The International Labour Organisation (ILO), which has conceptualized and introduced a viable Value Chain Financing (VCF) model for the coconut and coir industry in Sri Lanka, said on Tuesday that a similar working capital model can be applied to any micro and small enterprise (MSE) sector where buyers have a strong dependency on producers for supplies.
Ms. Simrin Singh, Country Director for ILO in Sri Lanka and the Maldives said, “This means lending for micro and small enterprises (MSEs) appears to be more feasible now which has often remained outside the target of the commercial banks. The ILO is willing to work with the Central Bank of Sri Lanka to set guidelines and sound practices for Sri Lanka’s commercial banks to undertake value chain financing in a symbiotic relationship with the country’s MSE sector gaining advantages from each other”.
She made these comments at a virtual session organised by the Central Bank of Sri Lanka amid the prevailing situation in the country and its impacts on MSEs.
Speaking further as to how the ILO approached industry members who were willing to advance credit to their MSE raw-husk processing suppliers with the intention of providing inputs they need to continue their exports, she said:
“ILO has had had a number of years of exposure to the industry though collaboration with the Coconut Substrate Exporters Association of Sri Lanka. Four of Sri Lanka’s largest coir and coconut related product exporters partnered with the ILO to move forward with this initiative. The partnership guaranteed that the ILO would cost share an equal amount of any loan that the company would provide to the MSE supplier as a grant, to be used for improving occupational safety and health and working conditions, machinery acquisition or similar capital investment at the suppliers’ level.
Accordingly, both MSEs and buyers would benefit from the resulting improved business conditions and quality of the products. Thus far, the ILO has engaged with 93 raw husk processing suppliers which has resulted in benefits to over 1,000 working people out of which approximately 50% are women.
The VCF intervention is part of an ILO-led initiative in Sri Lanka to facilitate the healthy socio-economic recovery of the MSE sector from the negative impacts of the COVID-19 pandemic. Vulnerability of this sector should not lead to exploitation and indebtedness at the hands of micro lenders of the informal sector.
A significant proportion of MSEs in Sri Lanka struggle to secure working capital through formal channels for a number of reasons, including a lack of credit history or a poor credit rating or an inability to offer collateral.
In searching for effective measures to help MSEs re-start or continue their business operations, the ILO introduced value chain financing as an effective and pragmatic approach to providing business owners with access to sufficient working capital.
For example, if the small business in question is involved in the apparel value chain, a financial institute would offer credit to the business if a reputed buyer from the apparel industry having commercial transaction with the financial institute vouches for the business.
In general, VCF is a tool used to increase returns for all stakeholders and growth and competitiveness along the supply chain. In view of this pragmatic approach, commercial banks of Sri Lanka could look at this lending tool in a more favourable manner as they can rely on a symbiotic relationship with MSEs.”