SME financing in the Maldives

Almost 90 percent of the 8,000 businesses registered to pay taxes in the Maldives are Small, and Medium-sized Enterprises (SMEs). SMEs are important in that their contribution to employment and GDP is large. However, similar to many other countries, the major problem faced by SMEs in the Maldives are the difficulties in accessing finance. Many of these issues have been exacerbated with the COVID-19 pandemic. 

Challenges faced by SMEs in accessing finance

As a small island nation, SMEs in the Maldives face various challenges due to its unique geographical nature and widely-dispersed population. However, as evidenced by a study carried out by the Maldives Monetary Authority (MMA) on impediments to SME growth, financial inclusion is one of the significant barriers to SMEs growth in the Maldives, especially in the outer atolls. According to the study, 80 percent of businesses registered in each atoll are SMEs. However, since only a few atolls have more than one bank branch, access to finance is a major issue for SMEs, especially in remote islands.

SMEs generally have two main options for external financing: debt and equity. Debt financing mostly involves borrowing from commercial banks; a difficult undertaking in the Maldives. According to a study conducted by the Ministry of Economic Development, two-thirds of entrepreneurs in the country have never borrowed from a bank, largely due to the high cost of borrowing, high collateral and security requirements, and low levels of financial literacy. These factors are particularly challenging for women entrepreneurs.  

Similarly, lack of proper bookkeeping records and inadequate credit histories with banks also reduce SME prospects for obtaining bank financing. A study by Sambajee and Dhomun in 2015 also found that loan applications not being backed up with a substantial feasibility study, tax evasion and poor management practices, were all potential reasons for SMEs' failure in obtaining bank loans in Maldives.

Equity financing is the second option available for SMEs, which involves bringing in investors or partners, who provide capital in exchange for shares in the company. According to the Sambajee and Dhomun study, this option is least used in the Maldives due to the 'domineering nature of local venture capitalists,' and in most cases because the business idea is evaluated based on the person driving the business rather than on its own merit. 

Given the difficulties in sourcing these external financing options, most businesses use internal financing and bootstrapping to kick-start their ventures. ‘Bootstrapping' refers to building or starting a business with very little funding or capital, or virtually nothing at all. Many of the world’s most successful businesses began as bootstrapped ventures, such as Coca-Cola, Apple, Microsoft and Dell Computers. 

According to Sambajee and Dhomun, the most commonly used bootstrapping strategy in the Maldives was 'private owner financed-bootstrapping,' whereby the owner/manager invests their own money in the business. 'Collaborative bootstrapping,' where a business starts alongside a network of other businesses, and 'relationship-oriented bootstrapping,' where businesses leverage their networks and strategic alliances to mobilise intangible resources such as business information, were also used. However, such financing is only accessible for few SMEs, and in most cases they are not large enough for the growth of the SMEs, necessitating the need for government intervention.

Policies by the Government to provide SME financing

In 2006, the Ministry of Economic Development (MED), as part of the Private Sector Development Program (PSDP), with financing from the Asian Development Bank (ADB), commenced a project to create a sustainable environment for SME growth. A key component of the project was the introduction of various micro-finance schemes, and piloting a Line of Credit Facility (LCF) valued at USD3 million, which provided 86 loans for targeted regions and sectors. 

This was expanded in a subsequent project, under financing from the ADB as well as the Islamic Development Bank (IDB), totalling USD7.5 million.  A total of 164 SMEs, including 96 SMEs run by women, received funding under the scheme, administered through the Bank of Maldives (BML), under guidance from the Government.

With the implementation of the SME Act in 2013, provisions were made for annual budget allocations of MVR50 million for SME funding. With this, the Government, in 2013, in collaboration with the BML, introduced MSME-related loan schemes. 

In February 2019, the current government established the SME Development Finance Corporation Pvt Ltd (SDFC) to make SME loans more sustainable. 

Under the Government's COVID-19 'Economic Recovery Plan,' the SDFC implemented the Viyafaari Ehee loan scheme, under which MVR381 million was sanctioned for 2,205 private businesses and SMEs to assist in overcoming their financial struggles with the impact of the pandemic. However, a UNDP study in 2020 found many issues in these relief loans, as the reach of these schemes remained limited and there were complaints about credit and logistics issues. Many SMEs also did not apply for the scheme due to high interest rates and short grace periods. 

MMA policies to reduce credit risk of SME loans

In 2011, the Maldives Monetary Authority (MMA), under the PSDP, established a Credit Information Bureau (CIB) to further reduce barriers in access to credit. The main objective of the Bureau is to serve as a one-stop repository of credit information for financial institutions. Currently, all banks and other financial institutions are members of CIB. In order to expand the service, industry experts have suggested spinning-off the CIB out of MMA in to a public-private company. 

As of June 2018, credit histories of 76,223 individuals and 1,629 corporations were recorded in the system. 

Usage of Credit Information Reports (CIRs) have also increased gradually, with over 5,000 obtained by financial institutions.

The MMA has also launched a Credit Guarantee Scheme in August 2016, to share the credit risk of financial institutions and to reduce collateral requirements. Seven of the eight commercial banks operating in the Maldives participate in the scheme. It provides guarantee cover for 90 percent of the loan granted by participating banks to commercially viable SMEs. Although expanding outreach of the scheme was an important pledge of the current government, the MMA, in February 2021, terminated the scheme claiming challenges in implementation. 

Next steps: introducing non-traditional financing

It is necessary to broaden the range of financing instruments available for SMEs to address their diverse financing needs and to increase their resilience to changing conditions in credit markets. Traditional bank financing poses challenges, in particular for newer, innovative and fast-growing companies, especially when faced with more rigorous prudential rules. 

According to the OECD, asset-based finance can enable young SMEs to access working capital on rapid and flexible terms. It has recommended regulatory reforms that enable the use of a broad set of assets to secure loans. 

In the Maldives, a lack of assets that can be collateralized is a major obstacle since only limited assets are accepted. In order to capitalise on this, legislation on collateral need to be amendment to allow for a diverse set of assets to be accepted as collateral. 

The OECD paper also highlighted the use of trade finance, alternative forms of debt such as corporate bonds, crowdfunding, hybrid tools and equity instruments to help boost investment for innovative start-ups and high-growth SMEs. Following the global financial crisis when the bank lending declined, many SMEs in Europe turned to alternative-finance markets, such as peer-to-peer lending – platforms which match borrowers and lenders directly, via the internet. 

According to a 2013 report by NESTA, a charity, and researcher at Cambridge University, the British alternative-finance market is estimated to be worth over USD6 billion.

The Government, as part of its pledge to enhance access to finance for SMEs, has also identified similar instruments. The Government plans to expand financial instruments available to SMEs by introducing non-traditional sources funding, such as equity financing options, angel investments, crowd funding and venture capital funds. However, no major progress has been made so far in this regard.  

With more than 80 percent of SMEs in the country affected by the COVID-19 pandemic, it is important that the government explores all options and avenues available for SMEs, as the impact on their cash flow has been large and devastating.