• Why SL’s smallest businesses still struggle to access finance 

Sri Lanka’s economic recovery is beginning to take hold after a period of overlapping shocks. The 2022 crisis, difficult macroeconomic adjustments, and more recent disruptions such as Cyclone Ditwah, have placed severe strain on Micro, Small, and Medium Enterprises (MSMEs).

While the financial system is stabilising and confidence is gradually returning, these gains have not been evenly felt. Microenterprises, in particular, remain on the margins of the recovery.

According to the World Bank and the Department of Census and Statistics (DCS), industry contributes to roughly 26–27% of the country’s Gross Domestic Product (GDP) and employs about a quarter of Sri Lanka’s workforce. Within this, micro and small enterprises dominate the business landscape. They are the grocery shops, food vendors, tailors, repair services, and home-based producers that keep local economies alive and generate everyday employment.

Yet, the impact of recent shocks has been profound. A 2023 DCS survey shows that over 20% of MSMEs operating in 2018 had either temporarily or permanently closed by May 2023. However, it is interesting to observe that while many small and medium firms declined sharply, the number of microenterprises remained relatively stable, and in some cases even increased. 

Crisis fallout 

This apparent resilience, however, masks a deeper shift: in many instances, firms have downsized into microscale operations, driven by falling demand, rising input costs, and limited access to working capital. 

The United Nations Development Programme’s (UNDP) post-economic crisis research on multidimensional vulnerability indicates how this has direct consequences for access to finance, showing that household debt in itself is a major contributory factor for multidimensional vulnerability.

Household debt and the survival of microenterprises are closely linked. The same UNDP study found that among the 38.5% of households who reported being in debt, most borrowed from microfinance providers, informal lenders, or personal networks, where loans are often costly and short-term. 

Credit is frequently used for survival – to put food on the table, keep children in school, and keep businesses running, or repay existing loans – rather than to invest and grow. This can trap households, particularly more vulnerable groups, including women-led enterprises, in perennial cycles of debt. 

One category, many realities

Without affordable and suitable financial options, microenterprises are more likely to depend on forms of credit that weaken, rather than support, their resilience and recovery. It is important to recognise that MSMEs are not a single, uniform category. They operate under very different conditions and require different financing approaches. 

Microenterprises are primarily survival-oriented, operating on thin margins, relying on daily cash flow, and needing small, timely amounts of working capital. Small enterprises occupy a middle space, often partially formal, with growth potential but highly vulnerable to shocks. 

Medium enterprises are generally formal, asset-backed, and focused on expansion and productivity. When financing systems are designed primarily around the needs of small and medium firms, microenterprises are often excluded by default.

Contrary to what is often understood, the primary challenge is not a lack of funds. Financial institutions confirm that funds are available. The problem lies in last-mile delivery – whether finance can reach micro and small enterprises in ways that are usable, affordable, and timely. 

Commercial banks often lack the reach or find it too costly and risky to serve informal and semiformal enterprises. At the same time, nonbank and community-level lenders, who are closer to these entrepreneurs, are not always fully integrated into national financing programmes.

Complex application processes, heavy documentation requirements, and slow approvals further discourage people from taking up concessional credit, even when it exists. This is reflected in rapid assessments following Cyclone Ditwah, which showed how quickly households turn to informal borrowing when livelihoods are disrupted and access to finance is limited. 

Key informant interviews indicated that 40% of affected households relied on borrowing from family or social networks, while only 23% were able to access formal credit mechanisms, highlighting the importance of last-mile financing. 

What is needed is a shift from a supply-driven model to one that responds to how microenterprises actually operate. Risk-sharing mechanisms, such as portfolio guarantees, can reduce the risk for lenders and encourage them to extend credit. Broadening participation to include institutions with deep local reach, simplifying procedures, and leveraging digital platforms can dramatically lower barriers. 

The role of financial literacy and digital tools

Supply-side measures alone, however, are not enough. Financial capability also matters. Many microentrepreneurs struggle with basic recordkeeping and financial planning – not from neglect, but from a lack of access to training. 

Strengthening financial literacy and promoting digital tools can help businesses manage their finances better, keep better records, and build stronger relationships with financial institutions. Digital payment systems, mobile-based accounting tools, and other fintech solutions can help microenterprises generate verifiable transaction data, addressing one of the key information gaps faced by lenders. Digital platforms can deliver financial literacy at scale and contribute to the establishment of a digital registry of MSMEs to support data-driven policymaking.

Ultimately, reaching the last mile requires Sri Lanka to move from a fragmented and reactive approach to a more integrated and inclusive financing ecosystem. Microenterprises are the backbone of local economies. They sustain livelihoods, absorb shocks, and anchor resilience. Ensuring they can access finance is not only about recovery; it is a strategic investment in long-term, inclusive growth.

The true test of enterprise finance is whether it is accessible, usable, and aligned with lived realities. If this gap can be closed, the result will be more than enterprise survival. It will unlock the full potential of its micro-entrepreneurs and lay the foundation for a stronger, more resilient economy.

(The writer is the Resident Representative of UNDP in Sri Lanka. Prior to her appointment in Sri Lanka, she served as the Resident Representative for UNDP in Bhutan from 2019–2022. She has served UNDP in multiple leadership capacities over the years as the Country Manager and Head of Office of UNDP in the Solomon Islands and the UN Joint Presence Manager [2016–2019]; Deputy Resident Representative for UNDP Lao PDR [2014–2016] and UNDP Maldives [2011-2014]. She led UNDP’s independent country programme and thematic evaluations in multiple countries across regions, while working for UNDP’s Independent Evaluation Office from 2008 to 2011. Her career with UNDP began as the Programme Analyst – Sustainable Economic Empowerment Unit, UNDP Malawi in 2002, after working for the International Law Institute in Washington DC. A national of Japan, she holds a Master’s Degree in International Affairs in Economic and Political Development from the School of International and Public Affairs, Columbia University, New York, US; and a Bachelor’s Degree from Smith College, Northampton, US)

(The views and opinions expressed in this article are those of the writer and do not necessarily reflect the official position of this publication)