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| Sunday, 18 July 2004 |
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Business |  |
| News Business Features Editorial
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Financial and Management problems caused SME collapse by L. S. A. Wedaarachchi. It has been revealed that most of the small and medium-scale enterprises (SME) collapsed within a short period due to the financial and management difficulties faced by them. The above fact was highlighted in a report which was prepared by a task force appointed by the government, to examine the problems faced by the SME sector. The main financial problem of the SME sector is the difficulty to obtain finance from traditional financial institutions such as Banks. On the other hand, it was revealed that the banking sector has excess liquidity. In addition to the liquidity available with the banking sector, several sector-specific credit lines are also available in the banking sector from the multilateral lending agencies namely ADB, KFW, and JBIC. ADB - Asian Development Bank, KFW - German Development Bank, JBIC - Japanese Bank for International Cooperation. According to the task force report the main reason for the slow and inadequate flow of funds to the SME sector is a gap between the traditional financial and banking institutions and the SME sector. Head of the SME and SME Development at the National Development Bank (NDB) A. L. Somararatne said that the flow of funds to the SME sector is very slow and that the sector experiences difficulties in obtaining funds from the formal financial organisations due to the structural weakness in the sector. He further said that especially the bankers think that lending to the SME sector is risky. Elaborating on the structural weaknesses, he stated that most of the SME organizations do not have a proper system of maintaining books of accounts which is a "Must," and also the criterion of a good Bank. When an organisation does not maintain proper books of accounts, Banks find difficulties in making proper assessment of their capability of repaying debts. Another reason why the SME entrepreneurs find it difficult to obtain finance from traditional finance and banking institutions is their inability to provide acceptable collateral. The availability of collateral reduces the risk of credit to some extent. Traditional financial organizations demand immovable property as security when they consider the loan applications. Non-availability of such properties is also a serious difficulty when it comes to applying for loans from Banks. The inability of some SME entrepreneurs to submit a proper and acceptable business plan to Banks prevents them from gaining access to finance from Banks. Most of the SME entrepreneurs have proper and viable business ideas but they are incapable of properly formulating them and submitting them to any financial institution in a convincing format. Non-availability of the services of Business Service Providers (BSP) or business consultancy services is the main reason for this. Generally, banks expect around 30-40% as the minimum contribution from the project promoters to minimise the debt-servicing burden on the enterprise, and also to secure the entrepreneurs' full commitment to the business. Most of the SME entrepreneurs find it difficult to raise this equity capital. Some SME enterprises are highly sensitive to economic and political environment changes and as such any unfavourable change in the environment renders such enterprises immediately unviable. Their sensitivity is mainly due to lack of professionalism or expertise in the areas of management, technology and marketing owing to the above reason. Also, Banks are reluctant to lend to the SME sector. The inevitable consequence of this situation is that the SMEs are compelled to go to the informal financial sector for finance at much higher rates of interest. Generally, their rate is around 10%-15% per month. This high cost of finance makes most of the SMEs unviable. In Sri Lanka, the SME sector is very important economically and accounts for approximately 94% of the total business units. It provides 36% of the total industrial employment and contributes 20% of the total volume addition in the economy. SME small and medium-scale enterprises play a major role in economic development. Our neighbouring-country India is the ideal example of it. India produces everything from pins to aero planes and she is now one of the world's nuclear powers. Since gaining Independence, while India marched to a progressive end, Sri Lanka marched towards a precipice. Sri Lanka imports almost everything. It is an undeniable fact that most of the SMEs were sunk in the deep unsettled loans of leading financial institutions or banks. Each and every government emphasized the importance of the SME sector for economic development, and the Finance Minister Dr. Sarath Amunugama also highlighted the importance of the SME sector in his presentation of "Future Economic Programmes" recently. To gain independence, government must remove all the barriers placed before the SME sector. Only then 'Maliban', Munchee', 'Siddhalepa', 'Vendol', 'Arpico', 'Jinadasa', 'Rani', 'Kohomba' and other local products will be able to come to the forefront. |
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