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The role of Small and Medium Enterprises (SMEs) are factors of paramount importance for global economy as it pertains to growth through employment, innovation, GDP contribution, economic growth, rural development as well as exports. SMEs form over 90% of the businesses and utilize over 50% of the labor force around the world.

In the European Union, 99% of businesses are SMEs and create around 100million jobs. In India, they generate over 110 million jobs and constitute almost 30% of their GDP. In China, the contribution of SMEs raises approximately to 60% of its GDP. In Japan, SMEs account for 50% of GDP and 70% of employment. Apart from these figures, SMEs are major contributors of innovation in technology-based economies like the USA and Israel. SMEs also enhance economic diversification in Nigeria and Brazil. In countries like Kenya and Indonesia, SMEs reinforce the local economy whereas, in Germany and Vietnam, SMEs are also crucial in the international business helping explain the need for strong global economies.

SMEs in Sri Lanka

Throughout Sri Lanka, small and medium-sized enterprises are equally crucial, representing about 75% of active businesses, providing close to 45% percent of total employment, and contributing around 52% percent of the GDP. What is perhaps more significant is that Sri Lankan SMEs have to deal with problems such as a lack of access to finance, poor financial literacy, and the consequences of the latest economic crisis. These problems worsened due to the COVID-19 pandemic and the economic downturn that followed, leading to many firms closing and a reduction of job openings in the sector. Importantly, despite such hurdles, SMEs remain a crucial part of the Sri Lankan economy and actions are yet to be taken to enhance their sustainability and growth potential.

Lagging SMEs, Lagging Nation

Many businesses in Sri Lanka, particularly the SMEs, have been at a comparative disadvantage with other nature due to their lack of adaptability towards digital technology and relevant skills. As a result, they have been highly susceptible to long-term economic damage and difficulties which has made them one of the severely affected categories of businesses.Large enterprises, on the other hand, have been able to withstand economic recessions quite well as they have already invested in their brand assets, talents, digital infrastructure and workflows which elevatesthem to a scale of invisibility. Businesses with a strong digital presence through social media and other digital marketplaces tend to have better chances of growth as customers prefer digital platforms.

Digitalization is crucial, not only for growth, but for the very survival of SME’s. When they grow, it empowers the entire economy. There can be no doubt that Sri Lanka needs to prioritize the digitalization of its SME’s if it hopes to use the energy and essence of its citizenry toward shaping the nation for a new globally competitive environment.

Why SMEs ever remain SMEs

Many large companies began as SMEs at the inception. But only a few SMEs blossomed into large enterprises in this context, as only that few were able to build their brand and secure customers at premium prices that resulted in super profits. These profits enabled them to reinvest into human capital, financial instruments, digitalization, and facilitate their growth into becoming large corporations. In contrast, many SMEs still struggle to scale because they cannot build a strong brand that yields significant profit that can be reinvested into the business.

Unlike large corporates that automate workflows with the help of digital tools to capitalize on ROI, many SMEs are skeptical towards financing digitalization as they feel it exposes them to unnecessary regulatory scrutiny and taxation. This fear ends up projecting them as high-risk borrowers which means the banks will almost never work with them. Sadly, many resort to loan sharks, and other high-interest financial institutions for operational financing, which limits their overall growth potential.

Digitalizing SMEs

Yet, this crucial part has contended with the same issues for quite a while: lack of financial access, narrow market opportunities, and a significant gap in understanding of technology usage. Against these all odds the driving digitalization for SME is a top priority to steer our nation to greater heights.  Sameera Wijeratne, Head of Digital SME at Dialog Enterprise, Corporate ICT arm of Dialog Axiata PLC stated it as, “If we talk about digitalizing SMEs, it’s basically digitalizing the whole nation and giving birth to a new generation of digital citizenry.” This is because the majority of our population still deal with SMEs for their day-to-day needs. When most of the population deal with digitalized SMEs it naturally turns out to be a nationwide digital economy.

Digitalization is a challenge faced by SMEs, is one of the causes behind their lagging. For instance, larger corporations have much stronger digital infrastructure, which enables them to serve customers through online channels, even during a crisis. On the other hand, many SMEs had trouble adapting to the rapid transformation that occurred in the ‘non-physical customer’ world during the pandemic. For instance, when consumers turned primarily to digital services, businesses that did not have an online presence had no way to reach those customers. Unfortunately, many SMEs were unaware of this shift.

The Cost of Avoiding Digitalization

One of the most notable issues that SMEs seem to confront is their hesitance towards the adoption of mainstream payment platforms and formal fiscal structures. Typically, this comes from entrenched attitudes towards taxation and other regulatory practices of the country. But this type of resistance carries unintended consequences. Reflecting the views of Sameera Wijeratne, “When SMEs ignore proper digital payment gateways and financial institutions, they get caught into an array of debt and can never escape.” Lenders, in this case, look for liquidity and are, therefore, reluctant to give loans to firms without proper turnover records. This poorattitude of SME pushes them far away from the financial institutions such as development and commercial banks.

This cycle not only curtails the development of SMEs but also limits the growth of the universal economy in the country. The digitalization of SMEs will eliminate this vicious cycle by equipping small and medium sized businesses with transaction recording tools that will allow them to prove their financial worth and access funds.

Digitalization: A Path to Resilience

‘The growth, strength, and competitiveness of an SME isn’t just achieved through adopting ventures like technology, it extends towards e-commerce marketplaces, social media advertising tools, and digital financial solutions.’ Sameera added, ‘An example of this would be how trust in formal financial systems can be built whilst also improving operations through the use of simple tools like payment gateways and inventory management apps.’

Key Challenges

Rahal Jayawardene, Vice President – Strategy of MilleniumIT ESP, one of Sri Lanka’s top IT companies in the country, provided an elaborated insight on how technology can elevate SMEs, allowing them to become self-sufficient while gaining the utmost value from their contribution towards the national economy.

Rahal remarked, “If we enable SMEs through technology, we can empower them to scale their business which in turn will contribute towards the GDP of the country.”

“Comprehensive research conducted towards late 2022 by us showcased the array of challenges faced by SMEs. These challenges however varied based on the scale of the enterprise- micro, small, or medium. Most of the enterprises, especially micro and small along with their business counterparts sadly faced agony during the pandemic. Key hurdles identified included market entry, business skills, adoption of technology, and access to finance.” He explained.

Key Challenges of SMEs

  1. Finance Accessibility: The majority of SMEs are challenged when it comes to securing loans mainly because of collateral needed, especially micro enterprises who cannot invest in opportunities that can increase growth.
  2. Access To Market: The potential of many SMEs is only confined to local or provincial markets simply because they do not have the ability to access the national and international markets.
  3. Operating Hurdles: There is no conducive environment for business registration, taxation and other agreements, and this in turn stifles growth.
  4. Gaps In Skills and Knowledge: Negative attitude towards entrepreneurial, business, and technology skills leads to many SMEs being stuck at ineffective scaling of operations.

Technology as an Enabler

As Rahal explains, technology is a fundamental change, but there is still a worrying divide in knowledge and resources on the part of SMEs that does not help them exploit available solutions. The emphasis should be on inexpensive and simple tools that can be used by these people.

For example, services like Alibaba, Daraz, and Shopify can offer market access, while services such as Canva and Vidyard can solve the content creation problem. Furthermore, inventory and finance management tools such as Blue Lotus 360 are also inexpensive and help to make business operations leaner. However, when it comes to these technologies being adopted by SMEs, there is a need for being onboarded through a much more controlled process which includes training and support in the local language.

So as Rahal says, winning people’s minds is going to delve deeper than just focusing on the latest technology, but helping SMEs win the remaining knowledge gap.

A Vision for the Future

In addition to the technological tools, Rahal also underscored the necessity of scalable solutions such as self-service portals, trilingual knowledge bases, and entrepreneurship nuggets on YouTube or Tiktok. These approaches target the scarce time and resources maintained by SME Owners ensuring they get actionable guidance.

Government and private sector collaborations need to emphasize the development of a conducive environment for the growth of SME’s which is inclusive of affordable consultancy, training, workshops, and financial literacy campaigns.

‘The challenges of SMEs are not as complex as those of large enterprises. Their capacity and competitive trust can be built, they just need the right tools and guidance.’Rahal concluded.

With identifying gaps in strategies, Sri Lanka could resolve the gaps of the untapped SME sector thus increasing the economic resilience and growth inclusivity for years to come.

The Road Ahead

To fully realize the promise that Sri Lankan SMEs hold, it requires the concerted efforts of multiple stakeholders. Key Telecommunication Operators and System Integrators already bear the brunt of offering support through their SME Digitalization programs.

Nonetheless, the support of the government is crucial. Self-service portals and educational platforms in Sinhala/Tamil on digital tools, need to be put in place so that Sri Lankan SMEs can compete in the modern world.

By tackling these issues, Sri Lanka can enter an era where economic challenges can be endured. Digitalization is not limited to technology but creating possibilities for SMEs to adjust to this digitalized era.

The Sri Lankan SMEs if they wish to survive and thrive, they need to embrace digitalization to buffer against the unfolded challenges in the future.  The large enterprises were efficiently getting the brunt of these pain points given their strong digital infrastructure and tools where they were serving their customers online. SMEs need to realize that business customers are now digital and for them to grow and survive, they need a strong digital presence to meet these digitally savvy customers who search the businesses for their requirement online. Plus, these prospective customers look for utmost convenience.

Source: https://www.dailynews.lk/2025/02/05/featured/717560/empowering-smes-with-the-power-of-digitalization/