SMALL & MEDIUM

ENTERPRISE (SME)

DEVELOPMENT

week6

LEARNING OBJECTIVES

By the end of this lecture students should be

able to understand:

Economic Environment for SMEs in

Maldives

Contributions of SMEs to Maldivian

economy

Impact of SOEs on SMEs

Policies & Regulations Affecting SMEs

Cost of Doing Business in the Maldives for

SMEs

INTRODUCTION

Policy makers around the globe does not debate

on the fact that SME’ plays a crucial role in

supporting employment, and enhancing economic

growth. SME’s increases production, and exports

and generate employment, and facilitate lifting

poor out of poverty. Hence SME development is

considered crucial element in the development of

the Maldivian economy.

Despite its intrinsic competitive disadvantages, the Maldives

has one of the fastest growing economies in South Asia

Tourism and fisheries has been the main two sectors

supporting economic growth, generating employment, and

creating linkages towards the other sectors

Overall Maldives seem to be doing well, and have potential for

growth, however the extent to which the developments are

transferred to different segments of the society are limited.

One of the most easiest ways to transfer the benefits would be

to encourage growth of SME’s

THE MALDIVES GENERAL ECONOMIC

INDICATORS, 2001-2011

THE MALDIVES SECTORAL CONTRIBUTIONS

TO GDP (%), 2001-2011

ECONOMIC ENVIRONMENT OF SME’S IN

MALDIVES

Among 7000 registered companies half of these are

assumed to be active, and most of them are either

micro, small, or medium-sized businesses

About 45% represented MSMEs located within the

Kaafu atoll where Malé (capital of the country) is

located

The MSME sector is restricted to a limited range of

activities with majority of the enterprises being

engaged in retail trade.

A vast majority of MSMEs remain unregistered and

operate informally, collectively they play a key role in

providing goods and services in the local economy and

represent the backbone of the domestic labor force

As per ADB report SME contribution to GDP has

so far not shown any significance progress.

The contribution of the agriculture remained

stagnant at around 2.5% during the five year

period 2006-2011; the contribution of the

fisheries sector has actually declined from 4.1%

to 2.9%

ADB identifies huger involvement of government

enterprises in the economy as being a key

challenge in further development of SME’s

Most SME’s operate as singler operators (54.7%),

which 36.2% operates as family business units.

SURVEY DONE BY MED IN 2010 ON THE TYPE

OF ACTIVITIES REVEALED THE FOLLOWING;

Manufacturing (11.2%)

Services (10.7%),

Construction (3.1%),

Transport (1.6%).

Other activities (15%)

Retail Trade (32.9% )

DEFINING SME

Category Full time employees Annual

Income/Turnover

Micro enterprise 5 - 0 500,000 – 0

Small enterprise 30 - 6 5,000,000 – 500,001

Medium enterprise 100 - 31 20,000,000 –

5,000,001

The main objective of defining SME is to target micro finance and

technical assistance to where needed. Other than this it would

enable to collect information properly, and have a more inclusive

information of SME and better implementation of SME policy.

POLICY ON SME

The current National Framework for

Development 2009-2013 that the Government of

the Maldives is supported under ―Anne Dhivehi

Rajje‖, known as the strategic action plan,

provides policy guidelines for national

development and underscores the new

administration recognition of the important role

of the micro, small, and medium-sized

enterprises (MSME) sector in contributing to a

more resilient and diversified economy as well as

creating more employment opportunities,

especially for women, particularly in the outer

atolls.

POLICY ON SME

Provide Small and Medium Enterprises (SMEs) with subsidies to

minimize the difference between the rich and the poor and to

encourage a business environment that will extend more economic

benefits to the public.

Establish an institution and develop human resources required for

the development of SMEs within the Food Security sector.

Create more opportunities for SME participation in the three main

industries, tourism, fisheries and agriculture, through the

formulation of relevant policies. Assist and facilitate

SME participation in agriculture, transport and and

infrastructure development sectors.

Provide technological capacity for SMEs to expedite the growth

and development, given that the development of SMEs is crucial to

economic progress.

SHORT TERM GOALS (1-3 YEARS)

Facilitate the growth and development of SMEs

through the development of human resources.

Encourage the participation of women in the SME

sector.

Revive the crafts industry by utilizing modern

machinery and facilitate the trade of local souvenirs

in the tourist market.

Give priority to SMEs when awarding regional

government contracts.

Formalize the SME sector and facilitate for the

registration of SMEs at the regional administrative

centers of the country to further expedite the

registration process for the start-up SMEs.

LONG TERM GOALS (1-5 YEARS)

Promote local products in the domestic market and

facilitate their export.

Establish a training facility for those wishing to

establish and promote SMEs in the Faculty of

Management and Computing.

Facilitate access to low-interest loans for the SME

sector and provide technological support training and

assist in marketing and promotion.

Support and develop traditional crafts practices in the

atolls.

CHALLENGES FACING SME’S IN MALDIVES

Internal constraints: Lack of technically skill labor, management

and accounting skills, and market information are the principal

concerns of MSMEs The market competitiveness of MSMEs in the

Maldives suffers due to :

limited market information and market linkages

links with suppliers and other national and international MSMEs

infrastructure facilities

transport

finance

market protection

technology support

training services

Skills deficiencies among youth and low

participation of women :Identification and

creation of entrepreneurial opportunities for the

poor, including women and youth, and facilitation

of skills development through business and

vocational training programs has been limited.

Youth unemployment is also substantial and has

been increasing in recent years, with the result

that 40.0% of young women and over 20.0% of

young men are currently unemployed

Poor access to credit for business operation and

expansion : Access to credit facilities is the biggest challenge

in doing business in Maldives. Given the housing shortage and

group housing loans procedures in Malé, there is a lack of

clarity on property rights. This acts as a major constraint for

MSMEs in accessing finance, as lenders are reluctant to take

land as collateral if they are unable to sell it freely upon the

borrower’s default. In addition to lack of suitable collateral,

lack viable qualitative information, financial statements and

accounts often put MSMEs in the high-risk and non-bankable

category

Difficulty in getting legal recourse :The lack

of a bankruptcy law further reduces the chances

of loan recovery in the event a borrower becomes

insolvent. All this makes security agreements for

MSMEs highly risky, costly and difficult to

enforce. Setting up a secured transaction registry

is needed to address this issue.

Legal and regulatory constraints: Suitable legal and regulatory environment is an important factor influencing MSMEs sector’s access to finance. In the Maldives, weak legislations and poorly developed financial sector limit SME financing

Logistical constraints: The Maldives is ranked 125th among 155 countries on the basis of the World Bank’s 2010 Logistics Performance Index (LPI), which includes transport costs, quality of infrastructure (e.g., roads, ports, etc), tracking and tracing of consignments, and timeliness of delivery

Monopolized business practices : Due to the

relative small size of the economy, much of the

trade, transport, and tourism industry is

controlled by only a few from the private sector

Limited CSR Initiatives for MSME

promotion. Although there are a large number

of international brands operating in the tourism

sector in the Maldives, there is no defined

corporate social responsibility (CSR) charter for

contributing to MSME development

Lack of integrated approach to MSME

development: One of the biggest challenges

faced by MSME sector is lack of integrated

approach by the government to MSME sector

development.

Limited access to enabling technologies.

Though the penetration of enabling technologies

in the Maldives MSME sector is growing, it is

still in a very nascent stage of development which

limits information and knowledge sharing among

the MSMEs

STRENGTHS, WEAKNESSES, OPPORTUNITIES,

AND THREATS ANALYSIS OF MSME

CURRENT MEASURES TAKEN TO DEVELOP

SME The strategic action plan of previous government

focused on development of SME through various

programs

ADB approved technical assistance in 2005 to support

development of MSMEs on the atolls by devising new

financing mechanisms and market accessibility plans,

and establishing centers for entrepreneurial training

ADB also approved a technical assistance loan in 2008

for the Private Sector Development Project (PSDP) to

minimize the problems of and improve the enabling

environment for MSMEs

Establishing and extending the credit information

bureau: The PSDP supported the establishment of a CIB.

By the end of 2011, the eight-member institution had

completed three cycles of loading data; of around 25,000

records of consumers and commercial loans (lending

facilities) that were initially submitted

Line of credit facility and credit guarantee fund: The

PSDP provided a $3 million line-of-credit facility (LCF) to

widen access to finance for MSMEs.

Start-up training through business development service

centers: The PSDP established two BDSCs. They will be the

chief vehicle for the delivery of business development service

products to MSMEs in a drive to create cluster development in

targeted regions.

Private–public partnerships: Capacity-development assistance

has been provided for strengthening the enabling environment for

the private sector, for structuring PPPs, and for MSMEs, as well

as for the use of this modality in the power and transport sectors

Bolstering the legal and institutional

framework: MSME development is premised to a

large extent on an enabling legal, regulatory, and

institutional framework. ADB stated that it would

assist the government in further strengthening the

institutional framework in the Maldives by initiating

new legislations and amending existing ones to secure

the confidence of both lenders and investors in the

enforcement of their rights

SUGGESTED POLICY RECOMMENDATIONS

TO DEVELOP SME’S

Development approaches for SMEs implemented by selected

bilateral and multilateral agencies

MALDIVES CAN USE THE FOLLOWINGS TO

DEVELOP SME

Create an enabling environment covering appropriate policy and

regulatory framework, including effective institutional framework

and probusiness fiscal policy, and supporting infrastructure

development, such as power, transport, communication, water, etc.;

Entrepreneurship development, including management skills and

human resources;

Financing a business;

Fostering business development services;

Technology transfer and adaptation; and

Market access, including trade promotion.