Sarath Wijesinghe President’s Counsel (LLM International Law (UCL)), and Harini Premaratne LLB of West End Law Centre, Hulftsdorp, Colombo, Sri Lanka

Necessity for Any Nation, Regardless of Magnitude and Size
Small and medium enterprises are a necessity for any nation, developed or developing, serving as the cradle of economic activity in motion. Economic activity is managed by private and state sectors, with the private sector generally being the engine of any economy across most sectors. It plays a crucial part in the development and prosperity of the country, contributing to the global economic movement and serving as an incubator for upcoming emerging economies. SMEs are enterprises managed by small or big entrepreneurs or groups in various sectors, generally starting as village-based but later emerging as leading entrepreneurs. The definition is more complicated and comprehensive, depending on the country, size, the nature of enterprise investment capacity, and the number engaged.
The success of SMEs is proof of the necessity and usefulness of the economy, especially in emerging economies with an educated and enterprising labor force, such as Sri Lanka, which has internationally proven its capabilities by employing 10% of its population overseas, indeed a great achievement. SMEs play a pivotal role, constituting 75% of businesses and contributing to 52% of the GDP, with a significant presence in the employment sector in SME establishments. In the USA, 40% of GDP comes from SMEs.
Definitions and Guidelines
Each country and institution provide varied interpretations and guidelines for defining SMEs, yet the principle of the concept and applicability may be similar. This ranges from a village agricultural enterprise, a dental practice, a small bar, to a huge setup like Hayley’s and leading banks that started as small enterprises, such as George Steuart’s business in the 1800s, now a leading business leader in Sri Lanka.
The role of SMEs is varied and versatile, with the potential to be converted into large firms of innovative enterprise, initially with few employees and small capital but with a large vision. The role of human capital is crucial so that initial losses and difficulties can be absorbed, playing a vital role in any economy at any given time. The Export Development Board (EDB) requires SMEs to have a capital of 4 million and 50 employees, a very moderate, loose, and flexible requirement. The World Bank suggests the number of employees to be 49, and some banks expect fewer than 300 employees, which is reasonable and affordable for any SME engaged in innovations and productions in specific areas, promoting production, development, and the economy of a nation, contributing to the GDP.
SMEs are easy to initiate and manage, flexible with fewer complications and a limited staff aiming for achievements primarily based on human capital, as seen in SMEs in Israel, which can be used as a model to be studied and an example to be followed as successful ventures. Israel had 625,267 businesses, with 97.5% being with 60,000 created each year, as sole partnerships converted to limited enterprises with the help of the state, ever prepared to assist and promote.
Israel as a Role Model
Israel has direct links with the USA for exposure, especially in innovations and the hi-tech sector. The new innovators in Israel are generally backed by ‘ISMEA,’ the SME authority in Israel, showcasing the state’s active and supportive role toward innovators and entrepreneurs. Despite ongoing wars with neighbors, Israel continues to progress with developments and innovations, considering them essential for safety, protection, and overall development. With no natural resources, the country relies on scientifically based innovative human resources, transforming a barren land into a leader in agriculture and innovations. Israel guides world powers on technology, applying 95% technology in agriculture and utilizing ‘Kibutths’ (communes adopted by Israel since its creation in 1948 through dedication, innovations, and visions by visionary leaders) as incubators and mini SMEs.
SMEs are employed by nearly every nation in the development of their economies, serving as a medium and cradle for the development process led by innovators and entrepreneurs with a vision for both business and the nation. Indonesia boasts 295,270 SMEs per 1,000, spread countrywide, contributing to developments across various sectors as an emerging economy that utilizes SMEs as a vehicle. In Australia, 47 million enterprises exist, with 98% of businesses in the hands of SMEs during their initial stages. Meanwhile, 40% of the GDP in the USA is attributed to well-organized SMEs backed by the state. Across Asia, 90% of businesses are products of SMEs, contributing to the region’s economic growth and flourishing economy in the journey of the tiger.
Developments in Other countries
This is common in the EU, with 99.8% of businesses being SMEs, and many other countries exhibit a similar trend. London alone boasts one million SMEs, while Northern Ireland has around 121,800. Asia collectively has 71 million, and the UK has 5.6 million SMEs, contributing to the 90% worldwide businesses that fall under the SME category of 400 million worldwide. This indicates the widespread integration and utilization of the SME concept across the globe.
The critical question lies in whether and to what extent Sri Lanka is capitalizing on this successful opportunity for its benefit. Are there innovative and productive ways to apply this concept for the nation’s success? Sri Lanka can learn valuable lessons from countries like Thailand and Vietnam, where SMEs act as a vehicle for breaking cultural barriers and village backwardness, fostering entrepreneurship throughout the country. Collaboration with media, educational institutions, government outlets, chambers of commerce, and other groups is essential, all aiming at common goals for development and prosperity.
Way Forward
It’s time for Sri Lanka to emulate the achievements of other nations by leveraging the concept and application of SMEs for societal benefit. This involves fostering innovations, hard work, vision, and strategies based on a network of easily set up and maintainable SMEs. These businesses prove productive with a small capital, a limited number of employees, and less complicated infrastructure, thanks to their flexible mechanisms. State supervision, guidance, and organization can create a network linking to the worldwide SME network, enhancing the current structure to be more comprehensive and workable with aims and strategies developed by both state and private establishments.
However, SMEs face financial difficulties of a volatile and uncertain nature, particularly in unexpected circumstances on the financial and economic front. The issue of “Perata Executions” – the execution of the recovery process without going to court based on agreements entered into with establishments – has raised concerns. The recent judgment on a shortcut to loan recovery has resulted in the loss of existence for 1,188 SMEs, while 89% of micro and small SMEs are victimized in the recovery process under the Banking Act No. 430 of 1988 and the Recovery Loans Act No. 4 of 1990 to 1900 special provisions in force.
It’s crucial to note that 1.3 million SMEs, employing 2.2 million employees and contributing 50% to the GDP, need improvement in organization and protection for the sake of economic progress. The 1,200 “parate executions” have dealt a blow to SMEs in the recovery process from Covid-19 and the financial crisis. It is timely for the state to formulate a new vision, strategy, and plan of action for the urgent promotion of this concept as an essential need.
There should be a concerted effort by all state and private sectors, led by chambers of commerce and bodies like the EDB promoting exports and agriculture using SMEs as a medium. It’s time for Sri Lanka to actively participate in the worldwide SME chain, contributing to the process of global development and prosperity with joint strategies.

Sarath Wijesinghe President’s Counsel (LLM International Law (UCL)), former Ambassador to UAE and Israel, President Lanka Ambassador’s Forum – United Kingdom, Former Chairman of The Consumer Affairs Authority, Solicitor in England and Wales, and Harini Premaratne LLB of West End Law Centre, Hulftsdorp, Colombo, Sri LankaThe author can be reached at sarathdw7@gmail.com.