More than 50 million SMEs exist currently and over the last
five decades, the SME sector has grown dynamically by contributing 40% of the
country’s exports and creating millions of jobs annually.
In Sri Lankan context, Small and Medium Enterprises (SMEs)
play an important role in economies in terms of their contribution to national
output, employment and share of firms operating in countries and also SMEs are the backbone of the economy, which is accounting over 52%
of total GDP in our economy, therefore key players in engendering regional
development and inclusive growth, i.e. ensuring that the benefits of growth go
to all cohorts of society. In addition SMEs provide 45% of national employment
and 75% of the total enterprises in the economy. The notable one in the below
figure is the SMEs are owned by the women is about 22-39%. So these enterprises present a wealth of
opportunity for domestic economic growth.
SME’s Contribution to Sri Lankan economy
The bellow diagram shows Sri Lanka’s SME exports performance against other region. In fact, the countries have different definitions of SMEs so it makes the comparisons a little bit complicated but the conclusion of Sri Lankan SMEs is unusually low. The low export participation of SMEs in Sri Lanka means that Sri Lankan exports are over dependent on the performance of a few large firms. Eighty one percentage of export revenue generated by around 240 firms, each with export turnover exceeding a billion LKR. (D Perera, 2020, SME’s are the backbone of the economy, Certified Management Accountant, 11-13)
SMEs share of exports in the Region
Source:
Annual Report 2014. Central Bank of Sri Lanka, Export Performance Indicators
2004-2013, Asia SME Finance Monitor 2013, ADB.
Source: www.ft.lk/columns/Development-of-SMEs-in-Sri-Lanka---Are-we-serious-about-SME-classification
Youth unemployment
Youth in Sri Lanka has a biggest problems to stand their own
lags, the stigma of most youths are to depend of In Sri Lanka’s government jobs,
Mostly, SMEs tend to be labor-intensive and require less establishment capital
than larger firms. As such, growth in the SME sector poses significant
potential to create new employment opportunities and facilitate wider
distribution of wealth across rural and regional areas. They also hold the potential
to increase tax bases at a quicker pace than larger enterprises, thereby
contributing to government revenue.
So, is entrepreneurship and promotion of the SME sector
alone the key to resolving youth unemployment? Yes, and no. Yes, because the
SME sector is diverse and able to incorporate people possessing a wide variety
of skill sets. Entrepreneurship is a means of harnessing specific and unique
skills which can contribute to economic growth, particularly in the periphery,
by stimulating incomes and by creating further employment. However, the
underlying factors related to youth unemployment need to be addressed first and
many of these relate to attitudes, skills mismatches and culture – these
factors are less easy to address.
2.
Common challenges in SMEs
Access to Finance
Access to finance is a common problem for SMEs across
countries including Sri
Lanka; SMEs often struggle to obtain finance including trade finance, which
constrain their development and opportunities for trade. Selling abroad
involves various costs ranging from marketing to adapting products and
packaging to meet foreign requirements; all of which entail additional costs
and require credit. Lending to SMEs suffers from informational problems, and
the inability to provide collateral/ guarantees and credit history means that
SMEs incur higher interest rates and fees compared to larger firms. This
problem is compounded by the difficulty to access affordable trade finance and
lack of dedicated financial services for the trading sector, which further
reduces their export potential.
Particularly, SMEs are treated as high-risk borrowers and
face a high cost of borrowing for at least two reasons:
(1) Lack of collateral,
(2) Lack of risk-related
information about their buyers and markets.
In this context, the risks tend to be overestimated and the
cost of borrowing becomes unreasonably high. Therefore, financing exports
becomes a problem for SMEs, which are then pushed to reduce their ambitions on
exports.
Access to Information
There are many challenges have been facing by SMEs which
prevent them from achieving their fullest potential. Access to finance – and an
inability to borrow from banks due to stringent requirements - is a key
challenge which persists despite policy initiatives by the Government.
In the modern advance financial system, adequate and
reliable information is the key tool for making a safe investment. Gapping in
information makes the investment more risky and vulnerable for investor. By
reducing the information gap, credit rating agency plays a contributory role in
the advance financial system.
Poor quality and access with regard to information
creates higher risk estimations and gathering information is also costly and
time consuming. The government has a role in this area as well. For example,
using the existing infrastructure of commercial sections in Sri Lankan
embassies in export destinations the government can provide buyer and country
information to help mitigate the distortions created by lack of information. It
will help reduce search costs and lower the price of export finance
instruments.
Inadequate access and marketing platform
SMEs in Sri Lanka have been subjected to weak marketing
linkages. Due to factors like insufficient public and private partnerships,
lack of adequate marketing facilities, the path for the marketing and
sale of SME products will continue to be a challenging one in future.
For marketing of products or services internationally, SMEs
are always constrained by the scarcity of budget, which in turn has limited
their growth.
Lack
of access to new technology
Although technology has advanced in the recent years, thanks
to the proliferation of mobile phones and internet, the continuance of low
technology use by SMEs has always resulted in low productivity. This has
rendered them uncompetitive in the ever-widening market.
Though SMEs in metropolitan cities have now shown their
positive attitude towards the technological uptake, the rural destinations are
still not advanced. This will continue to be the challenge in coming years also.
·
Lack of skills
·
Lack of Communication
·
Lack of knowledge sharing
·
Lack of quality production
The way forward or recommendations
From government policies to technological advancement, SMEs
can look forward to the following
1) Leveraging the e-commerce trend
Development of e-commerce provides export opportunities for
SMEs to engage in international trade. Online platforms can dramatically reduce
the cost of doing business across borders, eliminating the barriers created by
distance. However, affordability and access to communication and
infrastructure (i.e., logistics of shipping a good or delivering a
service, ICT security and data protection, payments) create difficulties for
SMEs. Thus, SMEs tend to be less represented online than
larger enterprises.
SMEs now can make their presence in the online world by
going digital. For many years, the SME sector was struggling with the intense
competition, but going digital can give them the required edge.
2) Adoption of technology
Since social media, mobile phones, and cloud technology is
the talk of the town now, SMEs can take help of these platforms. Embedding the
social and cloud platform will open up vast opportunities for revenue growth
and operational efficiency.
3) Taking advantage of Government schemes
SMEs need to receive benefits of Government initiatives such
as ‘Enterprise Sri Lanka’. These schemes introduced by the government are aimed
to promote an entrepreneurial culture to grow the current SME status.
3) SME credits
SME loans have always helped the enterprises to meet all
their business needs that arise from time to time without facing any
difficulty.
Following are the business needs catered by the SME loan:
·
Launch of a new product range
·
Business expansion
·
Paying out salary to employees
·
Warehousing needs
·
Purchasing new equipment
·
Credit for marketing and advertising activities
Getting easy access to loans is not the only decisive
factor, many lenders now do not require the borrowers to put their personal or
business assets on the line to qualify for financing.
Funding now has become faster as there is no need to
pledge collateral, less paperwork, and minimal documentation.
The online route of SME loans has further cleared the fog by
giving the convenience of accessing the business loan details anytime, from
anywhere online.
3. Summary
There have been an array of promises to uplift the status
and capabilities of SMEs through targeted assistance mechanisms that seek to
bolster the role of SMEs in the Sri Lankan economy. However, if the Government
truly intends to empower local SMEs, there needs to be a holistic approach to
policy reforms and programme implementation.
2020 is going to be a year of progressive changes in the Sri
Lankan SME sector based on the trends mentioned above. With a significant rise
in technology and innovation, a business-friendly atmosphere for the SMEs will
become a reality.
References
http://www.dailymirror.lk/87397/the-exporting-problem-of-smes-finance-is-one-solution
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