SME Development Strategies for Sri Lanka: Learning Lessons from Neighbouring Countries
Striving for the growth and competitiveness of the Small and Medium Enterprise (SME) sector in Sri Lanka has often been identified as imperative in order to provide more employment, bridge regional growth disparities, and ensure that post-war growth is inclusive and widespread. However, as highlighted in previous posts on the IPS blog1, several issues continue to hamper the faster growth of the Sri Lankan SME sector; particularly the difficult access to finance, improving competitiveness and market relevance, and entrepreneurship and skill development. Yet, these issues are not just limited to Sri Lankan SMEs.
In formulating a robust policy for developing Sri Lanka’s SME sector, there is a need to look at strategies adopted in neighbouring regions, particularly in East Asia, that share common SME development constraints. This post examines some of these, with a view to providing useful input for Sri Lanka’s efforts at SME policy development that are currently under way with the leadership of the Ministry of Industry and Commerce and the National Enterprise Development Agency.
1. Access to Finance – a common and persistent issue
In many of the ASEAN countries, the lack of adequate and affordable access to finance has been cited as a major obstacle for SMEs. For example, in Vietnam, a survey of 32,000 SMEs in 30 Northern provinces revealed that 67% were unable to obtain financing due to lack of requisite collateral. Their financial situation is further aggravated by the inability to meet institutional requirements with regard to accounting practices as well as to present business plans of acceptable quality to local banks. Hence, successful business plan preparation is one area that has been highlighted. To ease this constraint, the development and distribution of toolkit packages dedicated to the preparation of a “dehydrated” business plan of 4-10 pages has been a proposed strategy.
Although several special SME loan schemes have been launched in Sri Lanka, among the policies initiated to improve access to finance, business plan preparation appears to have taken a backseat and hence, needs to be considered. Currently, the SME Toolkit Sri Lanka provides some information on its website regarding the format of, and reasons for, creating a successful business plan.
A key reason for the access to credit constraint for SMEs is often the problem of inadequate collateral. The problem of insufficient collateral can be alleviated, to some extent, through the development of credit registries and rating systems. Empirical studies conducted by the World Bank in several countries reveal that establishing credit registries helps to improve access to credit without increasing risk to banks2.
In India, a credit registry, the Credit Information Bureau of India Limited (CIBIL), was set up in 2004 through a public-private partnership to consolidate the credit history of commercial and consumer borrowers, including those in the SME sector. The World Bank is also providing assistance to the Small Industries Development Bank of India (SIDBI) and commercial banks to validate and compile credit information on SMEs in an easily transferable format, which would then be shared with the CIBIL.
In Malaysia, a dedicated SME Credit Bureau was set up by the Credit Guarantee Corporation Malaysia Berhad (CGCMB) in 2008 to develop and strengthen credit standing and to improve outreach of and access to financing for small businesses. The Bureau publishes a Self-enquiry Report which allows SMEs to be aware of their credit standing, while helping them to identify areas for improvement that would increase their credit worthiness. Despite the efforts of the Credit Information Bureau (CRIB) of Sri Lanka to establish a Movable Assets Registry (MAR) which would make use of moveable assets as collateral, progress with regard to improving the credit history of SMEs in Sri Lanka is limited.
2. Credit Rating of SMEs – a key step towards easing the access to finance issue
Credit rating systems help to overcome the issue of banks being reluctant to lend to SMEs with inadequate collateral and unproven record. In India, a programme to rate small enterprises was set up in conjunction with various stakeholders which included the Small Industries Associations, the Indian Banks’ Association and rating agencies such as the Credit Rating and Information Services of India (CRISIL), Dun & Bradstreet and Onicra. The ratings are based on an evaluation of the performance and credit-worthiness of Small Scale Industries (SSI), and measure their operational, financial, business and management risks. The Ministry of Micro, Small and Medium Enterprises (MSME) subsidizes 75% of the rating fee charged on these firms. By assessing the capabilities and credit-worthiness of SSIs more accurately through the credit rating system, banks and financial institutions are better able to manage their risk and extend more credit to regional enterprises.
3. Taking SMEs to the Next Level – a Picking Winners approach?
There are major differences in the capabilities and competitiveness of SMEs within sectors and industries. SMEs that are more efficient, innovative, growth-oriented, outward-looking and learning-capable, deserve closer attention and collaborative support due to several reasons, and these SMEs must be identified and assisted. First, such firms have better prospects for success being more focused and manageable, administratively and financially. Second, they would be more receptive to policy support and facilitation, targeted with an efficiency-oriented and time-bound approach. Third, having been provided initial assistance and facilitation, they would also have better success in self-diagnosis and self-improvement.
However, up-to-date and comparable data and information on these SMEs are unavailable, not only in Sri Lanka, but in many ASEAN countries as well. Data and information on SME capabilities and competitiveness in various segments are essential to accurately identify their current core competencies as well as common areas of weakness that would necessitate follow-up capacity building. They also serve as a systematic and robust indicator of the changes in the competitive edge of SMEs over time. Operational benchmarks and guidelines for cost, price, etc., can be established based on the available information and data on the capabilities and competitiveness of top-rank SMEs, for SMEs at the lower tiers to follow. Data needs to be collected and grouped under categories like matters relating to the overall business environment, entrepreneurial characteristics, current levels of capabilities and competitiveness, potential for quality and productivity upgrading, finance and human resource development.
Given the current fiscal constraints of the Sri Lankan Government, it is important that financial resources allocated for SME support have a maximum impact. Assistance needs to be directed towards SMEs most likely to succeed, grow and generate more employment, rather than blanket assistance to all SMEs. For this, better information needs to be gathered regarding the capabilities and competitiveness of the country’s SMEs, in order to identify top performers. The key is to create a suitable enabling environment and ease of access to credit to all SMEs, while government support at the state’s cost ought to be targeted to potential SME champions.
4. Integrating SMEs into the Broader Picture – clustering and subcontracting
SMEs are increasingly becoming subject to great demands brought about by world trade liberalization and globalization. Capturing the market opportunities that are becoming available is not easy for individual SMEs to do, with many unable to achieve economies of scale and carry out functions such as training and technological innovation. Clusters are a powerful means by which SMEs can address some of their problems with regard to demand fluctuations, and procurement of inputs, as well as enjoy economies of scale and improve their bargaining position. It also becomes more cost- effective for the government, large enterprises, universities and other supporting agencies to provide BDS to a whole cluster of enterprises, rather than to individual enterprises in several locations. Although business clusters are well established among larger enterprises in Sri Lanka, it is still rare and nascent in the SME sector.
Subcontracting linkages between large enterprises and SMEs have been found to greatly improve the productivity of SMEs. Such linkages are an extremely important source of technological and marketing improvements and help reduce information and transaction costs. Subcontracting ties also provide important spillover benefits to SMEs in terms of easier acquisition of new technologies, management methods, marketing and input materials, and production techniques. They also help to reduce uncertainty and risk for SMEs as a result of stable orders and favourable payment conditions.
In Malaysia, the Industrial Linkage Programme by the Small and Medium Industry Development Corporation (SMIDEC) promotes the creation of linkages between SMEs and MNCs or large corporations in the country. Under the Vendor Development Programme by the Ministry of Entrepreneur & Cooperative Development (MECD) in Malaysia, large corporations provide technical training to SMEs in exchange for the purchase of parts and components from the former. This needs to be a key priority in Sri Lanka’s SME development efforts also, so that smaller businesses are able to establish lucrative links between themselves and larger enterprises at home and abroad.
Although the SME sector in Sri Lanka shares similar problems to those of some ASEAN countries and India, it is clear that they are far more advanced in their SME development policies and their innovative thinking. Sri Lanka can draw valuable lessons from their efforts, particularly Thailand’s SMEs Promotion Plan (2007-2011) and the ASEAN Policy Blueprint for the ASEAN SME Development Decade 2002-2012. However, the key is to distill the lessons to suit the Sri Lankan context and develop its own comprehensive, yet forward-looking agenda for SME development in this decade of new post-war growth.
1. ‘Access to Credit: Critical Issue for Conflict-Affected Enterprises’, [http://ipslk.blogspot.com/2010/10/access-to-credit-critical-issue-for.html]; ‘Private enterprise growth in the regions: What is slowing it down?’, [http://ipslk.blogspot.com/2009/11/private-enterprise-growth-in-regions.html]
2. Brown, M., T. Jappelli, and M. Pagano (2006), “Information Sharing and Credit: Firm-level Evidence from Transition Countries.” Swiss National Bank, Zurich; Powell, A. P., N. Mylenko, M. Miller, and G. Majnoni (2004). “Improving Credit Information, Bank Regulation, and Supervision: On the Role and Design of Public Credit Registries”, Policy Research Working Paper 3443, World Bank, Washington, DC.