COVID-19 has made an adverse impact to our economy, where many businesses fall into the micro small and medium enterprises (MSME) category and some in the small and medium enterprise (SME) category. A majority of Sri Lanka’s businesses fall into both the MSME and SME category.
During curfew and lockdown, the smaller businesses, which had small reserves or no reserves at all, had no choice but to use their very limited working capital for survival.
While we appreciate the government for allowing moratoriums on loan instalments and the introduction of the 4 percent loan scheme, many MSMEs have not been able to secure loans under this scheme.
With recovery of loans being an arduous task, even prior to COVID-19, one cannot actually blame banks for being risk averse and not disbursing loans the way we would have liked them to.
In the recent past (prior to COVID-19), we saw the emergence of numerous types of financiers, who entered the lending industry. They ranged from finance companies, which lent short term, daily collection outfits, which were in fact sophisticated money lenders, international lenders, who offered loans via social media, etc.
As a result of the above, the MSMEs in particular enjoyed an excess supply of funding, although they were at astronomical rates ranging from 3 percent to 17 percent per month, calculated on the flat method. For purposes of clarity to the layman, the above interest rates translate to an effective 72 percent to 400 percent p.a. when calculated on the reducing balance method, which is the correct way of calculating the time value of money.
The excess supply of credit made many entities over-indebted as well as financially undisciplined.
COVID-9 has now hit both the funders and borrowers very hard, so much so that some of the lenders have even exited the market (which is actually a blessing in disguise), after earning handsomely over the years.
So, where does this leave our MSMEs, which have been left high and dry in post COVID-19?
As you can imagine, they have no working capital, no past track record with banks and many don’t have the collateral that is acceptable to banks.
It must be most frustrating for MSMEs that are not able to avail themselves of the funds that the government directed the banks to give them at 4 percent p.a., while they watch SMEs and bigger entities that are much healthier than them and stronger, borrowing up to 25 million at 4 percent p.a. This is truly a catch 22 situation.
Sri Lanka’s cooperative movement has been in existence for over a century. Unlike in Europe, our cooperatives do not stand out as giants in comparison to banks, finance companies and insurance companies.
But this does not negate that the cooperative model, which is over a century in Sri Lanka, has stood the test of time.
The cooperatives have a strong inbuilt debt recovery mechanism by law, the Cooperative Act.
One can argue that the cooperatives have their own issues, which have been highlighted on and off in the media. (In that case, we have also seen three finance companies going into liquidation, in this very year!)
The issues the cooperatives have dealt with in the past stem from lack of integrity of errant office bearers of individual cooperatives and have nothing to do with the fault of the cooperative model per se.
We believe that we need to seek refuge from the cooperative movement at this crucial juncture to grant our MSMEs a new lease of life.
If there is synergy among the MSMEs, the cooperatives and banks, a winning solution could envisaged, whereby the MSMEs avail themselves of bank funding via the cooperative model and the banks mitigate their credit risk by lending to the MSMEs via the cooperative model, relying on the stringent debt recovery method, prescribed by the Cooperative Act.
Our recommendation is that the government through the Cooperatives Department should encourage the establishment of dedicated MSME thrift and credit cooperatives at divisional level. In turn, the government should also urge banks to lend to these dedicated MSME cooperatives on a wholesale basis (bulk loans), so that these cooperatives in turn could lend to their members. Using the above methodology, even the special COVID-19 loan scheme at 4 percent p.a. (which is due to lapse by August 31, 2020), could be extended to MSMEs via such MSME cooperatives, which would have definitely got left out otherwise.
Furthermore, thrift and credit cooperatives are authorised to mobilise savings from members. Mobilisation of savings from MSMEs will further strengthen MSMEs in terms of building reserves for themselves in their respective cooperatives. In turn, the banks that fund MSME cooperatives could always insist that such cooperatives maintain a certain ratio of savings to loans as time goes on, so that the banks could cushion their risk factor further.
The power of community savings via the cooperative movement can be phenomenal. Sanasa Development Bank, which was founded primarily through cooperative members’ funds alone, is a testimony to the power of savings within the
cooperative movement.
In conclusion, we sincerely appeal to the powers, led by the president and prime minister, to look at incorporating MSMEs into the cooperative movement by directing the Cooperatives Department to set up dedicated MSME thrift and credit cooperatives at divisional level and give Sri Lanka’s MSMEs a new lease of life in post COVID-19, by making available the special COVID-19 loan scheme at 4 percent p.a. through all banks and their branches.
We would be glad to lend our expertise in this regard to make the above recommendation a reality and a success.
(Lasantha Mendis,
founder of Avanka Lanka, can be reached at mendis.lasantha@gmail.com)
