Insights and Analysis

Helping Sri Lanka’s Banks to Trust Small Businesses

February 1, 2012

By Nilan Fernando

Since Sri Lanka’s decades-long civil war ended in 2009, we’re now witnessing the beginning of reconstruction in the country’s battered North and East. The government is rapidly investing in roads, rail, ports, and telecommunications that help connect marginalized communities with the vibrant, growing capital of Colombo. Meanwhile, the local economy is coming to life, and small businesses – typically on the margins of the private sector – are eager to take advantage of their long pent-up demand to grow their businesses. This is welcome news for people that have endured so much, but there are of course still challenges.

A store owner in Sri Lanka

After a 30-year war that has rewarded Sri Lanka's banks and enterprises for playing it safe, they are hesitant to take on risk by offering loans to small businesses. Recently, however, new initiatives are reviving trust between banks and businesses owners. Photo: Karl Grobl.

“The small and medium enterprise sector is the backbone of the Sri Lankan economy – even more so in the North and East,” Anushka Wijesinha, Research Economist at Sri Lanka’s Institute of Policy Studies (IPS) who has been studying access to credit, recently said to me. “The majority of large businesses continue to take a wait-and-see approach, but it’s the small businesses that are ready to take some risks.”

Unfortunately, as ready as the smaller businesses are to take these risks, they lack the collateral needed to do so. Micro and small business owners constantly say how difficult it is for them to even get credit to expand their business, for example. Most small businesses can’t meet banks’ collateral requirements to get a loan, even though Sri Lanka’s financial system is flush with more liquidity than ever, due to lower interest rates and government policies and programs that are meant to push credit down to the grassroots.

District bank managers say they do want to lend, and they are getting pressure from higher-ups to make it happen – the government recently announced it will ask state banks to set up a special small and medium enterprise bank branch in every district. But after a 30-year war that has rewarded banks and enterprises of all kinds for hunkering down and playing it safe, they are hesitant to take on risk. There is also not much trust between bankers and potential borrowers: the banks say that in addition to lacking collateral, small and micro businesses are often run by people who don’t have much education, making it difficult to negotiate loan applications and business plans. “Small business owners must up their game to be taken seriously by banks. Their financial literacy needs improving and this is where the private sector and development partners should focus,” Wijesinha said.

Last year, The Asia Foundation’s Sri Lanka office, with support from AusAID, launched a program  that partners with district chambers of commerce to help leverage bank loans for small enterprises in the North and East that are eager to grow. By extending small loans to “prime the pump,” the program helps under-capitalized entrepreneurs position themselves to get credit from over-capitalized banks. By doing this, entrepreneurs have the chance to demonstrate to cautious bankers that lending to them is not as risky as bankers think, and they can pay back their loans, on time, with interest.

Starting in Mannar, Jaffna, Trincomalee, and Batticaloa districts, we teamed with district chambers of commerce, and Sampath Bank and Hatton National Bank to establish and administer revolving funds to provide loans to small enterprises at low interest, for a period of 6-12 months, with special attention paid to vulnerable groups, like women entrepreneurs. (Many households in the North are headed by women because male breadwinners were killed in the war.) The chambers identify loan-worthy businesses, monitor each recipient’s progress, and provide business development services when required. After getting the okay from the chamber, the Bank will administer and disburse funds and ensure that loans are paid back. The interest accrued from loan recovery will be made available to the chamber to cover their administrative costs; excess funds will be added to the revolving fund’s working capital.

Thusitha Nakandala, Senior Manager for Development Banking at Sampath Bank, spoke positively of the program: “The initiative is a good opportunity for our branches to identify potential micro and small entrepreneurs in the North and East. It can give them a much needed lifeline and enable them to bounce back.”

While it’s still new, this initiative the potential to be a win-win model: the banks can widen their customer pool and increase revenue; the chambers can increase their membership, networks, influence, and voice; and the micro and small enterprises can finally access the finances to grow their businesses.

Watch a series of slideshows from Jaffna, Vavuniya, and Batticaloa for other ways The Asia Foundation is assisting lagging regions in Sri Lanka.

Nilan Fernando is The Asia Foundation’s country representative in Sri Lanka. He can be reached at [email protected]. The views and opinions expressed here are those of the individual author and not those of The Asia Foundation. 


  1. It is good to hear. We NEDA appreciate your valuable support given to upgrade the MSMEs in Northern area.

  2. Good work at the grass roots.The challenge is to tie up with like minded organizations and see how we all can add value. Hopefully we should not see initiatives that will hamper the local strengths and not address sustainability on the mid and long term.
    We must strengthen the communities that are willing to take the lead to pick up opportunities.

  3. Thanks for sharing this article. It’s good to know that there are programs that are helping small business owners survive and rise again. This is really a great article.

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