economic Census conducted in 2013/ 2014 the number of SMEs in Sri Lanka most of which are categorised as sole ownerships accounts for 1,019,681 of which 71,126 are small enterprises and 10,405 are medium scale enterprises.5 This number only represents enterprises that have registered under the above criteria. 

However according to the same survey there are three million people who engage in a similar SME related industry, trade or services. 45% of the micro enterprises and 10% of small enterprises remain unregistered. Overall, 42% of business establishments remain unregistered while 25% of these establishments are run by women entrepreneurs. In other words, informality is still high. 

According to a survey done by LIRNEasia  40% of SMEs reported using the internet or social media for business; much of this use was limited to information seeking, rather than transactional use. Those who used the internet for business thought that access to the internet is either important or very important, while those who did not use the internet remained unconvinced of its benefits: most said there was ‘no need’ to use the internet. 

Few SMEs were capable of taking any form of card payment at the time of survey, and the majority of SMEs did not use mobile money services. This research points to a serious digital divide restricting the potential of Sri Lanka’s small businesses. This would be tackled comprehensively during next week’s Op-Ed outlining the serious implications of the digital divide.  

So what is the problem?  

Let’s look at it through a micro entrepreneur. Chitra. She runs a string hopper stall opposite her village fish market, and her story is similar to that of three million6 people who engage in an SME related industry, trade or service. Her business remains unregistered. She does not use any digital technology. Because she is unregistered, she cannot go to a bank and get a low interest SME loan or even apply to the current Saubagya COVID-19 renaissance facility. 

Reforming the business registration process 

So what must be urgently done is to simplify our business registration process. At present the business registration process is implemented by the Divisional Secretariat. In contrast, the Business Registration process for companies under the Companies Act No. 7 of 2007 are streamlined through an online registration system called the e-ROC. However, this does not benefit small businesses who classify as sole proprietors and partnerships and is therefore regulated at the Divisional Secretariat. At best we have about nine different regulatory processors for the registration of sole enterprises and partnerships. 

Typically, an entrepreneur like Chithra would have to visit the Divisional Secretariat, collect and fill forms, provide documentation such as proof of premises ownership such as deeds, or rent agreements, tax assessments etc. Then she would have to visit the Grama Niladhari and get the documents validated. She might need other approvals as per the request of the Grama Niladhari before she hands over the final forms to the Divisional Secretariat.

A more effective method would be to have an online system. As implemented by New Zealand and Hong Kong, the applicant must be able to submit the form (available in all three languages) online on the Divisional Secretariat website, pay the business registration fee online or at a bank and receive the business registration the next day without the requirement for numerous signatures or documentation of ownership (the company registration process does not call for the original deed or proof of ownership, so why should a small business?). Then an entrepreneur such as Chithra can easily go to the nearest communication fill the forms, upload the deposit slip and get her business registration with ease. 

Therefore, in practise what has to be done is establishing an e-registration system which can be availed of by small businesses.  The Ministry of Industries must play an active role in setting up the online platform in partnership with Provincial Councils. Secondly the requirement for unnecessary documentation (proof of ownership, grama niladhari approval, etc.) has to be amended at the provincial council level. Implementation of these two policy recommendations would significantly empower small businesses to become registered.

Conclusion 

Sri Lanka needs to urgently capitalise on the potential of micro, small and medium enterprises. Creating growth and productivity in the small business sector is an investment in our wider economy.  This is not an easy task, however, mobilising synergies and bringing in much-needed regulatory reforms such as making the business registration process simpler and secondly bridging the digital divide. 

The Advocata Institute has compiled a comprehensive report on business registration reform titled ‘Barriers to Micro and Small Enterprises in Sri Lanka,’ which can be accessed on https://www.advocata.org/.

Next week’s oped will highlight the importance of digital technologies in growing small businesses, as well as the economy at large. What we really need to do is to implement policies that convert entrepreneurs such as Chithra into our success and growth story! 

(The writer is Policy and Advocacy Executive at the Advocata Institute. He can be contacted at [email protected]. The Advocata Institute is an Independent Public Policy Think Tank. Learn more about Advocata’s work at www.advocata.org. LIRNEasia is a regional digital policy and regulation think tank active across Asia.   The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or LIRNEasia.)

Footnotes

1Government of Sri Lanka, Department of Census and Statistics, ‘Non-Agricultural Economic Activities in Sri Lanka Economic Census 2013/2014,’ http://www.statistics.gov.lk/Economic/Non%20agri.pdf, (accessed March 2, 2020).

2 Government of Sri Lanka, Department of Census and Statistics, Annual Survey of Industries, (accessed March 2, 2020).

3 A .Wimalweera, Department of Labour, Sri Lanka, Covid 19 & Beyond – ‘The impact on the Labour Market of Sri Lanka Survey report of the e-survey conducted on private sector establishments, May 2020,’ http://www.labourdept.gov.lk/images/PDF_upload/notices/survey%20report%202020.pdf (accessed November 2, 2020)

4 https://www.vietnam-briefing.com/news/facilitating-sme-growth-vietnam.html/

5 Government of Sri Lanka, Department of Census and Statistics, Annual Survey of Industries, (accessed March 2, 2020).

6 Government of Sri Lanka, Department of Census and Statistics, ‘Non-Agricultural Economic Activities in Sri Lanka Economic Census 2013/2014,’ http://www.statistics.gov.lk/Economic/Non%20agri.pdf, (accessed March 2, 2020).