Credit Guarantees for Women's Small Businesses

In Sri Lanka, small and medium-sized enterprises (SMEs) contribute over half the nation’s gross domestic product. SMEs also create jobs and employ about 45% of the country’s workforce. However, their growth is hindered by limited access to financing, business skills, and networking opportunities. Many have no or inadequate collateral. The challenges are even more pronounced for women-owned SMEs.

Since 2016, ADB has been a strong and consistent supporter of SME growth in Sri Lanka, starting with an initiative that provided a credit line for Sri Lankan SMEs. Cofinanced with the Japan Fund for Prosperous and Resilient Asia and the Pacific and the Women Entrepreneurs Finance Initiative (We-Fi), the project opened opportunities for women to jumpstart their businesses. The project also explored the feasibility of a credit guarantee scheme to mitigate risks and catalyze SME lending. Supported by the feasibility study, the government mandated the establishment of the National Credit Guarantee Institution (NCGI) in 2021.

Stepping up its support in 2022, ADB has been helping to enhance NCGI’s operational frameworks and expand its business. Additional cofinancing from We-Fi in 2023 is ensuring financial inclusion and support for the development of an SME ecosystem that bolsters SMEs and empowers women entrepreneurs.

The NCGI is the government’s vision of a sustainable mechanism for credit guarantee operations. Its objective is to “support the SME sector in the country by assisting SMEs in overcoming obstacles such as an inability to adapt to rapidly changing market demands, changing technology, and limitations in capacity due to a low level of financial inclusion, limited access to finance, and esoteric regulations.”

The NCGI aims to be well-funded, profitable, and efficient. It will endeavor to follow the best corporate governance and risk management practices, and with board representation from the Central Bank of Sri Lanka and other financial institutions. These principles are important for keeping NCGI’s credit rating strong, which will attract financial institutions that want to use its credit guarantee services. The NCGI will be owned jointly by the government and the financial institutions that use its services.

This shared ownership will help reduce the risks of banks and nonbank financial institutions taking advantage of the system and not properly overseeing the loans they guarantee. The financial institutions will nominate board directors who represent their interests as users of the guarantee service and investors in the NCGI.

“Sri Lanka’s new National Credit Guarantee Institution will address crucial development mandates, such as financial inclusion for women-owned SMEs and climate change adaptation,” said Manohari Gunawardhena, senior financial sector specialist at ADB. “It will also tackle regulatory and infrastructure challenges, promoting innovative financing solutions that sidestep traditional collateral requirements,” Gunawardhena said,

The NCGI was formally established on 5 July 2023.

ADB has also approved a related loan for equity infusion into the NCGI, which will provide partial credit guarantees on investment loans to SMEs with inadequate or no collateral.