Small and Medium-sized Enterprise (SME) development is a favourite topic of every government. This week, the Ceylon Chamber of Commerce held Scale Up 2.0, its National SME Forum for 2026. The attention is understandable. SMEs form the bulk of Sri Lanka’s businesses and provide a large share of employment across agriculture, manufacturing, and services.

The response from governments is also familiar. We offer concessional loan schemes, often with multilateral agencies. We organise technical training programmes and build institutions such as the Ministry of Industry, Industrial Development Board, and National Enterprise Development Authority. Private banks have SME desks and special credit schemes. We then encourage entrepreneurs to export, enter global markets, and become more competitive.

All this may be useful. But we rarely ask the harder question: do Sri Lanka’s SMEs remain small because they lack support, or because our regulations make growth too expensive?

Diagnosing the ailment

We usually describe the SME problem as a financing problem. But it may be more accurate to call it a scaling problem.

For a small business, scaling means hiring the next worker, importing a new machine, opening another branch, registering for another tax, or supplying a larger company. At each stage, the business encounters another licence, approval, report, or compliance requirement.

Large firms can hire lawyers, consultants, accountants, and retired officials to navigate the system. A small entrepreneur often has to do it alone. Every day spent following up on an approval is a day taken away from customers and production. Every delay ties up working capital.

The regulation may appear neutral on paper, but its cost is not neutral. A fixed compliance cost is much heavier for a small company than for a large one. In practice, it becomes a ‘size tax’ on SMEs.

Sometimes this tax appears suddenly. When a business crosses a particular turnover or employment threshold, it may face a new set of taxes, audits, reports, or labour regulations. Growth then becomes a cliff. The rational response may be to remain informal, split the business, avoid the next employee, or decline a large order.

We then offer the same entrepreneur a concessionary loan to grow. But a loan cannot solve regulatory uncertainty. It can finance a machine, but it cannot guarantee that an approval will arrive on time. A development bank cannot compensate for a business environment that punishes firms when they expand.

This does not mean businesses should be exempt from tax, labour, environmental, or consumer protection laws. Good regulations are essential for a functioning market. But every regulation must address a clear and measurable harm, and it should do so at the lowest possible cost.

Treating the underlying problems

Many Sri Lankan laws still carry an old assumption: commercial activity is suspicious unless the State permits it. A modern economy should begin from the opposite position. Economic activity should generally be allowed unless it causes measurable harm to another person or the public.

A law is not necessarily bad simply because it is old. But an old legal framework can become a serious problem when it governs a modern economy.

The Customs Ordinance No.17 of 1869 is a good example. It has been amended many times, but its basic legal architecture was designed for a paper-based trading world. Documentary requirements, broad officer discretion, uncertain timelines, and complex penalties all increase the cost of importing and exporting.

Large companies can spread these costs across many shipments. A small exporter cannot. One delayed shipment can mean losing a buyer, missing a season, or facing a cash-flow crisis.

Sri Lanka needs a modern Customs act built around electronic documentation, risk-based inspections, clear statutory timelines, transparent rulings, and proportionate penalties. For an SME, faster Customs clearance is not merely a matter of convenience. It can determine whether the company is competitive enough to export.

Free trade agreements can provide valuable market access. But market access is useful only if Sri Lankan firms can reach those markets competitively. Rules of origin, certification, and buyer requirements also carry costs. If an SME must first struggle through expensive and unpredictable regulations at home, a trade agreement alone will not make it an exporter.

Land is another part of the same problem. For many small entrepreneurs, land is the most valuable asset they own. But unclear ownership, weak titles, and long delays in settling disputes make it difficult to use that land as collateral. Improving land titles, digitising records, and resolving commercial disputes faster would address part of the financing problem at its root.

Instead, we often leave the underlying problem untouched and create another loan scheme to treat the symptom.

Regulatory clean-up crucial

Sri Lanka needs a serious regulatory clean-up. Every licence, permit, and approval affecting a business should be reviewed. The institution responsible should explain what harm the regulation prevents and whether the same purpose can be achieved more simply.

New regulations should disclose their likely cost to a small firm. Low-risk approvals should have firm deadlines. If an agency fails to respond within that period, approval should be granted automatically. Rules that no longer serve a clear purpose should expire.

In a healthy economy, SMEs will always be large in number. Some entrepreneurs will choose to remain small. Others will become suppliers to larger companies, join export value chains, and slowly climb the ladder. A few may eventually become large Sri Lankan companies.

The objective is not to eliminate small businesses. It is to make remaining small a choice, rather than a regulatory destiny.

Sri Lanka’s SME problem is not simply that our entrepreneurs think small. Too many of our laws make scale expensive, uncertain, and permission-based. If we genuinely want SMEs to grow, we should not offer only another loan, institution, or seminar.

We must remove the rules that make hiring the next worker, buying the next machine, and entering the next market unnecessarily difficult.

(The writer is the Chief Executive Officer of Advocata Institute. He can be contacted via dhananath@advocata.org)

(The opinions expressed are the writer’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute)