Sri Lanka : Enhancing Small and Medium-sized Enterprises Project (formerly Small and Medium-sized Enterprises Credit Guarantee Institution Project)
The proposed $50 million loan would support the establishment of the Small and Medium-sized Enterprises (SMEs) Credit Guarantee Institution, a new nonbank financial institution that would help SMEs to access commercial loans.
South Asia Department
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|Project Name||Enhancing Small and Medium-sized Enterprises Project (formerly Small and Medium-sized Enterprises Credit Guarantee Institution Project)|
|Country / Economy||Sri Lanka
|Project Type / Modality of Assistance||Grant
|Source of Funding / Amount||
|Operational Priorities||OP3: Tackling climate change, building climate and disaster resilience, and enhancing environmental sustainability
OP6: Strengthening governance and institutional capacity
|Strategic Agendas||Environmentally sustainable growth
Inclusive economic growth
|Drivers of Change||Gender Equity and Mainstreaming
Governance and capacity development
Private sector development
|Sector / Subsector||
Finance / Banking systems and nonbank financial institutions - Small and medium enterprise finance and leasing
|Gender Equity and Mainstreaming||Effective gender mainstreaming|
|Description||The proposed $50 million loan would support the establishment of the Small and Medium-sized Enterprises (SMEs) Credit Guarantee Institution, a new nonbank financial institution that would help SMEs to access commercial loans.|
|Project Rationale and Linkage to Country/Regional Strategy||
1. SMEs are critical for Sri Lanka's economic growth. They are responsible for 52% of the country's gross domestic product. SMEs are arguably even more important for poverty reduction as they provide 45% of employment. Despite their importance and despite the presence of key market infrastructure such as secured lending legislation, a credit information bureau, and a property registry, SMEs struggle to access financing. A 2011 World Bank survey found that 30% of Sri Lankan firms, the fourth highest among the 29 developing member countries included, cite access to finance as a major constraint. A key explanation is that Sri Lankan banks are hesitant to lend to SMEs because they rely on collateral-based lending. Yet, many SMEs cannot provide such collateral.
2. To address such market failures, the government has introduced various SME credit guarantee schemes over the years. However, none has flourished. Market participants cite slow claims processing, limited guarantee coverage, and high premiums. Recognizing the need for a comprehensive solution, the government proposed developing SME credit guarantees in the 2016 Budget Speech and requested ADB's assistance. ADB originated a capacity development technical assistance (TA) to assess market demand, research international best practices, and prepare a business plan. The steering committee established under ADB's 2016 Small and Medium-Sized Enterprises Line of Credit Project (SME LoC) reviewed this work and endorsed the draft final report in September 2016 to Sri Lanka''s Cabinet. The Cabinet Committee on Economic Management, chaired by the Prime Minister, endorsed ADB''s proposal in October 2016, and the finance minister highlighted the plans to establish the institution in the 2017 budget speech.
3. The proposed approach draws heavily from lessons learned from previous domestic SME credit guarantee schemes and international best practices. The new guarantee institution should be well-funded, efficiently managed, financially sustainable, removed from political influence, operated with the highest level of corporate governance, and subject to central bank regulation and supervision. The institution's initial gearing should be conservative to ensure profitability and a strong credit rating. The proposed approach is also aligned with World Bank principles for public credit guarantee schemes for SMEs.
4. The proposed ADB loan and TA are aligned with one of the two pillars of ADB's country partnership strategy for Sri Lanka 2018-2020 catalyzing private investment and enhancing the effectiveness of public investment. Moreover, ADB has three ongoing projects - a $50 million SME LoC and two TA projects on improving Sri Lankan SME's access to finance. A credit guarantee institution is a natural extension of this work.
Contribution of businesses to employment generation, export diversification and productivity growth increased
SMEs' access to finance enhanced
Financial institutions' capacity for lending to underserved SMEs increased
Regulatory and institutional framework for financially sustainable SME credit guarantee operations established
Enabling environment for SME finance developed
|Summary of Environmental and Social Aspects|
|Stakeholder Communication, Participation, and Consultation|
|During Project Design||A seminar was held in 2017 to discuss the proposed structure with stakeholders.|
|During Project Implementation|
|Responsible ADB Officer||Hoshino, Takuya|
|Responsible ADB Department||South Asia Department|
|Responsible ADB Division||Public Management, Financial Sector and Trade Division, SARD|
Ministry of Finance
|Concept Clearance||15 Feb 2017|
|Fact Finding||04 Apr 2017 to 06 Apr 2017|
|MRM||07 Dec 2022|
|Last Review Mission||-|
|Last PDS Update||20 Dec 2022|
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.
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|Title||Document Type||Document Date|
|Small and Medium-sized Enterprises Credit Guarantee Institution: Initial Poverty and Social Analysis||Initial Poverty and Social Analysis||Feb 2017|
|Small and Medium-sized Enterprises Credit Guarantee Institution: Project Data Sheet (Sinhala Translation)||Translated PDS||Feb 2017|
|Small and Medium-sized Enterprises Credit Guarantee Institution: Project Data Sheet (Tamil Translation)||Translated PDS||Feb 2017|
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.
None currently available.
Evaluation Documents See also: Independent Evaluation
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