Small and Medium Enterprises Banking

SMEs are defined in a variety of ways by various countries using such parameters such as number of persons employed, amount of capital invested, amount of turnover or nature of the business, etc.

Using the size of capital and the number of employees as the criteria, the Industrial Development Board defines a small industry as an establishment whose capital investment in plant and machinery does not exceed Rs.4 million and the total number of regular employees does not exceed 50 persons. The Department of Small Industries classifies enterprises with capital investment of less than Rs.5 million and fewer than 50 employees as SMEs.

For the purpose of a World Bank Financed Investment Assistant Scheme, financial institutions define SMEs as those enterprises whose investment in fixed assets at original book value, excluding land and building, do not exceed Rs.8 million (US$ 84,000). In the case of projects where the main investment island and buildings (for example warehouses), the total investment in fixed assets, inclusive of the cost of land and building should not exceed Rs.16 million (US$168,000).

INSTITUTIONAL SUPPORT FOR DEVELOPMENT OF SMEs 

The governments who came to power since independence have initiated various measures, from time to time,for the up-liftment of the SME sector.This is reflected in the establishment of various institutions and launching of various programs aim at supporting the sector. By establishing the following institutions,Sri Lanka has tried to boost the SME sector.

• Ceylon Institute of Scientific and Industrial Research (CISIR)
• The Department of Rural Development and Cottage Industries 
• The People’s Bank and The Bank of Ceylon
• Laksala
• Industrial Development Board ( IDB)
• Department of Textile
• The National Development Bank (NDB)
• Small Enterprise Development Division (SEDD)of Ministry of Youth Affairs & Sports
• Regional Rural Development Bank (RRDB)

PROBLEMS ASSOCIATED WITH THE DEVELOPMENT OF SME SECTOR IN SRI LANKA 

A major problem in the SME sector is the shortage of capital due to number of reasons such as lack of access to bank facilities,lack of knowledge of bank procedures, long delays and inability to provide guarantees.Although there are some loan schemes available,the high rate of interest makes the venture unattractive.

The sector has a weak institutional base due to lack of management skills.Management skills are the critical success factors in all of businesses thus Small Business has no exception. Small business does not mean that they are scaled down version of big business.It has to deal with all most all the functions that large businesses have to deal.So,lack of managerial skills of owner/manager may hamper the progress of the business.

The use of obsolete or inappropriate technology results in low productivity,low quality of products,and a high rate of rejection of products,resulting in higher costs to the producer and a reduction in market competitiveness.Again,this is also due to the weak financial base and lack of managerial skills.The weak financial position may hampers the upgrading of technology;expansion of production capacity,production efficiency,and does not allow the firm to go for new and sophisticated technology and spending on training and development of its work force to increase the productivity.In some cases,although fund are available,the management does not utilize them in areas such as training and development as the management do not understand the positive impact of training on business success.

The lack of SME policies and institutional support to protect and encourage SMEs are also hampers the progress of this sector.Specially,small businesses are vulnerable to the changes in the environment.Due to the inherent nature of smallness it will not be able to compete with big businesses.For example,with the introduction of open economic policies in 1977,a large number of handloom textile enterprises had to be abandoned by owners.So,the lack of clear policies, incentives and institutional support will reduced the survival rate and progress of ventures in this sector.