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Access to finance and related issues in the SMEs in Sri Lanka

Although SMEs constitute a significant part in both developed and developing countries, they face greater growth obstacles. Compare to larger firms SMEs are more constrained by different obstacles, and limited access to finance is an important one of these. The purpose of this research is to find the constraints of access formal finance and investigate solutions to develop access to formal finance for SMEs. The study was carried out by gathering primary data from owner/manager of SMEs in order to achieve the research objectives. The sample comprised 197 SMEs in rural areas in Sri Lanka operating retail shops, manufacturing firms and suppliers of various services. The finding reveals that, even though there was developed and competitive formal financial market in Sri Lanka, majority of SME owners prefer commercial bank loans. The main constraint to firm's access to finance from commercial bank is the cost of finance. Sri Lanka should reduce interest rate and extend bank networks to rural areas for the effective functioning of SMEs. The study further revealed that the owners/managers of SMEs were highly willing to learn more about how to access finance successfully for their businesses because lack of knowledge about financing market. This study recommended that that the responsible authorities should come up with an effective program to overcome these constraints by developing a supporting program with government, commercial banks and other relevant private sector institutes.