The Asian Development Bank initiated the Private Sector Development Project (PSDP) loan in 2008 which was intended to develop and expand the micro-, small-, and medium-sized enterprise (MSME) subsector leading to broad-based, private sector-led, and sustainable inclusive growth. Being an ADB initiative, MSME development was a part of the development strategy for Maldives under the 7th National Plan 2006-2010. The impact of the project is expected to be inclusive and broad-based MSME sector. The outcome of the project will be a further expanded and strengthened MSME sector. For this purpose, the MSMEDP will focus on enhancing the business environment and support infrastructure for doing business with better knowledge, greater access to financing, and expanded business opportunities for MSMEs. The project has three components.
The first component of MSMEDP will increase MSME access to business development services and support institutional capacity building for Business Development Services Centers (BDSCs) by (i) expanding BDSCs' geographical coverage to all seven provinces within the country; (ii) introducing new business development services (BDS) including business incubator programs offered by the BDSCs, including institutionalized support in creating and enforcing market linkages; and (iii) strengthening the institutional, infrastructural, and human resource capacity of an expanded network of BDSCs to better support BDS demand needs of MSMEs. This component will also support energy sector linkages to value chain business opportunities having potential for MSME participation.
The second component will improve MSMEs' access to finance through (i) additional a line of credit facility (LCF) to meet with a huge credit demand from MSME sector, (ii) extension of credit information bureau to improve information quality and reduce credit risk, and (iii) establishment of secured transaction registry providing database information on fixed and movable assets.
In line with previous PSDP implementation, information communication technology (ICT) will be managed by Bank of Maldives (BML) to promote MSME by providing them with financing for investment. The eligibility criteria for such financing includes (i) MSMEs which are registered in the MSME database; (ii) MSME activities focus on target clusters as per government policy (agricultural commercialization, fishery processing, handicrafts, and tourism-related activities which are environment impact neutral activities), and special emphasis will be given to non-traditional sectors such as ICT and renewable energy project (e.g. solar panel citizen service centers); and (iii) the MSME has adequate cash flow or enterprise budget as well as collateral.
BML will undertake an independent credit risk assessment for proposals to determine if they meet the lending criteria agreed among the government, ADB, and BML. If the credit risk assessment is satisfactory, BML will approve subloans and execute an onlending agreement. Onlending agreements will be signed between BML and the subborrower on terms and conditions, as agreed among the government, ADB, and BML. The maximum sub-loan size for individual applicants will be local currency equivalent to $80,000 and the anticipated average sub-loan size is local currency equivalent to $40,000. It is expected that BML will provide around 200 MSMEs with subloans under LCF. Any deviation will be subject to ADB prior approval. The terms of lending will be on a commercial basis at the prevailing market rates of interest and tenor, reflecting costs of raising such funds locally and guaranteeing adequate spread of interest rates for BML to cover transaction costs and risks.
MSMEDP needs to be classified based on its minimum or no environmental impact (as category FI treated as C). An eligibility criteria will be further developed in the LCF guidelines to ensure that the qualified MSME subproject shall be for activities that (i) are not included in the list of prohibited investment activities set out in Appendix 5 of the Safeguard Policy Statement (SPS) (2009); and (ii) have minimal or no adverse environmental impacts in accordance with ADB's SPS, and in compliance with the laws and regulations of the Republic of Maldives. Given protection of the environment is critical for the Maldives to maintain its environment resources for tourism industry, Maldives environment protection rules and regulations belong to high standards.
The third component will facilitate and enable use of information, communications and technology (ICT) to promote information and knowledge sharing between MSMEs and the government; and implementation of a pilot ICT project to (i) demonstrate the use of ICT and viability of solar energy as a cost effective energy option; (ii) creation of a platform for delivery of e-governance services such as e-commerce, e-banking, and online submission of government taxes through citizen service centers; and (iii) create revenue stream for BDSCs through a public private partnership model, with a view to grow their economic contribution to the gross domestic product.
The proposed Inclusive MSME Development Project will promote economic and financial inclusion in the Maldives by enhancing economic activities including those in the remote islands through more opportunities and access to finance for MSMEs which will thereby contribute to private sector development and overall growth.