SMEs and loans

The National Economic Council (NEC) presided over by President Maithripala Sirisena this week issued instructions to the Central Bank, Finance Ministry and State banks to facilitate an estimated 100 loan schemes for entrepreneurs in an effort to promote private sector employment in Sri Lanka. This is a laudable move but it should ideally be underpinned by several other measures as well. 

Sri Lanka has a gap in its private sector. On one hand there are large corporations, mostly based in Colombo, that employ thousands of people and are the backbone of the private sector and on the other are hundreds of thousands of small enterprises that employ up to a few dozen people and are mostly based in rural areas. The middle is conspicuously empty and while brave new startups have attempted to colonise this space, they remain largely scattered. 

One of the main issues that startups and entrepreneurs in Sri Lanka have is funding. The other is adequate mentoring and networks linking them to the market. Both of these are needed if banks are to loosen their demand for collateral. Officials are well aware of this and has raised the point that some loans are already guaranteed by the Central Bank, reducing the risk to financial institutions. But clearly more needs to be done by the financial industry, which concentrates the majority of its resources on promoting consumption rather than the manufacture of tradable goods and services. 

The NEC’s request was made  in the context of a case made out by the Policy Development Office (PDO) of the Prime Minister’s Office on the basis of some recently applied research by the PDO which showed that a large number of young entrepreneurs with professional vocational qualifications have started up businesses in the Service sector in what mainstream economists describe as the ‘gig economy’ – i.e., outsourced contractual services, a sector which has seen massive expansion even in developed economies, in Sri Lanka especially in hair dressing, beauty culture, bridal dressing, event organisation, catering and delivery of goods and services. Moreover large numbers of unemployed graduates also could be drawn into this net, rather than employed in the already overburdened public sector. 

This significant section of the economy is often overlooked and struggles to be directly influenced by macro level policies. 

The burden of capital becomes even more difficult in Sri Lanka as there are limited efforts by banks to tailor loans or other products to these small-time entrepreneurs. Angel investors too are few on the ground and mostly limited to the IT sector. Crowd funding and other options are also at their infancy in Sri Lanka and most would be wary of backing anything without adequate credibility. It is a vicious cycle for entrepreneurs as they try to build a sustainable business. 

However, one thing is clear, there are many pieces of the puzzle that need to be worked on simultaneously. Banks providing loans is only part of this effort and more if not equal effort needs to be made to formulate competent business plans, target markets and accounting practices to make ideas flower. 

The Government in its latest Budget announced about Rs. 15 billion to be earmarked for loans for entrepreneurs but this policy needs to be supported by many other stakeholders to become a sustainable measure. A start has been made but other pieces of the puzzle need to come together too.