Microfinance as an Instrument for Small Enterprise Development: Opportunities and Constraints

This presentation highlights key findings of an impact assessment survey conducted in two districts of Sri Lanka. The study evaluates the effectiveness of microfinance schemes in meeting credit, savings and risk-management needs of poor entrepreneurs. It uses a structured questionnaire to analyze impact of microfinance at household, enterprise, individual and community levels. Survey findings reveal that:

• Limited product diversification is a major drawback of small enterprises;
• Microfinance clients tend to run traditional family enterprises and do not engage in new income-generating activities;
• Small enterprises concentrate on low value added products, resulting in low profit and productivity levels;
• Lack of technology is a major cause of low productivity and poor product quality;
• Small enterprises lack economies of scale;
• MFIs do not have efficient information systems, accounting and auditing standards, and self-regulatory mechanisms.

The presentation recommends that policy makers and microfinance should adopt the ‘credit-plus’ approach and address the above issues. Further, they should initiate networking among enterprises to promote knowledge sharing as well as leverage collective economies. Finally, policy makers should develop appropriate financial infrastructure and legal framework for supervision and regulation of MFIs.