Small and medium scale enterprises (SMEs), comprising trade, service, and manufacturing, put in a large proportion of revenue, employment, and innovation to the Sri Lankan economy. In Sri Lanka, SMEs make up for 52 percent of the GDP and 45 percent of national employment, contributing, perhaps, the largest portion to the economy.
While more effective Government involvement is required, the SME sector entrepreneurs continuously insist that such State backing is not satisfactory for their survival and growth.
Sri Lanka’s SME sector forms the backbone of its economy, contributing significantly to the Gross Domestic Product (GDP), employment generation, exports, social welfare, and innovation. With a large number of SMEs operating across various industries, empowering this sector is crucial for fostering economic revival and growth, promoting entrepreneurship, and achieving socio-economic objectives.
Employment opportunities
The SME sector is a major source of employment in Sri Lanka, particularly for rural populations and youth. By providing employment opportunities, SMEs help alleviate poverty and reduce income inequality. They are often more labour-intensive than larger enterprises, thus creating more employment opportunities per unit of investment. Empowering SMEs can lead to the creation of more jobs, especially in sectors such as agriculture, manufacturing, and services.
With the impact of post Covid-19 followed by the gruesome economic downturn, the country has severely suffered job losses and shortfalls. Particularly, the negative trend in business sectors such as tourism and agriculture, the country endured an enormous blow. The improvement in the SME sector therefore has become paramount to ensure survival.
Creativity and innovation are integral to entrepreneurial success. The two criteria immensely help produce novel ideas that boost the economy. In this context, SMEs in Sri Lanka are most often centres of innovation and creativity. There were many success stories of Sri Lankan entities that startled even the global business community.
SMEs have the flexibility to experiment with new ideas, products, and technologies. These enterprises contribute to process improvements, and product diversification, thereby enhancing overall competitiveness. Innovation in SMEs can lead to the emergence of new industries and the adaptation of existing ones to changing market demands.
The Sri Lankan SME sector, despite continuous setbacks, has displayed strong resilience. Most of them have survived the pandemic and the subsequent economic slump. They have embraced risks, communicated effectively, and continually learnt to adapt. By harnessing their bold approaches, the entrepreneurs have navigated challenges, seized opportunities, created new solutions.
SMEs also play a crucial role in regional development by decentralising economic activity. They often emerge in rural areas, contributing to local economies. Empowering SMEs in rural areas can help reduce regional disparities and promote balanced growth across the country. Therefore, the Government policies must be aimed at supporting SMEs in rural areas more where they can stimulate economic growth and improve living standards in the regions.
At this crucial juncture in Sri Lankan contemporary history, earning foreign exchange has become one of the highest priorities. The current crisis stemming from an unsustainable debt load and persistent deficits on both the international balance of payments and the government budget, caused a severe shortage of foreign reserves. This forex shortage has led to difficulties importing essential goods, such as food, medicines, and fuel.
Export sector
Hence, the need to improve the export sector is mandatory. Export-based SMEs can help this task enormously by improving their capacities if the government provides adequate assistance. According to Export Development Board (EDB), the premier institution responsible for promotion of exports, the Sri Lankan industrial exports accounted for nearly 80 percent of all export earnings.
With the large diversity of indigenous products, SMEs have the potential to become significant players in export markets, contributing to foreign exchange earnings leading to economic stability. Through targeted support and capacity-building initiatives, SMEs can expand their market reach and participate more actively in international trade. Export-oriented SMEs can enhance Sri Lanka’s competitiveness in global markets and diversify its export base beyond traditional sectors.
Despite all encouraging and optimistic potential, currently SMEs in Sri Lanka are confronting many daunting challenges. Constraints on raising finances are at the forefront of the rest of the grievances for entrepreneurs. Many small businesses struggle to obtain affordable credit from formal financial institutions. High interest rates, collateral requirements, and stringent lending criteria pose obstacles to SME financing. Although financial institutions keep announcing that they offer SME loans, the issue is that obtaining a loan is a nightmare for most of the small and medium sized entrepreneurs.
Several medium scale business owners spoke to this writer stated that obtaining a loan requires scores of strenuous measures. From application to collateral to release of a loan, the processes are complex that makes the ultimate approval complicated. Their criticism is that most of these Banks offer facilities to large organisations at special interest rates and concessions, but not to SMEs. Therefore, they expect the Government to intervene to offer more conveniences and concessions for the financial requirements of SMEs.
In contrast, the several bankers who expressed their views stated that the banks must be extremely cautious about the credibility of borrowers, hence apply stringent rules. According to them, there were many instances where the borrower disbursed the funds obtained from the SME scheme for their personal luxuries or spent funds on unspecified interests.
However, the common view of the banks is that they are releasing as many as loans possible for SMEs under the guidance of the bank supervision department of the Central Bank. However, the temporary suspension of the “Parate Executions” until December 2024 has met with stiff resistance from the banking sector. This can further complicate loan processes and the lenders are most likely to enforce stricter measures on collateral.
Addressing this challenge requires the development of specialised financial products tailored to the needs of SMEs, as well as initiatives to promote alternative sources of funding such as venture capital and promoting angel investors.
Regulatory burdens are another challenge SME sector often confronts, particularly at the start-up stage. SMEs often face these regulatory inconveniences, including complex licensing procedures, cumbersome compliance requirements, and more severely bureaucratic red tape.
Hence, the authorities must seriously consider the ongoing difficulties and introduce more business-friendly and streamlined regulatory processes, reducing administrative barriers, and enhancing regulatory transparency. These policy changes can facilitate SME growth and encourage entrepreneurship. Particularly, the authorities must alleviate the existing public sector inefficiency that drastically slows down administrative processes.
Limited access to domestic and international markets constrains the growth prospects of SMEs in Sri Lanka. Improving market access requires investments in infrastructure, logistics, and market information systems. Due to the ongoing financial constraints, infrastructure and logistics factors have become a challenge to the Government. However, the Government support to SMEs in market research, branding, and market development activities can help them identify and exploit new business opportunities.
Sustainable economic growth
Despite the prevailing concerned economic situation, empowering the SME sector in Sri Lanka is essential for achieving sustainable economic growth, fostering entrepreneurship, and addressing socio-economic challenges.
By recognising the importance of SMEs and implementing targeted policies and interventions, Sri Lanka can unlock the full potential of these enterprises and harness their contributions to national development. Through improved access to finance, streamlined regulations, enhanced skills development, and expanded market opportunities, SMEs can thrive and play a transformative role in driving inclusive growth and prosperity across the country.
