Studies in Business and Economics no.

10(2)/2015

DOI 10.1515/sbe-2015-0018

BANK FINANCE FOR SMALL AND MEDIUM-SIZED

ENTERPRISES IN SRI LANKA: ISSUES AND POLICY
REFORMS

GAMAGE Pandula
College of Business, Victoria University, Melbourne, Australia.

Abstract:
Access to bank finance is necessary to create an economic environment that enables
Small and Medium-sized enterprises (SMEs) to grow and prosper. The SMEs in Sri Lanka,
however, face significant constraints to access bank finance. The purpose of this paper is to
investigate the access to bank finance and related issues in the SME sector of Sri Lanka. The
paper is exploratory in nature and reviews the bank financing situation for SMEs in Sri Lanka, as
well as provides an overview of constraints faced by the banks (supply-side) and SMEs
(demand-side). The paper also highlights some good practices in SME lending from international
experience and outlines some recommendations to help overcome the constraints faced by the
banks and SMEs. The recommendations discussed in this paper may be of importance to
policymakers, not only in Sri Lanka, but in many other developing countries in a similar stage of
economic growth.

Key words: small and medium-sized enterprises, bank lending, financial constraints, Sri Lanka

1. Introduction

Small and Medium-sized Enterprises (SMEs) continue to be central to the

economic development of Sri Lanka. According to a newspaper article in the ‘Daily
News’, government estimates indicate that around 80 per cent of the businesses in Sri
Lanka are considered to be SMEs (Joseph, 2014). Additionally, SMEs contribute 50
per cent to the Gross Domestic Production of the country and employ 26 percent of the
labour force and have a value addition of 17 percent (Institute of Policy Studies &
Oxfam International, 2014). However, most financial providers consider that financing
SMEs is a risky business that generates high transaction costs and/or low returns on
investment, and therefore hesitate to grant loans to potential clients in this sector. In
fact, the World Bank’s 2011 Investment Climate Assessment Survey in Sri Lanka,
reveals that around 35 percent of Sri Lankan small firms can access a loan or a line of
credit and around 14 percent of those who applied were denied financing. Therefore,

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developing solutions to this major concern should be a priority for public policymakers.
This paper examines the current situation of SME financing in Sri Lanka.
The article proceeds as follows. In the next section, a theoretical framework
that underpins the prevalence of credit market imperfections is discussed. Then a brief
description of historical background of SME financing in Sri Lanka is presented.
Thereafter, a discussion on the constraints faced by banks and SME operators are
provided. Finally, the article concludes with some recommendations on how to
overcome these constraints.

2. Literature review

Finance theorists highlight that the credit market imperfections exists due to
adverse selection, moral hazard and contract enforcement problems. Banks need
information in order to decide whether to offer loans, what kind of loans to provide to
which customers, and at what rate. However, in practice, there are problems in gaining
information from SMEs due to reasons such as lack of records maintained by the
owner-managers of SMEs and high transactions cost of gathering these information.
Because of this information asymmetry, banks are unable to differentiate between the
high-risk and low-risk borrowers and face two problems, namely; adverse selection
(hidden information) and moral hazard (hidden action).
Adverse selection can occur prior to contracting because lenders have to
decide whether, and on what terms, to lend. As discussed by Stiglitz and Weiss (1981),
borrowers have ‘inside information’ about the nature of the project they want to be
financed and may reap substantial rewards from ‘talking up’ their projects. Moreover,
while the lender gains if the loan is repaid with interest, it is not a beneficiary of any
upside gain in the firm’s performance; it is, however, a victim of any downside losses in
the case of default. Lenders therefore face difficulties in discriminating between good
and bad credit risks and simply increasing the price of credit to all potential borrowers
can lead to adverse selection; rather than driving potential non-payers out of the
market, there may be systematic reasons why some of the highest risk firms are willing
to pay high interest rates (Pollard, 2003).
The other information asymmetry problem; namely, the moral hazard, arises
when lenders are unable to discern borrowers’ actions that would affect the distribution
of returns from an investment. This means that after a lender has extended finance to
a firm it is exposed to moral hazard, the risk that the firm will not perform in a manner
sufficient to meet the contract. For example, once a loan has been secured, a borrower
could use the proceeds of the loan for a higher risk purpose or a non-income
generating activity.
Mushinski (1999) argues that credit market imperfections in developing
countries derive not only from moral hazard and adverse selection problems but also
from costly monitoring and contract enforcement. From the lenders’ perspective,
contract enforcement is important because in case of borrowers’ default, the lenders
often have the right to seize collateral. However, in practice, the enforcement of this

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right depends on the judiciary efficiency of the country. For example, drawing data from
129 countries, Djankov et al., (2007) conclude that the weak legal system is an
impediment to the functioning of credit markets in many developing countries.
Similarly, using loans to borrowers in 48 countries, Bae and Goyal (2009) conclude
that banks respond to poor enforceability of contracts by reducing loan amounts,
shortening loan maturities, and increasing loan spreads.
Although these arguments are not specifically drawn at SMEs, these problems
are more associated with SMEs than with large companies.

3. SME Financing Situation in Sri Lanka

The establishment of People’s Bank and the nationalisation of Bank of Ceylon

in 1961 were landmarks in providing institutional credit to SMEs in Sri Lanka
(Williams,1999). Bank of Ceylon branches and its sub offices at Agrarian Services
Centres provided credit facilities under special programmes to SMEs. Some domestic
private banks have also introduced special facilities to these industries with the
expansion of their branch network. Sri Lanka’s first development bank, DFCC Bank,
was established in 1955 to encourage greater equity financing. However, definite and
concerted efforts to provide formal credit for small enterprises began in the late 1970s’
with the commencement of an industrial policy which promoted labour intensive small
scale enterprises (Williams, 1999). A credit line called the ‘Small Scale Industries (SSI)
credit scheme’ commenced in 1978. This credit line was operated through the Bank of
Ceylon and People’s Bank in collaboration with the Industrial Development Board
(IDB). In 1979, a new credit line, called SMI Loan Scheme commenced operations.
This credit line was funded by the World Bank and the Asian Development
Bank, and the National Development Bank (NDB) acted as apex institution for this
credit scheme. It was operated through the branch network of five leading local
commercial banks, and two other local commercial banks along with Regional Rural
Development Banks (RRDBs) became the participating credit institutions for the SMI III
& SMI IV credit schemes. Industrial Development Board (IDB) provided the technical
assistance for this credit facility and it was made available exclusively to small and
medium industries (SMIs).
The main objective of the SMI loan scheme was to provide finance on a
concessionary interest rate to SMIs. Since the end of SMI IV in 1996, there have been
other credit lines introduced to the country, which provided loans for SMEs such as the
SMILE credit scheme, SMAP credit scheme, E-Friends credit scheme, SPREAP credit
scheme, SMERDP credit scheme, KfW credit scheme, Sahanya credit scheme,
Susahana credit scheme and Saubhagya credit scheme.
While the Central Bank of Sri Lanka collects and reports data on total assets,
deposits and credit advanced by banks, neither the government nor other parties have
comprehensive and comparable data from all financial institutions describing their
current lending activity for SMEs by the size, type and location of borrowers. As per the

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knowledge of the researcher, the only recent and reliable data related to lending to
SMEs come from the recent survey conducted by the World Bank in 2010 as part of
the preparatory work for the Small and Medium Enterprise Development Facility
(SMEDeF) Project. Although the data is available only for the top seven banks
covering SME lending in Sri Lanka, these seven banks represent approximately 75 per
cent of the banking assets to SMEs. The share of SME loan portfolio of the top seven
banks in Sri Lanka is shown in Table 1.

Table 1: Share of SME portfolio of the top seven banks covering SME lending-2009
Bank Total portfolio SME portfolio Percentage
(in million $*) (in million $*) (%)
Bank of Ceylon 1,865.75 58.83 3.15
People’s Bank 2,584.83 40.39 1.56
NDB Bank 485.53 30.73 6.33
DFCC Bank 339.79 140.48 41.34
Hatton National Bank 1,545.28 763.86 49.4
Commercial Bank of Ceylon 1,554.06 468.85 30.17
Wayamba Development Bank 66.73 7.02 10.53
TOTAL 8,441.97 1,510.16
(*Converted from LKR May 21, 2010)
Source: World Bank, SME Banking Assessment – Sri Lanka, 2010

As can be seen from Table 1, approximately 17.9 per cent of the total portfolio
of the top seven banks covering SME lending is related to SME financing (both short-
term and long-term facilities).
Another interesting point from the above data is that three local commercial
banks, i.e. Hatton National Bank, DFCC Bank and Commercial Bank were actively
engaged in SME financing and had the largest SME portfolios, whereas the lowest
SME portfolios were held by the two large state-owned commercial banks, Bank of
Ceylon and People’s Bank.
Although the above data represented a significant coverage of the SME
financing portfolio of all banks in Sri Lanka in 2009, it should be noted that the absence
of such information for all banks in the country on a regular basis makes it impossible
to know with confidence the coverage that banks are providing for SMEs.

4. Shortcomings and constraints in SME financing

This section covers the constraints in SME financing in Sri Lanka. The
constraints are covered from two perspectives, namely banking sector constraints and
SME operators’ constraints.

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4.1 Banking sector constraints: Supply-side

Bankers consider it risky to lend to SMEs. This risk comes from many angles
including single person risk, problem of uncertainty surrounding SME activities, risk of
default, insufficient assets, low capitalisation, high failure rate etc. For example, the
SME banking sector assessment for Sri Lanka conducted by the World Bank found
that non-performing loan ratios on Banks’ SME loan portfolio ranged from 2.7 percent
to 11.5 per cent (World Bank, 2010).
The banks find it costly to make and service loans to SME clients. For
instance, collection and review of financial and non-financial information to assess loan
applications for SME clients is a difficult task and involves significant amount of staff
labour. As a result, SME lending erodes the lender’s margin. Moreover, most
administrative costs of lending (e.g. the costs of collecting information about the
borrower) are independent of the size of the loan and inevitably make small loans more
expensive than large loans.
Lack of information on the borrower is another barrier faced by the banks in
lending to SME clients. This may be due to the lack of reliable financial information, no
credit history of the borrower, etc. Unlike listed companies, SMEs do not have to
comply with financial reporting requirements of the regulators and at times even some
of the established SMEs with sound financial performance are unable to provide
information required by the banks due to their underreporting or withholding profit
figures to avoid tax. Even the SMEs with accounting records may have two or three
sets of accounts for different audiences. As a result of this information asymmetry, it is
difficult for banks to assess the credit worthiness of potential loan applicants. However,
this problem is mitigated to a certain extent as Sri Lanka has a Credit Information
Bureau (CRIB) which issues credit reports on individuals and firms to financial
institutions. Membership of the CRIB is mandatory for licensed commercial banks, the
licensed specialised banks, leasing companies and finance companies.
SMEs are an extremely heterogeneous group of businesses and it is
challenging for banks to establish lending operations to this sector. According to
Weidig (2011), the SME sector is a heterogeneous group compared to micro
enterprises and corporate businesses, and requires a more sophisticated approach to
customer service and risk assessments.
Most of the banks lack the technical capacity or willingness to service this
heterogeneous sector. Another capacity-related problem faced by banks is the difficulty
of doing the follow-up loan procedures due to poor banking practices of SME owners.
The legal system of Sri Lanka can be stated as not-debtor friendly. The strength of
legal rights index measured by the International Finance Corporation (IFC) is an
important indicator to support this claim. To construct the strength of legal rights index,
eight aspects related to legal rights and two aspects related to bankruptcy law are
considered. Sri Lanka is assigned an overall score of 5 out of 10 for the strength of
legal rights index (IFC, Doing Business Indicators, 2013). For example, there are

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inefficiencies in the land registry and there is not a centralised system for registration of
chattels. Most of the time the courts are too weak to repossess any collateral that is
offered. Moreover, banks face a serious handicap as the judicial process takes a long
time to resolve the default cases filed in the courts.
The longer-term credit lines to banks to lend to the SME sector are required as
the banks are faced with the problem of managing their fund mismatch. Indeed, the
majority of deposits in the financial sector tend to be short-term and are hardly
appropriate for funding long-term lending on a large scale because of maturity
mismatches. This problem aggravates as credit lines from foreign donor agencies to
Development Financing Institutions have decreased in the recent past and leading
development financing institutions in the country, such as National Development Bank
and DFCC bank, have obtained the commercial banking license as a measure to
aggressively target local funding sources.

4.2 SME Operators’ constraints: Demand- side

The credit culture in the Sri Lankan banking industry shows that banks
predicate their decisions not so much on cash flows but on collateral. Therefore, being
able to offer a clear title to land can be critical in qualifying for a loan.
The banking survey of the SME market in Sri Lanka 2006/2007 undertaken by the
South Asia Enterprise Development Facility identified insufficient or undervalued
collateral as one of the reasons for not borrowing from a bank.
Land is the most commonly offered collateral for SME loans in Sri Lanka.
However, lack of proper title for the land prevents SMEs from offering them as
collateral at the time of applying for loans. Most private land records take the form of
deed registrations that record transactions. Each time a piece of land is used as
collateral, a lengthy search for all deeds recorded during the last 30 years must be
undertaken to provide title to land. Records are often poor, and this results in frequent
disputes (World Bank, 2005).
SMEs are characterised by limited formality and are sensitive to loan delivery
time and complex procedures. SMEs are usually small, family-owned businesses, run
or managed by one or two people taking full responsibility for all aspects of the
business. These individuals typically know their business well, but lack the skills to
produce written business and financial plans and are discouraged by the extensive
documentation requirements of banks. These complex bank procedures used for SME
lending are time consuming and costly. Most of the time, the SME operators give up
the loan application process half way through because the owner/manager must spend
time away from business to complete these procedures to obtain the loan and to meet
the lending officer.
Another main constraint to firms accessing finance is the cost of finance. The
SME Banking Assessment done by the World Bank (2010) states that the average rate
of interest for term loans charged by Sri Lankan banks was between 12-16 per cent,
while working capital loans have been granted at 13-19 per cent. On the other hand,

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costs such as legal fees, valuation charges, stamp duty, etc. make bank lending
expensive for SMEs. Lakshman et al., (1994) also stated high interest rates to be a
serious problem affecting SMEs’ performance, competitiveness and growth. On the
other hand, when enterprises require financing, they usually need it immediately
because their management rarely plans operations far in advance. It is also common
that these enterprises have limited or no formal credit history, lack formal financial
statements, and possess few immovable assets.
SMEs are also constrained by the lack of branch network, especially in the
rural areas. Most of the banks are confined to Colombo (the capital city) and suburbs.
There are complaints from the entrepreneurs located outside Colombo that most
Colombo headquartered financial institutions are not sufficiently knowledgeable about
the other districts and are not in the position to judge credit risks sufficiently, resulting
in limited financial facilities being made available to them. The Task Force for SME
Sector Development Programme (2002) also highlighted this point and mentioned the
lack of regional spread of loans as another financial constraint faced by entrepreneurs
operating outside the districts in the Western province where the capital city of the
country is located.
Some of the entrepreneurs are of the view that the existing Loan Recoveries
Act in Sri Lanka is one sided and it is in favour of the banks (Task Force for SME
Sector Development Programme – Sri Lanka, 2002).
Furthermore, they are of the opinion that some banks did not have the capacity
and/or attitude to support sick enterprises, their approach to problem loans is a bit rigid
and most of the banks applied the provisions of the Loan Recoveries Act (immediately
without negotiating other workable solutions such as loan restructuring with the
entrepreneurs).

5. Suggestions for improvement

As a remedy for high administration costs in processing SME loans, the banks
can use credit scoring systems. With credit scoring, data on an applicant are passed
through an analytical model, and this model generates a score that indicates the level
of credit risk associated with the loan applicant. This technique can be effectively
deployed as an early pre-screening tool to establish which applications to investigate
more thoroughly and which to reject before having to investigate in depth. This would
enable banks to avoid insolvency due to bad loans, and to sustain profitability from
proper lending practices. It would also reduce the cost and time associated with loan
applications, as only a smaller pool of borrowers would need a more rigorous
individualised review. Sri Lanka can start with simpler ‘judgmental’ scoring models,
based on qualitative parameters, and later switch to more complex and powerful
‘statistical’ scoring models. These scoring systems could be used for rating individual
borrowers and could be used for management reporting, pricing, limit setting and loan
loss provisioning apart from loan approval. According to Asch (2000), effective use of

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credit scoring model can reduce the number of loan applications that need manual
review by 50 per cent to 80 per cent.
As mentioned in this paper, some SME operators are of the view that the loan
documentation is a complex process. Therefore, policymakers should simplify loan
documentation and procedures for SMEs. For example, Sri Lankan banks could follow
the approach used by the Planters Development Bank in the Philippines and design or
customise the loan documentation to suit the needs of SMEs (Aldaba, 2012). Similarly,
Bank Rakyat Indonesia has developed a unique approach to SMEs and relaxed the
administrative procedures and collateral requirements to facilitate lending programs to
this sector (Murthy, 2007). Sri Lankan banks can refer to these good practices to
provide better service to SME customers.
As SMEs become older, they require dynamic financial needs for research and
development activities and to diversify their business operations. Therefore, banks
need to create more innovative funding packages, to boost these established small
and medium-sized businesses. Additionally, the innovative models like revolving funds
can be used to finance credit to SME sector. Moreover, Sri Lankan banks can further
promote structured finance methods such as leasing, factoring, supplier finance and
warehouse receipts for SME clients. According to Antonio and Cernov (2011, p.167),
‘structured finance tools allow financing at different stages of the value chain and it is
specially designed to consider the characteristics and needs of the players at a
particular stage’.
It is recommended that banks and financial institutions collect and maintain
data on SME lending. Banks may collect information on their borrowers such as sales
and the number of employees but often they do not keep these data in their computer
systems. Maintaining such information on their borrowers would allow banks to monitor
SME lending operations. Such data may also be useful for monitoring different
segments of the bank’s client base and developing credit scoring models.
Organisations like the Chamber of Commerce and other business associations can
play a key role in assisting their members to access bank loans from banks. For this
reason, it is recommended that banks can cooperate with these organisations to
identify credit worthy SME clients and to promote their financial products to SME
owner-managers.
Banks are encouraged to advertise the availability of the various loan products
to the SME sector, so that the SME owner-managers are aware of all the financial
options available to them. This type of communications between the banks and SME
owner-managers may help to reduce the problem of access to finance. Bankers should
also look beyond financing or lending and aim at efficient and quick customer service
for their SME clients. Bankers should hold meetings with their clients on a regular basis
in order to understand their needs and grievances and to offer tailor-made products
that would help remove the bottlenecks in the growth of SMEs to a greater extent.
Lending to SMEs can be considered more of an art than a science. Therefore, banks
should train staff that handle SME clients. The attitudes of bank staff should also be

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changed and they should be briefed on the importance of the SME sector in national
development.
Sri Lankan banks are more oriented towards ‘security based’ lending as
opposed to ‘cash flow based’ lending. This situation demands some form of
government intervention such as credit guarantee schemes. Under the credit
guarantee scheme, the government agrees to indemnify the bank up to a certain
proportion of its loan to a borrower without collateral.
The objective of such a scheme is to motivate the banks to lend to borrowers
to whom it would not otherwise lend in view of the borrower’s lack of collateral. Credit
guarantee schemes are considered less distortionary and more market friendly. They
help reduce the risk to the lender as part of the risk is borne by the issuer of the Credit
guarantee. It also diversifies risk by covering loans across different sectors and
geographical locations (De Alwis and Basnayake, n.d). However, most SME credit
guarantee schemes have terminated by now. Hence, it is recommended that the
Central Bank introduce new credit guarantee scheme for SMEs in Sri Lanka and that a
dedicated agency such as the Credit Guarantee Cooperation is set up to provide credit
guarantee services. Sri Lanka could learn a lesson from the SME credit guarantee fund
established by the Taiwan government in 1974 which is operating successfully up to
now. Establishing such a credit guarantee fund may help SMEs overcome the
difficulties that they face when offering collateral to banks at the time of obtaining
loans.
Furthermore, Sri Lankan banks are following the BASEL II standards, so their
risk weight for lending is 75 per cent. The risk weight would be much lower, which
would encourage the banks to grant more loans to the SME sector.
Another recommendation is to expand the ‘Secured transaction registry' of the Credit
Information Bureau of Sri Lanka which was introduced recently. Expanding this
collateral registry makes it easier for SMEs to obtain financing even without traditional
mortgages like land or property. Sri Lanka should also aim at well developed Secured
Transactions Act which will enhance financing against movable assets such as
inventory and equipment.
For example, in 2004, China embarked upon a reform of its movable collateral
framework to encourage financing against valuable movable assets. Following this
reform, SMEs can now use movable assets, such as inventory and receivables as a
basis for borrowing and the percentage of movable assets based lending in China has
gone from 12 per cent to about 20 per cent since the reform (International Finance
Corporation, 2010).
Another recent initiative that merits consideration is the SME rating agency.
Although a few international rating agencies are operating in Sri Lanka, they all
concentrate on rating corporate and listed instruments. At present, there is no agency
in Sri Lanka which provides credit ratings for SMEs. It would be advisable that the
government authorities in Sri Lanka set up an SME rating agency similar to that in
India. The Government of India has introduced an SME Rating Agency (SMERA),
focusing on the micro, small and medium enterprise sector. SMERA provides

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comprehensive ratings for the use of financial institutions in the assessment of credit.
The ratings have improved the access to bank financing for at least 20 per cent of
rated clients (International Finance Corporation, 2010). However, some critical issues
such as who pays for the ratings to avoid conflicts of interests have to be revisited
before implementation.
The lack of hard data on SME financing is a major challenge in evaluating the
needs of the sector and in assessing progress. Thus, it is necessary to develop a
mechanism to gather data on this important area through a government establishment.
Sri Lanka could learn from other countries in the world in developing such a
mechanism. For example the National Statistics Office collects this type of data in
Japan, Denmark and Greece. In Chile, Lithuania, Taiwan, Nicaragua and Venezuela
SME data is collected by the Ministry of Economy. The Ministry of Trade monitors SME
lending in Albania, Botswana, Colombia and Zambia. SME lending data is collected to
monitor compliance with lending targets set for priority sectors, including SME in some
countries in the South Asian region such as India, Pakistan and Afghanistan.
It is proposed that a survey of SME finances should be conducted in Sri Lanka
on a regular basis to find reliable independent data on the demand and supply of
finance for the SME sector. These types of surveys are quite common in the UK (UK
Survey of SME finances 2004, 2008 and 2009) and the USA (Survey of small business
finances).
The government may consider introducing an appeals mechanism for SMEs to
independently evaluate the appeals made by SMEs with regard to their loan
application rejections.
It was also highlighted in this paper that not having accounting records makes
the SMEs risky borrowers and makes them less attractive in the eyes of bankers.
Hence, the policymakers are encouraged to implement capacity building programmes
for entrepreneurs in terms of preparing financial statements and business plans.
Policymakers, small entrepreneurs, donors and those who deal with the
development of small enterprises in developing countries can use the network
formation approach apart from their traditional supporting approach. For instance,
supporting institutions should organise network activities for small businesses. Small
business owners should also realise the importance of constructing networks. They
should focus their attention and programs not only on providing increasing resources
but also on providing more facilities and efforts on ‘networking’ (for example, a self-
help support network for SMEs, see McRae,1995), because particularly small firms do
not expand in isolation and have a lack of resources. Networking is a possible solution
because through established network relationships, firms gain not only access to
external resources but also gain encouragement and influence.
The government can also implement the ‘cluster’ approach to SME lending.
The ‘cluster’ is a sectoral and geographical concentration of similar or related
complementary manufacturing/ business units that are exposed to similar opportunities
and threats (Sobha Rani and Rao, 2008). The government can direct banks to
establish specialised SME branches in identified clusters to enable enterprises to have

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easy access to finance. An international example that can be drawn from the South
Asian region is the initiative taken by the Small Industries Development Bank of India
(SIDBI) where they tried to improve the flow of credit to SMEs by using the cluster
approach. SIDBI also initiated the establishment of small enterprise financial centres in
selected clusters (Murthy, 2007). Similarly, ICICI Bank of India divides SME clients into
three groups, namely Corporate-linked businesses, the cluster-banking group and
business-banking group. The Cluster-banking group consists of pre-selected and pre-
defined industry clusters that represent promising opportunities. This type of
segmentation of SME clients into clusters may also help banks to address challenges
such as risk management and knowledge development (International Finance
Corporation, 2009).

6. Conclusion

This paper examined the current situation of SME financing in Sri Lanka.
Thereafter, the paper highlighted some constraints faced by the banks and SMEs.
Banking sector constraints discussed in the paper were high risk, high administration
costs, lack of information on the borrower and poor legal systems. Among the SME
operators’ constraints, lack of collateral, complex loan application procedures and high
cost of finance have been stated as main issues.
The paper proposed recommendations to overcome these constraints such as
developing credit scoring systems in SME lending, simplification of loan
documentation, promoting structured finance tools, training bank staff who handle the
applications of SME customers, introducing new credit guarantee schemes, setting up
a SME rating agency and developing ‘cluster-based approach’ in SME lending. These
recommendations may be of importance to policymakers, not only in Sri Lanka, but in
many other developing countries in a similar stage of economic growth.

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