SMEs and the economy

So the mantra goes – that Small and Medium Enterprises (SMEs) make a major contribution to an economy, both in terms of development as well as in job creation. According to the World Bank, SMEs represent 90 percent of businesses and more than 50 percent of employment across the world. It also estimates that 600 million jobs will be needed by 2030 to meet the growing global workforce, making SME development top of the list for governments around the world towards meeting this growing workforce. 

SMEs by definition are more attuned to the needs of the market, given their scale, and are able to channel their efforts towards changing market trends. They also play an important role in innovative disruptions in established markets. Developments in access to, and utilisation of, modern technologies make it easier to access markets. However, given the geographical dispersion of the Maldives, distribution and delivery is more challenging, leading to increased costs. 

SMEs can, however, find it difficult to weather economic downturns, usually being the first to be hit. Their low reserves and capitalisation ratios make it challenging to weather bad times, in contrast to larger businesses which may have higher capitalisation ratios. This was largely seen during the recent pandemic. Safety measures put in place by the authorities have led to many SMEs being unable to function within lockdowns and restrictions. Given their low reserves, and reliance on internal financing, it has meant that many have had to shut down.  

Access to finance is a major constraint for SMEs, with the International Finance Corporation estimating that 40 percent of formal SMEs in developing countries have an unmet financing need of USD5.2 trillion each year. This is not including the informal SME sector. Many SMEs usually rely on internal financing or financing raised from family and friends to start their businesses. Continued during operation, and given a lack of financial literacy, this restricts the businesses' scope for growth and expansion and at times proves challenging in raising credit from established banks and financial institutions.

However, with a base rate of 10 percent applicable to both SME loans as well as loans to corporates, and corporate lending rates at base rate plus 3 percent per annum, there does not appear to be much differences in lending to SMEs and larger corporations. These high lending rates make it virtually impossible, and prohibitively expensive, for SMEs to raise the financing it will needs for operations or expansions. 

The government's role in SME development extends to establishing the policy framework needed to foster and promote SMEs, such as enacting the required laws and increasing access to financial schemes. In 2013, the Government of Maldives enacted an SME Act, which covers micro, small and medium enterprises.

Micro enterprises are defined as those with six or less employees and annual incomes of below MVR500,000. Small enterprises are defined as those enterprises with between six and 30 employees, making an annual income between MVR500,001 and MVR5 million. Medium enterprises are defined as those enterprises with between 31 and 100 employees and making an income of between MVR5,000,001 and MVR20 million. The Ministry of Economic Development has also established seven business centres across the country to promote and assist development of SMEs. 

In March 2019, the Government also established an SME Bank, the SME Development Finance Corporation (SDFC), to assist with affordable financing for SMEs. It offers products for developing guesthouse businesses, business assistance, agricultural sector, as well as start-up financing, at competitive rates compared to the Bank of Maldives.

While SDFC has faced some criticism in terms of access in terms of political affiliation, this is a much needed step in creating a more friendly operating environment, and culture, for SMEs. This alone is not enough; more forward thinking policies that support the SDFC and the business centres can only serve to further empower SME growth which in turn can increase overall economic resilience and diversification.

The work also has to be put in to ensure that these do not just remain a fancy project, or institution, titles and that they are indeed working for the benefit of SMEs — these cannot just be an added bureaucratic, red-tape, measure that will suck up more time and resources from the SMEs as their needs are delayed from being addressed by funding, and regulatory, organisations. The Maldives has had its fair share of ‘regulators’ and paper State Owned Enterprises which have not added value, urgency or proper representation to their stated causes and goals; the nation should not repeat this same mistake with SMEs.