An island of potential?

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

By Aneetha Warusavitarana

Micro, small, and medium-sized enterprises (MSMEs)are constantly a part of policy discussions. They are described as the backbone of the economy, an important source of employment, and drivers of innovation and change. Successive governments have identified these enterprises as a focus for government help and have acted on this. We have seen a variety of loan schemes especially targeted at these enterprises under a variety of different names. More recently, we have witnessed the Government introducing a credit support scheme for small and medium enterprises (SMEs) in an attempt to assist struggling businesses.

But what do we know about our micro and small enterprises?

When one thinks of a micro or small entrepreneur, what comes to mind is the grocery at the corner of your road the vadai cart at Galle Face or the small tailoring business you run to for a last-minute adjustment. While Sri Lanka’s “start-up” ecosystem is growing, and we are witnessing an increase in tech start-ups and other innovative microenterprises, this is a fairly accurate description of what Sri Lanka’s micro and small entrepreneurs look like.

In October 2019, as part of a larger research project, the Advocata Institute commissioned an islandwide survey of 1,500 micro and small entrepreneurs across the sectors of industry, services, and trade. The purpose of the study was to understand and identify the barriers that these enterprises face during the course of setting up and running their businesses. Apart from the focus on barriers and obstacles, the survey also looked into the motivations and expectations of these entrepreneurs to understand why they decided to strike out on their own and where they see their business in the future.

Why do Sri Lankans start their own businesses?

A majority of these entrepreneurs were motivated by a desire to run their own business and try out a new idea, a need to support their family, or a belief that they could make more money working for themselves than for someone else. When asked, 43% of women cited a need to support their family as a driving factor behind their decision, compared with 28% of men. Among men, a desire to run their own business was the most common reason provided, with 40% stating so. Only 12% of the respondents started their own business because they couldn’t find employment elsewhere and only 11% because they had no other means of survival.

While this paints a picture of people driven by a desire to strike out on their own and take risks, those in lower socioeconomic classes were more likely to start a business for reasons of survival – because they lost a previous job, couldn’t find work elsewhere, or simply needed to support their family.

Across the island, entrepreneurs were overwhelmingly positive about the future of their business, with 91% certain that they can make their business a success. Interestingly, when asked if offered a salaried position as an alternative, only 15% said they would close their business and take up the position, while 67% stated that they would not take up the position and the remaining 18% were uncertain. Given the opportunity, only 15% would leave Sri Lanka to work abroad, with 60% disagreeing with that statement. It is clear that our entrepreneurs have a rosier outlook on the business climate than most economic pundits, and have a determination to make their business a success.

What stands in their way?

When asked how their business has performed over the last two years, although their outlook was positive, 40% of entrepreneurs said performance has been alright, but could do better. 32% ranked their performance as either poor or very poor, while only 28% perceived their business performance to be good or very good.

The reasons they provided ranged from high competition, unsupportive government policies, and the Easter Sunday terror attacks to a lack of market access and business networks and an excess of regulations and restrictions. The question of what is holding our small and micro entrepreneurs back is one we tried to explore in greater depth through the survey. Sourcing finance, low sales, and difficulties in finding space were the most common problems cited.

How do we help these businesses?

Finance is often where governments intervene, with an aim to help or assist these enterprises. Under the credit support scheme introduced by the Government, performing and non-performing loans of up to Rs. 300 million are eligible for a capital moratorium, but interest payments will continue to be charged.

While this scheme provides relief for small and medium entrepreneurs, it does address the issue that these entities struggle to find access to finance. Focusing on how this problem could be eased, and how information could be better disseminated on options available, may be a better angle to take.