Sri Lanka : Enhancing Small and Medium-Sized Enterprises Finance Project

Sovereign Project | 50349-002

The proposed financial intermediation loan (FIL) project will support small and medium-sized enterprises (SMEs) through two components: (i) a new SME line of credit (SMELOC2) for those affected by the 2022 economic crisis to provide emergency working capital (SMELOC2 component); and (ii) a loan to the government for equity infusion into the National Credit Guarantee Institution Limited (NCGI), which will provide partial credit guarantees (PCG) on investment loans to SMEs with inadequate or no collateral (PCG component). The project will help SMEs by enhancing access to finance and strengthening their capacity to adapt their business models to external changes, including those caused by climate change. The project is designed to particularly support women entrepreneurs who are often disadvantaged, as well as promote climate adaptation and mitigation activities. The implementation of both components is supported by ongoing technical assistance (TA), which was approved in January 2022.

Project Details

  • Project Officer
    Gunawardhena, Manohari
    Sectors Group
    Request for information
  • Approval Date
    15 March 2024
  • Country/Economy
    Sri Lanka
  • Modality
  • Sector
    • Finance
Project Name Enhancing Small and Medium-Sized Enterprises Finance Project
Project Number 50349-002
Country / Economy Sri Lanka
Project Status Approved
Project Type / Modality of Assistance Loan
Source of Funding / Amount
Loan 4441-SRI: Enhancing Small and Medium-sized Enterprises Project (formerly Small and Medium-sized Enterprises Credit Guarantee Institution Project)
Concessional ordinary capital resources lending US$ 100.00 million
Operational Priorities OP1: Addressing remaining poverty and reducing inequalities
OP2: Accelerating progress in gender equality
OP3: Tackling climate change, building climate and disaster resilience, and enhancing environmental sustainability
OP6: Strengthening governance and institutional capacity
Sector / Subsector

Finance / Banking systems and nonbank financial institutions - Small and medium enterprise finance and leasing

Gender Effective gender mainstreaming
Description The proposed financial intermediation loan (FIL) project will support small and medium-sized enterprises (SMEs) through two components: (i) a new SME line of credit (SMELOC2) for those affected by the 2022 economic crisis to provide emergency working capital (SMELOC2 component); and (ii) a loan to the government for equity infusion into the National Credit Guarantee Institution Limited (NCGI), which will provide partial credit guarantees (PCG) on investment loans to SMEs with inadequate or no collateral (PCG component). The project will help SMEs by enhancing access to finance and strengthening their capacity to adapt their business models to external changes, including those caused by climate change. The project is designed to particularly support women entrepreneurs who are often disadvantaged, as well as promote climate adaptation and mitigation activities. The implementation of both components is supported by ongoing technical assistance (TA), which was approved in January 2022.
Project Rationale and Linkage to Country/Regional Strategy

SMEs in Sri Lanka contribute 52% of the country's gross domestic product (GDP) and provide 45% of employment, including for women and youth. Given its significant contribution to the socio-economy, expanding the SME sector will help the country to recover from the current economic crisis, promote export diversification, lessen provincial disparities, and support growth in disadvantaged communities. Gender equality can be enhanced by supporting SMEs and businesses led by women, and the country's long-term climate change and sustainability objectives can be advanced by encouraging SMEs to undertake climate mitigation and adaptation investments.

The economic crisis of 2022 affected 89% of all SMEs in Sri Lanka which were already severely impacted by COVID-19 (business operations of nearly 80% of the surviving micro and SMEs were affected). The decrease in economic activity due to COVID-19 and the 2022 economic crisis caused disruptions in supply chains and reduction in consumption, which ultimately led to layoffs and bankruptcies among SMEs. Most of these SMEs have financing constraints and low levels of technological expertise, making them less flexible to respond to the adverse economic situation. The level of finance available to SMEs had already been reduced during the pandemic-related lockdowns imposed in 2020. Credit to the private sector decelerated from 15.9% in 2018 to 6.2% in 2022 and contracted to 5.1% as of March 2023. This lack of access to finance and high interest rates reduced availability of working capital at affordable rates, while the lack of collateral required to borrow money restricted SMEs from expanding and reinvesting for future growth. SMEs tend to suffer disproportionally because of lack of financial literacy and resources, knowledge, and bargaining power. To help SMEs survive, recover, and transform, while mitigating the negative impacts of the 2022 economic crisis on the poor and vulnerable, it is critical to meet the immediate working capital needs of SMEs at affordable rates while meeting their financing requirements for expansion without collateral.

The project will enhance access to finance for SMEs that have been most affected by the 2022 economic crisis and help improve their capacity to deal with vulnerabilities stemming from changes in their business operating environment and climate change. SMEs' recovery from the economic crisis will be supported through FIL, with SMELOC2 providing urgent working capital targeting the export, agriculture, manufacturing, technology, and tourism sectors, as well as SME businesses led by women; and PCG component providing a loan to the government for its equity infusion to set up the NCGI, which will offer PCGs to SMEs with no or inadequate collateral for investment loans. A separate TA is being processed and will be provided to banks and nonbanks to build capacity on cash flow-based lending to SMEs and help improve SMEs' financial literacy to enhance their access to finance and improve their adaptive capacity.

Impact

Contribution of businesses to employment generation, export diversification and productivity growth increased

Project Outcome
Description of Outcome

SMEs access to finance and adaptive capacities enhanced

Progress Toward Outcome
Implementation Progress
Description of Project Outputs

Financial institutions' capacity for lending to underserved SMEs increased

Institutional framework for financially sustainable SME credit guarantee operations established

Enabling environment for SME finance including green finance developed

Status of Implementation Progress (Outputs, Activities, and Issues)
Geographical Location Nation-wide
Safeguard Categories
Environment FI
Involuntary Resettlement FI
Indigenous Peoples FI
Summary of Environmental and Social Aspects
Environmental Aspects
Involuntary Resettlement
Indigenous Peoples
Stakeholder Communication, Participation, and Consultation
During Project Design A seminar was held in 2017 to discuss the proposed structure with stakeholders.
During Project Implementation
Business Opportunities
Consulting Services tbd
Procurement tbd
Responsible ADB Officer Gunawardhena, Manohari
Responsible ADB Department Sectors Group
Responsible ADB Division Finance Sector Office (SG-FIN)
Executing Agencies
Ministry of Finance, Economic Stabilization and National Policies
Timetable
Concept Clearance 01 Oct 2023
Fact Finding 04 Apr 2017 to 06 Apr 2017
MRM 07 Dec 2022
Approval 15 Mar 2024
Last Review Mission -
Last PDS Update 15 Mar 2024

Project Data Sheets (PDS) contain summary information on the project or program. Because the PDS is a work in progress, some information may not be included in its initial version but will be added as it becomes available. Information about proposed projects is tentative and indicative.

The Access to Information Policy (AIP) recognizes that transparency and accountability are essential to development effectiveness. It establishes the disclosure requirements for documents and information ADB produces or requires to be produced.

The Accountability Mechanism provides a forum where people adversely affected by ADB-assisted projects can voice and seek solutions to their problems and report alleged noncompliance of ADB's operational policies and procedures.

In preparing any country program or strategy, financing any project, or by making any designation of, or reference to, a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.


Safeguard Documents See also: Safeguards
Safeguard documents provided at the time of project/facility approval may also be found in the list of linked documents provided with the Report and Recommendation of the President.

Title Document Type Document Date
Enhancing Small and Medium-sized Enterprises Finance Project: Environmental and Social Management System Arrangement Environment and Social Management System Arrangements Nov 2023

Evaluation Documents See also: Independent Evaluation

None currently available.


Related Publications

None currently available.


The Access to Information Policy (AIP) establishes the disclosure requirements for documents and information ADB produces or requires to be produced in its operations to facilitate stakeholder participation in ADB's decision-making. For more information, refer to the Safeguard Policy Statement, Operations Manual F1, and Operations Manual L3.

Requests for information may also be directed to the InfoUnit.

  • 18 Mar 2024 | News Release

    ADB Approves $100 Million Loan to Support SMEs in Sri Lanka 

    ADB has approved a $100 million loan to provide small and medium-sized enterprises in Sri Lanka more access to finance and build their resilience to external shocks, such as the economic crisis and climate change.  

Tenders

No tenders for this project were found.

Contracts Awarded

No contracts awarded for this project were found

Procurement Plan

None currently available.