Micro enterprises face many issues in running a business
Guests who arrived at the Lakshman Kadiragamar Institute (LKI) in Colombo last week to attend the launch of a report on ‘Barriers to Micro and Small Enterprises in Sri Lanka’ by the Advocata Institute (AI) were taken aback when the seating accommodation inside the auditorium had a ‘Red Tape’ right across all the seats.
Puzzled participants were then informed that it was only a symbol to inculcate in the minds of those who attended the event that red tape is the root cause of ‘the festering melanoma’ that enveloped all activities of the country, including the economy as it is the notorious gateway to offer bribes and leads to widespread corruption.
The report indicated some of the challenges when running their businesses. Issues like sourcing finance, finding space to run the business and low sales are the main difficulties faced by the sector.
During the question and answer time, entrepreneur Isuru Mendis from Kurunegala described his woe to get his tea business registered in one day through the Divisional Secretariat, but ultimately it took several months and he was compelled to offer ‘5 papayas’ to the Grama Sevaka as a bribe.
This revelation sparked Milinda Rajapakse, a Colombo Municipal Council Member and Media Coordinator to the President, to explain the total phenomena of bribery culminating from the peon of an office. He indicated the salaries of elected members and pointed out that they, over and above their legal emoluments, were compelled to collect funds through bribery for the election campaign on some occasions – millions. This is the practice now in place and each government employs more and more people and all of them have to be given some sort of work. The solution, he remarked, is digitalisation and computerising the whole system.
Dhananath Fernando, CEO, AI at the outset explained the harrowing experiences the micro entrepreneurs encounter and also explained the purpose of the ‘red-tape’ across the participants’ seats.
To prepare the report, AI carried out a survey to find out these barriers and the report was based on the survey. The researchers have found out that micro-small entrepreneurs largely operate from their homes and lack of access to finance limits this sector reaching the next level.
They have found that sourcing finance, raw materials and low sales were the topmost common problems faced by these enterprises. Lack of access to finance is a serious concern particularly when businesses require additional capital to support expansion and growth.
However, an underlying fear persists in terms of taking collateral-based loans due to past experiences/observations.
Labour shortages and finding space also remain common issues. Entrepreneurs in this sector are faced with the challenge of finding a skilled workforce who is capable of handling responsibilities. Even those who are willing to work, demand high salaries.
The sector seems to avoid registration required to become a formal business entity due to its lack of awareness of procedures, complexity of procedures and to avoid tax payment. There is low level of registration among female entrepreneurs.
Access to finance is the driving force to register businesses in addition to compliance with law and avoiding harassment from authorities are the perceived benefits of registering/licensing business. There is a high preference to operate the businesses as a sole proprietorship due to costs and tax related issues. Most of the businesses are satisfied with the levels of service provided by the state institutions. The survey sample reported moderate performance in the last two years. However, issues such as higher competition, lack of government support and Easter Sunday attacks were considered as reasons contributing to the low performance of these enterprises.
Considering the above it is evident that the registration process for registering sole proprietorship in Sri Lanka is unreasonably complicated even though the country has the capacity and the expertise to implement reforms in the registration process.
In 2018, Sri Lanka successfully transitioned from a manual paper-based system of company registration to an electronic registration process. The e-RoC system has streamlined the process of registering a company, bringing the total time required for registration down from four days to one day. However, the documentation required to register a sole proprietorship or partnership in Sri Lanka is far greater than the documentation required to register a company. If the company registration process does not call for the original deed and notarized copy of the deed – why it’s a requirement for a sole proprietorship or partnership is the question.
The challenges are many as the registration of these entities – micro and small businesses – has been devolved to the Provincial Councils and there is an absence of a single registration system. The first step should be to unify and simplify registration across the island.
The first objective of reform would be to bring the registration process of sole proprietorship and partnerships in line with the registration process for companies in Sri Lanka.