Harsha’s strategy for financing long-term credit for SMEs: Is it viable?

AT a recent SME forum, Dr. Harsha de Silva proposed an approach to support Sri Lanka’s small and medium enterprises (SMEs) by creating a dedicated long-term credit facility by tapping into domestic provident funds. He underscored a critical challenge facing Sri Lanka’s financial sector: the collapse of the traditional development banking model following the country’s transition to middle-income status.

- By Dinesh Weerakkody

Historically, Sri Lanka’s development banks—backed by concessional funds from multilateral agencies such as the World Bank and Asian Development Bank (ADB)—played a pivotal role in financing long-term projects, especially for Small and Medium Enterprises (SMEs). These institutions provided affordable, extended-term loans that fuelled growth and innovation. However, after Sri Lanka’s graduation to middle-income status, concessional funding ceased, forcing many development banks to transform into commercial banks. This shift has sharply reduced the availability of long-term financing, leaving a significant gap for SME funding. Dr. de Silva argues for a fundamental rethink of development banking, noting that it is not limited to specialised institutions but is an approach any bank can adopt—provided it has access to long-term capital. Without such funding, banks remain constrained to short-term lending, which restricts SMEs from undertaking larger, growth-oriented projects.