Banking on SME Growth: Concepts, Challenges and Policy Options to Improve Access to Finance in Sri Lanka

Research team

Nipuni Perera
View profile
Anushka Wijesinha

Publication

The IPS Publication is available for sale from the IPS premises at No. 100/20, Independence Avenue, Colombo 07 (Tel: +94-11-2143107, +94-11-2143100), and bookshops island-wide. For more details, contact the IPS Publications Unit.

ISBN

978-955-8708-880

Published Year

March 2015

Price

US$ 15

Although SMEs have been recognized as an integral component of Sri Lanka’s economic and social fabric, they are faced with a myriad of constraints that impede their ability to grow. Even though the sector has received much attention from successive governments as well as international development agencies over recent decades, it is still faced with these challenges that need to be addressed in a comprehensive manner. Among them is the critical issue of the difficulty in accessing finance.

A unique contribution of this publication is that it puts forward a new way of looking at the access to finance challenge for SMEs. This ‘Twin-Pillar Approach to Access to Finance’ argues that improving access to finance for SMEs is a case of improving ‘availability’ on the one hand and improving ‘bankability’ on the other. The publication largely focuses on the second pillar – ‘bankability’. This stems from the understanding that a flush of SME credit alone is not enough. ‘Bankability’ is about improving banks’ approach to SME lending as well as improving SMEs’ ability to approach banks.

The publication dissects relevant issues to better understand the drivers of the access to finance challenge, from both a conceptual as well as practical perspective. Some of the key policy options put forward are the adoption of SME-friendly banking practices, introduction of SME credit rating and Credit Guarantee Fund, and improving financial literacy and internal management of SMEs. The publication cautions against over-zealous policy intervention and argues that the focus of the government must be to put in place suitable incentives as well as regulatory frameworks that encourage greater SME lending.

The publication draws on the latest insights from recent IPS surveys to provide evidence for Sri Lanka, and puts forward pragmatic policy options, considering strategies adopted in East Asian economies. Through this, the publication aims to inform the ongoing National SME Policy process of the government as well as future SME interventions to be undertaken by government agencies, financial institutions, chambers of commerce, and international development agencies.