By: Staff Writer
February 09, Colombo (LNW): Sri Lanka’s micro, small and medium enterprises are fighting for survival on multiple fronts. Even as businesses attempt to recover from years of economic turmoil, recent cyclone- and flood-related disruptions have delivered another blow one made heavier by rising borrowing costs driven by tight monetary policy.
Industry representatives warn that MSMEs are being pushed to the brink not simply by external shocks, but by structural weaknesses in the country’s lending and regulatory framework. According to the Ceylon Federation of MSMEs, policy responses since 2022 have failed to shield productive enterprises, while allowing financial institutions to protect and even expand profitability during national emergencies.
At the heart of the issue is the sharp escalation of lending rates following the Central Bank’s policy tightening. Businesses that borrowed under stable conditions prior to April 2022 suddenly found themselves exposed to extreme interest volatility an outcome they neither anticipated nor could absorb. Many MSMEs, already weakened by pandemic-era closures and supply chain disruptions, were left with ballooning repayment obligations just as consumer demand collapsed.
Natural disasters have compounded this pressure. Floods and cyclones have damaged inventories, halted operations, and disrupted cash flows, particularly for enterprises operating outside major urban centres. Yet unlike some regional counterparts, Sri Lanka has offered limited mandatory relief to borrowers affected by such calamities.
The Federation argues that reliance on voluntary guidelines and temporary concessions has repeatedly failed. During COVID-19, loan moratoriums were announced without clear rules on how interest should be treated. This regulatory ambiguity, they claim, allowed lenders to restructure facilities in ways that maximised returns, often through complex compounding mechanisms that borrowers struggled to decipher.
When repayment notices eventually arrived, many MSME owners were unable to obtain transparent breakdowns of how their liabilities had grown so dramatically. Requests for clarification, the Federation says, were frequently met with enforcement threats rather than restructuring support, including warnings of asset seizure under parate execution laws.
Such practices, they warn, are accelerating business closures and eroding trust in the financial system. The continued classification of distressed borrowers as non-performing—without accounting for repeated national shocks has further locked entrepreneurs out of formal credit markets, undermining recovery prospects.
To correct what it describes as systemic imbalance, the Federation is calling for legally binding reforms, including retrospective relief for excessive interest charged during the peak volatility period from mid-2022 to late-2024. It has also proposed a fiscally neutral mechanism to cushion banks from sudden losses, using tax credits spread over several years.
Without decisive intervention, MSME leaders caution that Sri Lanka risks losing not just businesses, but livelihoods, local supply chains, and the economic resilience needed to withstand future crises.
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