Small and Medium Enterprises (SMEs)

 

1.     Background

The new administration recognizes the potential of the SME sector in creating a more resilient and diversified economy as well as creating more employment opportunities, particularly in the outer atolls. It envisages establishing the requisite institutional and organizational mechanisms to restructure and consolidate all SME development activities in order to achieve economies of scale and efficiency of operations. Furthermore, it is also exploring the option of pooling all funds allocated for development of SMEs and related activities under the aegis of a single entity with responsibilities for providing the various services needed for SME development in the country across sectors.

Economic activities in Maldives are largely dependent on tourism and fisheries and related sectors. Nevertheless, the wealth and income generated from these two sectors is not fully enjoyed by most Maldivians, because of limitations in redistributing the surplus through fiscal policies. The limited diversification in the economy tends to further exacerbate these inequalities. The latest Vulnerability and Poverty Assessment indicates an increase in the income inequity gap between the capital and the atolls. The limited employment opportunities available in the outer islands, along with the centralization of major services in the capital have resulted in many seeking work away from their home islands, leading to an increase in inward migration of atoll populations to the capital in search of job opportunities and better social facilities. Women have fewer opportunities at island level with men working away from the island.Although there are a large number of small and medium enterprises (SMEs) in the country, the rather informal nature of the SME sector makes it difficult to ascertain the contribution of the sector to the domestic economy. While there have been a number of activities undertaken to develop the SME sector in order to address the disparities in wealth and income distribution and employment issues in the outer atolls, they have been rather fragmented in nature. Although a number of line ministries, with the support of various international development agencies, are actively involved in relation to their respective sectors, a holistic approach to sector development is lacking. Much of the backward-forward linkages to the rest of the economy have not been established, resulting in impediments to the sector’s potential for growth. SMEs have mushroomed across the country based on specific needs of various localities, but without the requisite support framework, in many cases have not been operated profitably or sustainably.

 

 

2.     Constraints and emerging issues in the sector

 

1. The informal nature of small businesses in the Maldives has limited the amount of reliable information and statistics available on the SME sector

2. Studies conducted by various authorities have documented obstacles impending the development of SMEs as skill deficiencies, start-up costs, limited access to finance, high collateral requirements, imperfect market information, inadequate levels of business development services and lack of access to banking facilities (especially in the atolls), and high costs of inter-island transportation and electricity.

3. The fragmented nature of SME development interventions carried out to date, and the ambiguous nature of various line ministries’ mandates, contributes to duplication of efforts, inefficiencies and wastage of already limited resources.

4. Lack of a comprehensive enabling regulatory framework has limited sustained development of the sector. As a result, there are no clear definitions of SMEs, incentives for sector development, or entry and registration related provisions and guidelines to date.

 

 

 

3.     Goals of the sector

 

• Promote SME development to reduce poverty and related vulnerabilities

• Consolidate SME support services under one institutional umbrella

• Create opportunities and facilitate support for broad SME participation in the economy

• Enable SMEs to generate additional employment and develop a broad based livelihood platform, particularly in the provinces, and especially for women

• Strengthen the SME sector as a means to facilitate economic diversification

 

 

 

4.     Key sector policies

 

 

Policy	Manifesto linkage	Other directives
Policy 1: Formalize the sector and compile sector data to facilitate evidence based policymaking	S5	SME Development Cabinet Paper
Policy 2: Consolidate SME related policy formulation and institutionalize one-stop services for SME development	S5
Policy 3: Facilitate incentives and support services for micro, small and medium business development	P1, P4 S4 L3, L4
Policy 4: Develop the requisite human resources for the development and efficient management of SMEs	P2, S1 L2
Policy 5: Facilitate penetration and linkages of SMEs to major economic sectors	P3, S3 L1, L4

 

 

 

5.     Institutional framework for sector

 

 

Lead Agency for the Sector:

Ministry of Economic Development: responsible for the implementation of policies

SME Development Council: chaired by the Minister of Economic Development, responsible for policy coordination

 

 

Regulatory Body:

Currently there is no regulatory body. It is expected that the proposed SME Development Council, with the assistance of the SME Secretariat at the Ministry of Economic Development, will formulate policies and the regulatory mechanism. The SME Secretariat will implement the directives of the Council. Maldives Monetary Authority will regulate the SME Bank.

 

 

Stakeholder Ministries and Sectors:

 

• Ministry of Fisheries and Agriculture           

• Ministry of Tourism, Arts and Culture

• Ministry of Employment, Human Resources and Youth

• Ministry of Health and Family (Department of Gender)

• Ministry of Finance and Treasury

• Ministry of Housing, Transport and Construction

• Maldives Monetary Authority

• Maldives Food and Drug Authority and other regulatory agencies

• SME Bank

• Bank of Maldives

• Maldives Finance Leasing Company and other financial sector supporting agencies

• Business associations and representing bodies (MNCCI, MATI, MACI, WEC, Seafood Processors, etc)

 

Local Governance System:

SME development activities will be decentralized to Province and Atoll Offices with business development and SME support services provided through cells of the SME bank at province level. Registration of SME businesses will be facilitated at Atoll and Island office level under the direction of the SME Development Council.

 

 

Private Sector involvement:

 

Services of the Development Banking Cell of the Bank of Maldives will be used in disbursing low-cost loans to SMEs until SME lending activities are consolidated with the establishment of a development bank dedicated to the SME sector. In addition, the support of the private sector will be sought to enable market linkage activities at province level through a PPP approach and the development of a value chain system.

 

 

Co-operation with other External organizations:

Existing donors’ Support and technical assistance to SME and private sector development activities will be continuously utilized. Donors currently working in SME related activities include ADB, UNDP, IFAD, FAO, IDA, and IFC. In addition, the support and technical assistance of a mature and experienced SME bank in the region will be enlisted.

 

 

 

6.     Legal framework

 

A comprehensive enabling regulatory framework needs to be drafted and implemented in order to facilitate sector development.

• An SME enabling legislation needs to be enacted.

• Legislations of key sectors including banking and finance, tourism, fisheries, agriculture, construction, logistics and communication have to be reviewed to identify any legal impediments limiting the creation of an environment conducive for SME development activities, and revised where necessary.

• A banking legislation to provide a licensing and regulatory framework for a specialised development bank for SMEs and regulations for the establishment of a credit information bureau to share credit information among lending institutions is required. MMA is in the process of developing the regulatory framework.

• Legislation to facilitate e-commerce transactions is required

• A business registration act will be required to facilitate formalization of the sector and to undertake objective data collection and the research necessary for informed policy making.

 

7.  Cross cutting themes and programmes relevant to the sector

 

• Human Rights and Social Protection: as SME activities will target the vulnerable and the focus will be the outer atolls, it is expected that SME sector activities will contribute to alleviating absolute poverty levels and enable the fulfilment of basic rights.

• Decentralization: SME related business support services and business registration activities will be provided at province level.

• Transport and connectivity: regular and needs based transport links will facilitate backward forward market linkages. Affordable and secure ICT services including mobile banking will enable business facilitation and banking, networking and home-based work.

• Gender: SME development activities will target women and youth in order to provide more opportunities for these groups. Incentives for women will facilitate empowerment.

• Environment: incentives provided for SME development will be designed to encourage environmental awareness and a ‘green’ approach to business.

• Private Sector Participation: HRD service providers linked to the TVET system. Provision of support services through business development centers attached to the SME Bank.