Innovative Auctions to Channel Funds to Small Sri Lanka Firms

News Release | 23 February 2016

COLOMBO, SRI LANKA — The Asian Development Bank (ADB) will provide $100 million through innovative bank auctions to help channel more funds to smaller Sri Lankan firms that struggle to access the finance they need to grow.

The ADB funds will be lent to banks who will then lend the funds to small- and medium-sized enterprises (SMEs). To access the funds, however, banks will need to bid for a specific amount of the finance at a specific interest rate at each $12.5 million auction to be held eight times over the coming 4 years. 

“There is no market price for lending to banks if the banks are required to lend the funds to the least-well served SMEs, like new or rural borrowers or those led by women. Auctioning—rather than allocating—the funds will establish a market price for bank borrowing,” said Don Lambert, Senior Finance Specialist with ADB’s South Asia Department. “As this should be below normal borrowing costs, it should encourage banks to work more energetically to disburse the funds that Sri Lanka’s SMEs so urgently need.”

SMEs are responsible for 30% of Sri Lanka’s gross domestic product, and provide 35% of the country’s jobs. However, many fail to grow because their lack of credit history or collateral means they are unable to borrow from banks. Banks, meanwhile, must deal with higher operating and credit expenses and often cannot recover these costs through higher loan pricing. 

A typical solution in the past has been to provide subsidized loans, but these ultimately distort the market in a way that undermines financial stability.

Both public and private domestic banks of good standing are eligible to participate in the auction, with the first expected to take place by 31 March. Banks will be required to reach targets on lending to female-led companies, firms outside the capital city, and first-time borrowers. 

The Japan Fund for Poverty Reduction will provide a complementary $2 million technical assistance grant for business development and financial literacy training for women entrepreneurs in promising export-generating sectors to promote SME demand for the funding, independent administration of the auction, and developing the business plan for a national credit guarantee scheme for SMEs.  

ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, it is owned by 67 members – 48 from the region.