Sri Lanka: Small and Medium-sized Enterprises Credit Guarantee Institution Project

Sovereign Project | 50349-002

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 Details

  • Project Officer
    Hoshino, Takuya
    South Asia Department
    Request for information
  • Country/Economy
    Sri Lanka
  • Modality
    • Loan
  • Sector
    • Finance
Project Name Small and Medium-sized Enterprises Credit Guarantee Institution Project
Project Number 50349-002
Country / Economy Sri Lanka
Project Status Proposed
Project Type / Modality of Assistance Loan
Source of Funding / Amount
Loan: Small and Medium-sized Enterprises Credit Guarantee Institution
Ordinary capital resources US$ 100.00 million
Strategic Agendas Inclusive economic growth
Drivers of Change Gender Equity and Mainstreaming
Knowledge solutions
Private sector development
Sector / Subsector

Finance / Small and medium enterprise finance and leasing

Gender Equity and Mainstreaming Some gender elements
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.

Impact Contribution of SMEs to Sri Lanka's economy increased
Outcome SMEs' access to finance improved

Corporate and regulatory framework for SME credit guarantee institution established

Financially sustainable SME credit guarantee institution operationalized

SME credit guarantee outreach enhanced

Geographical Location Nation-wide
Safeguard Categories
Environment FI
Involuntary Resettlement FI-C
Indigenous Peoples FI-C
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 Hoshino, Takuya
Responsible ADB Department South Asia Department
Responsible ADB Division Public Management, Financial Sector and Trade Division, SARD
Executing Agencies
Ministry of Finance
The Secretariat Building
Colombo 01
Sri Lanka
Concept Clearance 15 Feb 2017
Fact Finding 04 Apr 2017 to 06 Apr 2017
MRM 14 Mar 2022
Approval -
Last Review Mission -
Last PDS Update 10 Jan 2020

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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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Related Publications

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No tenders for this project were found.

Contracts Awarded

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Procurement Plan

None currently available.