Financial Times

Potholes curtailing investment
Some revealing comments about our commercial banks and banking culture as well as the care we have taken of our infrastructure can be found in the new survey of Sri Lanka’s investment climate by the World Bank and Asian Development Bank. The study called ”Improving the rural and urban investment climate” has confirmed a perennial complaint by our small business entrepreneurs – bank loans are hard to get for small-timers, and even when they are available, the costs are prohibitive.

The new study has added significance as it is the first to include an analysis of entrepreneurship in rural areas. Given the fact that poverty in this country is largely a rural phenomenon, fostering the growth of the rural non-farm sector is critical to reducing poverty, the report has said.

Contrary to claims by private commercial banks that they are serving small entrepreneurs well, the study confirms that bank loans are still difficult to get for small and medium entrepreneurs. Furthermore, most such lending is concentrated in urban areas or the Western Province with businesses in rural areas not having much access to bank loans.

The study reveals that banks rely too heavily on collateral in making lending decisions and either do not have the capacity or simply cannot be bothered to adopt alternative ways of evaluating a customer’s creditworthiness. Banks don’t look enough at company performances in evaluating applications for bank loans.

The implications of these findings on access to cheap and easy credit are not confined to the banking sector but have an impact on the entire economy as they determine the ability of business to grow. Getting finance is rated as the biggest obstacle for business in many countries with small businesses constrained the most and women entrepreneurs facing the biggest hurdles.

In Bangladesh, for instance, according to another World Bank report, nearly half the people who received credit lifted themselves out of poverty, but only four percent of those without credit did. While the report, ‘Doing Business in 2005’ concedes that “some of the effect is no doubt due to differences in education and land ownership, a large role remains for improving access for creditworthy borrowers.”

Commercial banks, of course, can argue that they have to protect their depositors’ money and that they can’t afford to be to free in lending to potentially risky clients, but that does not absolve them from the responsibility of adopting more innovative and realistic approaches to lending in keeping with modern trends.

The investment climate study also reveals wide differences in the perception of constraints to investment between urban and rural entrepreneurs. While political uncertainty was ranked second among constraints to investment among urban manufacturing firms, it seems to hardly bother their rural counterparts, who ranked the risk a lowly tenth in their ratings of constraints. For the latter, the biggest constraints were transport difficulties, access to and cost of finance, and marketing. These findings indicate that the ballyhoo about political uncertainty made from time to time by the organised business sector is somewhat exaggerated.

The fact that transport has been listed high as an investment constraint by both urban and rural businesses is a telling indictment of the performance of successive governments and our bureaucracy. Sri Lanka is said to have a dense road network by regional standards. But the study reports that as much as 90 percent of the country’s paved road network is in poor condition because of lack of maintenance. This would indeed be laughable if the implications of the situation were not so significant – the state of our roads have become an investment constraint merely for lack of proper maintenance.

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