New development bank to support SMEs soon | Sunday Observer

New development bank to support SMEs soon

6 September, 2020

The Central Bank will set up a national entrepreneurship development bank to support small and medium sector enterprises and startups which contribute a major share to the GDP, said Central Bank Governor Prof. W.D. Lakshman at the Bank’s 70th anniversary oration last week.

He said Sri Lanka has a poor history of development banking and added that the setting up of an entrepreneurship development bank will be a fillip for  development. “Discussions are under way in the bank to set up the entrepreneurship development bank and we hope to expedite work on it to enable funding for the sector,” the Governor said. 

The setting up of a permanent credit guarantee institution is also in the pipeline according to the Governor for which the bank has commenced discussions.

“These are avenues through which Central Banks in developing states have actively supported domestic industries to grow and expand into global giants,” the Governor said, adding that Central Banks provide capital to development institutions as industrial and agricultural development banks. 

SMEs make up for around 80 percent of all businesses in the country  and are found in all sectors of the economy, primary, secondary and tertiary providing employment to people of various skills. SMEs in industrial activities account for around 20 percent of establishments and around 90 percent in the service sector.

A development finance institution (DFI) also known as a development bank or development finance company (DFC) is a financial institution that provides risk capital for economic development projects on a non commercial basis. They are often established and owned by governments or charitable institutions to provide funds for projects that would otherwise not get funds from commercial lenders. Some development banks include socially responsible investing and impact investing criteria into their mandates. Governments often use development banks to form part of their development aid or economic development initiatives.

The Governor also said that Central Banks maintain exchange rates at appropriate levels to support exports, capital controls and development finance systems to achieve development goals. “These methods are used to bring down the government’s borrowing costs, to promote development of particular sectors and stimulate structural transformation of economies,” the Governor said, adding that the past decade in Sri Lanka was marked by  building up of depreciation pressure from time to time due to domestic and external factors.

The Governor said that the Central Bank has intervened in the foreign exchange market to bring about a relatively more stable exchange rate regime since the change of government last year.

“If not for intervention in the foreign exchange and other markets there would have been widespread panic in domestic markets,” the Governor said. However, he said that greater success in the intervention calls for action elsewhere in the economy in areas such as export oriented and import replacing production and sources of inflow of foreign exchange.

“The search for an alternative development policy framework would depend heavily on productive and efficiently run State owned enterprises and public institutions,” he said.