Country Report -Sri Lanka


Enhancing Entrepreneurship in SME Development & Export Consortia

Country Report - Sri Lanka

1

Country Paper -Sri Lanka

Contents

  1. General information of Sri Lanka1 - 2
  2. Geographical Overview
  3. Economic Overview
  4. Demography
  1. Government and Non- Government organizations interventions related to income generation and poverty reduction for development 2 - 7
  2. Government Institutional Support for Development of SMEs
  3. Ministry of Enterprise Development and Investment Promotion.
  4. Ceylon Inst it ut e of Scientific and Industrial Research (CISIR)
  5. The Department of Rural Development and Cottage Industries
  6. The People's Bank and the Bank of Ceylon
  7. Laksala
  8. Industrial Development Board (IDB)
  9. Department of Textile
  10. The National Development Bank (N DB)
  11. Small Enterprise Development Division (SEDD) of Ministry of Youth Affairs & Sports
  12. Regional Rural Development Bank (RRDB)
  13. Non Government Organizations

2.2.1 Small and Medium Enterprise Developers - SMED

2.2.2 Enterprise for Pro-poor Growth, or Enter-Growth for short

  1. Best practices concerning income generation and poverty reduction implementation7 - 12
  2. ‘Samurdhi’ Movement in Sri Lanka
  3. “Strength” (Gemidiriya) Project in Sri Lanka
  1. Small and Medium Enterprises (SMEs) in Sri Lanka12- 15
  2. Definition of SMEs
  3. Importance of the SME sector
  4. Major issues and challenges of SMEs
  5. Policy issues
  6. Emphasis on collateral by lending institutions and High interest rates
  7. Low level of technology and technical and managerial skills
  8. Lack of market information and marketing skills
  1. Annex - 1 (Regional statistics from Sri Lanka) 16 - 17

1. General Information of Sri Lanka

1.1. Geographical Overview

Sri Lanka is an island in the Indian Ocean, located to the south of Indian Subcontinent. Sprawling over the area of 65, 610 square kilometers, with a forest area of 20,820.0 square kilometers, Sri Lanka is dominated by the astonishingly varied features of topography, making it one of the most scenic places in the world. Three zones can be divided by its distinguished elevation: the Central Highland, the plains, and the coastal belt.

1.2. Economic Overview

Sri Lanka is a developing economy with a per capita income of U.S. $2,014 in 2008. Since the introduction of market-oriented policy framework in 1977, the economy has transformed from a traditional export-import economy to a more outward looking export-oriented economy. Sri Lanka achieved average real GDP growth rate of 5 percent per annum during the 1990s despite the civil war and turbulent economic environment at global level and continued to recover from the slump in 2001 achieving 6.0 per cent growth in 2008. There is an increasing trend of service sector activities in the national economy as against the declining relative share of the agricultural sector activities. During the same period, the relative share of the manufacturing sector has reduced marginally.

The main economic sectors of the country are tourism, tea export, apparel, textile, rice production and other agricultural products. In addition to these economic sectors overseas employment contributes highly in foreign exchange, most of them from middle-east. The other key economic indicators are given in the annex – 1.

1.3. Demography

Sri Lanka has a population of 19.8 million of whom the majority are Sinhalese (74%). Other ethnic groups are made up of Sri Lankan Tamils (12.6%), Indian Tamils (5.5%), Moors, Malays, Burghers (of Portuguese and Dutch descent) and others (7.9%). Sri Lanka is a multi-religious country; Buddhists constitute 69.3%, Hindus 15.5%, Christians 7.6% and Muslims 7.5%. (Source: Central Bank, Country Profile 2006).

2Government and Non- Government organizations interventions related to income generation and poverty reduction for development.

2.1Government Institutional support for development of SME

The governments who came to power since independence have initiated various measures,

From time to time, for the up-liftmen of the SME sector. This is reflected in the establishmentof various institutions and launching of various programs aim at supporting the sector. Byestablishing the following institutions, Sri Lanka has tried to boost the SME sector.

2.1.1Ministry of Enterprise Development and Investment Promotion.

  • Establishment and mandate

SME sector in Sri Lanka was a neglected sector several years ago. At present Sri Lanka , has identified the importance of the SME sector and its contribution to the GDP of the country. Economy of Sri Lanka is predominantly a small and medium enterprise economy. Over 50% of our GDP is produced by this sector. Therefore, the Government has clearly manifested in the Economic Policy Framework on the importance of this sector and has proposed various strategies and institutional arrangements.

As a result, this Ministry was established in 2004 as the Ministry of Small and Medium Enterprise Development. Although the name of the Ministry was changed later as the Ministry of Enterprise Development and Investment Promotion, one of the key subject areas is development of SME sector in the country. This Ministry is the leading Government Body in Sri Lanka, responsible for SME development activities. Therefore, our Ministry has been given themandate of coordinating and implementing programmes relating to SME Development. This Ministry attached to the Ministry of Economic Development Since June of 2010.

  • Ministry contribution to the SME sector Development

Since 2004, our Ministry has taken various steps to create suitable environment and to set up institutional mechanism for the development of the SME sector in Sri Lanka. We established a SME Bank for Sri Lanka to resolve financial problems of the SME sector. We also have established National Enterprise Development Authority (NEDA) in Sri Lanka, as an apex body for the provision of other inputs and support services to the SMEs. In addition to that, we have drafted a National Enterprise Policyfor Sri Lanka with the collaboration of relevant stakeholders.

2.1.2Ceylon Institute of Scientific and Industrial Research (CISIR)

T he establishment of the Ceylon Institute of Scientific and Industrial Research (CISI R) in

1955 has contributed to the development and dissemination of appropriate technology toenhance the efficiency and productivity of SMEs. Over the years, the CISIR has catered to thetechnology requirements of cottage and small scale industries especially in the areas of agro and food processing and preserving, wood and wood products, leather products, chemicalproducts, and paper and paper products.

2.1.3The Department of Rural Development and Cottage Industries

The Department of Rural Development and Cottage Industries was established in 1957 as themain institution responsible for promoting the cottage industrial sector. The Department wasrenamed as the Department of Rural Development and Small Industries in 1968 and its scopeof activities was expanded to include industries such as power looms, hand looms, carpentry,commercial pottery and coir fiber. In 1993, the Department of Small Industries was wound-upand its duties and functions were allocated to the provincial councils.

2.1.4The People's Bank and the Bank of Ceylon

The establishment of People's Bank and the nationalization of Bank of Ceylon in 1961 wereland marks in providing institutional credit to SMEs. Bank of Ceylon branches and its suboffices at Agrarian Services Centers provided credit facilities under special programs to SMEs.Some domestic private banks have also introduced special facilities to these industries with theexpansion of their branch network.

2.1.5 Laksala

With the objective of helping to solve marketing problems of handicraft industrialist,

“ Laksala” was established in 1964. With a view to promoting the export orientation of theSmall Business sector, the Department of Handicraft Marketing and Export Promotion wasestablished in 1980 by amalgamating Laksala and other handicraft marketing centers. In 1982, Sri Lanka Handicraft Board was established in place of this Department.

2.1.6. Industrial Development Board (IDB)

With the main objectives of encouraging, promoting and developing SMEs in Sri Lanka, the Industrial Development Board (IDB) was established in 1969. The IDB is considered to be thechief industrial extension institution in the country and was armed with regional offices andindustrial extension offices. Over the years, the IDB has concentrated mainly on the development and dissemination of appropriate technologies, marketing facilities and in some cases, financial facilities and conducting entrepreneurship training and Small Business training for thesmall scale industrial sector.

The Small Scale Industries Credit Scheme (SSI) was introduced in 1974 in order to enlargethe small industry sector credit base. The Central Bank offered credit guarantees from July 1979 on SMI loans provided with financial assistance from the International Development Association (IDA).

2.1.7.Department of Textile

In 1976, the Textile Department was created in view of the importance of textile production as a small industry. In 1984, the Sri Lank a National Design Center (NDC) was established in order to assist the cottage industrial sector through improvement of craft design and thedevelopment of new designs, better utilization of raw materials, t he development of newproduction methods, the improvement of local design capability, assistance in market researchand the organization of training programs in the field of design, product development andmarket promotion.

2.1.8.The National Development Bank (NDB)

In 1979 the Government established the National Development Bank with the primaryobjective of providing project finance for large industry, agriculture and commerce. How ever, it was also required as an important secondary objective, to ensure that small industrialist aregiven access to project finance on the same term and conditions as afforded to large borrowers. Accordingly, the Small and Medium Industries Loan Scheme was initiated in 1979.

2.1.9.Small Enterprise Development Division (SEDD) of Ministry of Youth Affairs & Sports

The self-employment programs assisted by the Ministry of Youth Affairs and Sports

(MYUS), as well as several non-government organizations (NGOs) and private institutionshave also helped the promotion of SME sector in the country. In this respect, a separate SmallEnterprise Development Division (SEDD) was established under the Ministry of Youth Affairsand Sports in 1984 with the objectives of formulating strategies and policies for stimulatingself-employment and small scale enterprises.

2.1.0.Regional Rural Development Bank (RRDB)

The establishment of Regional Rural Development Bank (RRDB) in 1985 made available anadditional credit outlet to small business sector. Several micro credit schemes were implemented by these banks The Janasaviya Trust Fund, the Samurdhi Development Loan Scheme or SAHANA for Samurdhi beneficiaries and “Surathura Diriya” also provides financial assistance to this sector.

At present, in addition to the Ministry of Industrial Development, there are several others

Institutions namely, the Ministry of Rural Development, Ministry of Textile industries,

Ministry of Rural Industrial Development established to assist the development of the SME

sector. Recently established Vocational Training Authority and the proposed Enterprise PromotionBank are major steps taken towards the development of SME sector in Sri Lanka in recent years. So, it appears that there are a large number of institutions established aiming at supportingSME sector. How ever, studies have concluded that objectives of establishing these institutionshave not been achieved due to a number of reasons.

2.2 Non Government Organization

Considerable private and Non Government organizations support to SME sector inSri Lanka. It can be helped to income generation and poverty reduction for development.Mention here some main organization of private sector which is support to the SMEs.

2.2.1 SMED ‐ Small and Medium Enterprise Developers

SMED ‐ Small and Medium Enterprise Developers is a project of Federation of Chambers of

Commerce & Industry of Sri Lanka (FCCISL) in collaboration with the Friedrich‐Naumann Stiftung of

Germany (FNst). This project was established in 1989 to develop and promote the Small & MediumEnterprise (SME) sector in the country.

Functions and Services of SMED since 1989

• Industrial Engineering & Technology Services

• Energy & Environmental Services

• Enterprise Development and Management Services

• Agribusiness

• Events

2.2.2 Enterprise for Pro-poor Growth, or Enter-Growth for short

Enterprise for Pro-poor Growth, or Enter-Growth for short, is a project of the International Labour Organisation (ILO), the Swedish International Development Agency (Sida), and the Ministry of Enterprise Development and Investment Promotion. Its goal is to contribute to pro-poor economic growth and quality employment for women and men, through an integrated programme for development of micro and small enterprises.

Micro and small enterprises are the engine of growth in Sri Lanka, especially outside Colombo and the WesternProvince. They are vital to local economic development, which creates jobs and reduces poverty. From 2000 to 2005 the ILO, Sida and the Government therefore collaborated on the Start and Improve Your Business (SIYB) project. This built a capacity to provide SIYB training in partner organizations throughout the country. The programme is now coordinated by the SIYB Association of Sri Lanka, with limited technical support from Enter-Growth.

3Best practices concerning income generation and poverty reduction implementation

Sri Lanka being a beautiful island known as the Pearl of the Indian Ocean is one of the smallest of the South Asian Nations. As a developing country, it also faces the problems of poverty. It is estimated that around 15.2% of the population being poor but, around 45% out of total families are being covered under the safety net programmes funded by the government of Sri Lanka in terms of income transfer (food and income subsidy), nutrition package for pregnant and lactating mothers and milk feeding subsidy for children between two and five. There fore, the main responsibility of the government of Sri Lanka is to eradicate poverty from our mother land. Percentage of approximately four to five of the national budget is being allocated annually to provide safety net assistance to the poor.

Compared to other countries in the developingworld, Sri Lanka hashigher rate of literacy, higherlife expectancy andlower infant mortality ratios. However the country is currently confronted with serious socio-economic problems with rising unemployment and high incidence of poverty.Therefore, bellow mentioned programmes have been implemented by the government to income generation and poverty reduction practices.

3.1.‘Samurdhi’ Movement in Sri Lanka

"Samurdhi" is the National Program introduced by the Government in 1994 to alleviate poverty. The objective of this program is to find a solution for the poverty. It is not an easy task, but through the “Samurdhi” Program priority has been given to activities such as development of rural infrastructure facilities, improving health and nutritional conditions among rural community and creates opportunities.

The Ministry of Samurdhi, Youth Affairs and Sports was established in 1994 to launch the above Program. In 2004, the Ministry's name was changed to Ministry of Samurdhi & Poverty Alleviationand again it was converted as the Division of Samurdhi under the Ministry of Nation Building and Estate Infra Structure Development. At presently, Ministry of Nation Building attached to the Ministry of Economic Development.

3.2.“Strength”(Gemidiriya) Project in Sri Lanka

(LocalPoverty Reduction and Employment Generation Through the” Village)

The GemidiryaProject demonstrates an innovative approach in employment generation and

Rural poverty reduction in Sri Lanka, based on the Community Driven Development (CDD)strategy, where communities form village-based institutions, plan and implement their owndevelopment programmes, thereby ensuring benefits to the poor. This demand-drivenapproach for poverty reduction is in contrast to the supply-driven approach, where planningis undertaken by outsiders who have limited knowledge on the ground realities of the localcommunities. Over a period of two years, the Gemidiriyamodel has been implemented in535 villages, covering 500,000 people in the country. Encouraged by the positive outcomes,the Government of Sri Lanka (GoSL) has set aside funds from the national budget to doublethe number of project villages in 2007.

Background and Objectives

Although Sri Lanka is already on track towards achieving the non-income Millennium

Development Goal (MDG) targets such as primary education, infant and maternal mortalityand gender equality in education, income poverty still remains a major challenge in thecountry (MDG Country Report, 2005). Given the present situation, the country is unlikely toachieve the MDG of reducing poverty from 23 percent to 13 percent by 2015. In Sri Lanka,about 90 percent of the poor live in rural areas or estates. However, a large share of thecommunity resources does not reach the rural poor; is not directed to activities thatthe poor want or is not delivered in a cost effective manner.

Given these challenges, the Gemidiriya (a Sinhala word meaning “village strength”) Projectwas designed for rural poverty reduction by adopting a CDD approach, where decision-making,planning and implementation are done by the local people. Gemidiriya wasdesigned to address the five widely-accepted impediments to poverty reduction in SouthAsia, namely: a dependency mentality, where local communities expect the government to “deliver” development; the non-inclusion of women, who constitute more than 50 percent of the population in decision-making; the absence of demand-driven Village DevelopmentPlans (VDPs); the lack of re-investment of rural savings in the rural economy; and theabsence of effective social mobilization efforts. The objective of the first phase of theGemidiriyaProgramme is to enable rural communities to build accountable and self-governinglocal institutions and to manage sustainable investments.

Achievements of the Gemidiriya Project

Over a period of less than two years from 2004 to 2006, the Gemidiriya project has beenimplemented in 535 villages by 515 PCs and 20 registered Peoples Associations in the pilotphase with households covering 500,000 people. Households of 350,000 family membershave 71,000 members in 11,762 small SHGs. They have saved LKR 35 million (USD350,000) and invested LKR 142 million (USD 1.4 million) in income-generating activities of

125 types, maintaining a loan repayment rate of 99 percent. They have earned USD 71,000as interest income and have reinvested in livelihood activities.Village organizations have categorized households in the participating villages according totheir economic status and USD 90,000 has been allocated as one time grants to 1,309poorest individuals to invest in appropriate income-earning activities, demonstrating theability to provide better social protection to the poorest, by the community. USD 80,000 has been provided from the Skills Development Fund (SDF) as loans to youth to obtain trainingand secure employment opportunities over the two year period.