Feb 19, Colombo: The Asian Development Bank (ADB) has approved a $50 million loan to the state-owned Regional Development Bank (RDB) of Sri Lanka to provide affordable and accessible credit to rural micro, small, and medium-sized enterprises (MSMEs) in the country, a statement said.
"Limited access to finance is a key barrier facing entrepreneurs in Sri Lanka," said ADB Financial Sector Specialist Takuya Hoshino. "The project will not only directly fund $50 million of long-term financing to micro and small enterprises outside of Colombo, including 500 women-led businesses, but also be structured to provide the regulatory capital that would leverage up to an additional $533 million of lending to MSMEs."
MSMEs have high growth potential, create more jobs, and over time, potentially increase the tax base at a quicker pace than larger enterprises. Because of their distribution over the whole country, they also help reduce regional inequalities. However, only about 30% of Sri Lankan firms have sufficient access to bank loans and other capital. These constraints are even greater for micro and small enterprises led by women or located in rural areas.
One of the means to address this challenge is through RDB, a state-owned bank whose mission is to strengthen the living standards of the rural population by providing affordable and accessible credit facilities. With its unique business model and wider branch network across rural areas, RDB can effectively cater to rural small and micro enterprises that are mostly missed out by private sector commercial banks.
Despite its relatively strong operating framework and sound financials, RDB is seeking additional capital to meet higher Basel III regulatory capital requirements, which came into effect in Sri Lanka on 1 January 2019, in line with RDB's continued credit growth expansion. Given fiscal space considerations, the ADB loan to RDB is structured to be subordinated with a sovereign guarantee to qualify as tier 2 capital. As a result, RDB's lending capacity to MSMEs will be enhanced and the credibility of the Sri Lankan banking system will be ensured through its full compliance with Basel III requirements for the first time in the South Asia region.
Integral to the project is a new technical assistance (TA) grant of $1 million from the Japan Fund for Poverty Reduction, financed by the Government of Japan, to support RDB's sustainable long-term growth. The TA will upgrade RDB's business model by supporting a deposit marketing campaign to source low-cost funding and strengthening RDB's operational capacity in client outreach, risk management, environmental and social safeguard management, and loan origination and administration. The TA will also directly promote gender mainstreaming through trainings to about 500 women entrepreneurs who are current or prospective clients on how to prepare a business plan.
The project will further expand ADB's support for MSME financing in Sri Lanka with an emphasis of gender empowerment. Over these three years, ADB provided a $100 million line of credit project in 2016, a $75 million additional financing and a $12.5 million grant that targeted women entrepreneurs funded by the Women Entrepreneurs Finance Initiative. The support for MSMEs will continue to be a priority under ADB's country partnership strategy, 2018-2022.