SMEs enjoy ROI’s of 21% - IFC survey

By Dinali Goonewardene
The recently concluded 28th National Conference of Chartered Accountants saw the International Finance Corporation present the results of a survey on Small and Medium Enterprises (SME’s).

With the primary objective of short listing sectors which were active and effective, the survey identified that on average the SME sector had a Return on Investment of 21 per cent and almost half the companies had an ROI in the range of 11 to 20 per cent.

The tea sector had a ROI of 18 per cent, rubber 15 per cent, printing 21 per cent, gems and jewellery 26 per cent, foundry 22 per cent, deep sea fishing related 37 per cent, construction 17 per cent, commercial transport 12 per cent and coconut based products 19 per cent. The sectors carry diverse risk profiles. For the study, SME’s were defined as enterprises with turnover in the range of Rs.5mn to Rs.150 mn.

IFC Colombo Financial Markets Specialist Deva De Silva said banks were inadequately equipped with necessary credit structuring and evaluation skills leading to high cost and burdensome collateral.

There is limited access to finance from the formal financial sector as there is a dearth of acceptable collateral, limited awareness of banking services and inability to provide credible accounting records and statements. Other constraints faced by SME’s include the internal capacity to initiate and manage banking relationships with business plans, project proposals for finance etc. There is an absence of technical management skills, marketing constraints include the lack of demand supply information and access to markets. Inadequate infrastructure such as high electricity costs and inadequate transport facilities also play a role. Mr De Silva said financial models should focus on cash flow lending, lowered cost of borrowing and the transformation of credit assessment towards cash flow/ project based lending from collaterised lending.

Research indicates 53 per cent of firms do not approach financial institutions due to a lack of collateral. Sources of finance to this sector include bank loans which account for 29 per cent of funding, promoter funds 34 per cent, family and friends 22 per cent, Leasing companies 6 per cent, money lenders, agents etc 5 per cent, bank OD’s 2 per cent and other sources 2 per cent.

IFC Colombo Head of Investments Jeetendra Marcelline outlined other constraints faced by SME’s such a labour constraints and said the 1971 Termination of Employment of Workmen ( Special Provisions ) Act restricts termination without the prior consent of the worker or the prior written approval of the Commissioner of Labour. He said the high number of public holidays, estimated at around thirty, leads to reduced competitiveness.

In Sri Lanka, SME’s constitute 80 to 90 per cent of business and account for 70 per cent of employment in the business sector. The IFC has a US $4.2 bn Micro Small and Medium Enterprise (MSME) portfolio and 56 per cent of the IFC’s financial sector investee institutions lend over half their commercial loans to MSME’s.