The Cooperative movement can be used to give MSMEs a new lease of life

COVID-19 has made an adverse impact in our economy where many businesses fall in to the Micro Small and Medium Enterprises category (MSME) and as well as some in the Small and Medium Enterprise category (SME). A majority of Sri Lanka’s businesses fall into both MSME and the SME category. 

During curfew and the lockdown the smaller businesses who had small reserves or no reserves at all had no choice but to use their very limited working capital for survival.

While we appreciate the Government for allowing moratoriums on loan installments and the introduction of the 4% loan scheme many MSMEs have not been able to secure loans under this scheme.

With recovery of loans being an arduous task even prior to COVID-19, one cannot actually blame banks for being risk averse and not disbursing loans the way we would have liked them to.

In the recent past (prior to COVID-19) we saw the emergence of numerous types of financiers who entered lending industry. They ranged from finance companies who lent short term, daily collection outfits who were in fact sophisticated money lenders, international lenders who offered loans via social media, etc.

As a result of the above MSMEs in particular enjoyed an excess supply of funding although they were at astronomical rates ranging from 3% to 17% per month, calculated on the flat method. For purposes of clarity to the layman the above interest rates translate to an effective rate of 72% to 400% p.a. when calculated on the reducing balance method, which is the correct way of calculating time value of money.

The excess supply of credit made many entities over indebted as well as financially undisciplined.

COVID-19 has now hit both the funders and the borrowers very hard, so much so that some of the lenders have even exited the market (which is actually a blessing in disguise); after earning handsomely over the years though.

So, where does this leave our MSMEs who have been left high and dry in post COVID19?

As you can imagine they have no working capital, no past track record with banks and many don’t have the collateral that is acceptable to banks.

It must be most frustrating for MSMEs that are not able to avail themselves of the funds that the Government directed the banks to give them at 04%p.a., while they watch SMEs and bigger entities who are much healthier than them and stronger borrowing up to 25 million at 04% p.a.

This is truly a catch-22 situation.

Sri Lanka’s Cooperative movement has been in existence for over a century. Unlike in Europe our Cooperatives do not stand out as giants in comparison to Banks, Finance Companies and Insurance companies.

But this does not negate that Cooperative model which is over a century in Sri Lanka has stood the test of time.

The Cooperatives have a strong inbuilt debt recovery mechanism by law; the Cooperative Act. 

One can argue that the Cooperatives have their own issues which have been highlighted on and off in the media. (In that case we have also seen three finance companies going into liquidation, in this very year!)

The issues that Cooperatives have dealt with in the past stems from the lack of integrity of errant office bearers of individual Cooperatives, and has nothing to do with fault of the Cooperative model per se. 

We believe that we need to seek refuge from the Cooperative movement at this crucial juncture to grant our MSMEs a new lease of life. If there is synergy among the MSMEs, the Cooperatives and the banks, a winning solution could envisaged whereby the MSMEs avail themselves of bank funding via the Cooperative model and the banks mitigate their credit risk by lending to the MSMEs via the Cooperative model, relying on the stringent debt recovery method, prescribed by the Cooperative Act. 

Our recommendation is that the Government through the Department of Cooperatives should encourage the establishment of dedicated MSME Thrift and Credit Cooperatives at divisional level. In turn the Government should also urge banks to lend to these dedicated MSME Cooperatives on a wholesale basis (bulk loans) so that these Cooperatives in turn could on lend to their members.

Using the above methodology, even the special COVID-19 loan scheme at 4% p.a. (which is due to lapse by 31 August 2020) could be extended to MSMEs via such MSME Cooperatives, who would have definitely got left out otherwise.

Furthermore Thrift and Credit Cooperatives are authorised to mobilise savings from members. Mobilisation of savings from MSMEs will further strengthen MSMEs in terms of building reserves for themselves in their respective Cooperatives. In turn the banks that fund MSME Cooperatives could always insist that such Cooperatives maintain a certain ratio of savings to loans as time goes on so, that the banks could cushion their risk factor further.

The power of community savings via the Cooperative movement can be phenomenal. The Sanasa Development Bank which was founded primarily through Cooperative members’ funds, alone, is a testimony to the power of savings within the Cooperative movement.

In conclusion, we sincerely appeal to the powers that be led by the President and the Prime Minister to look at incorporating MSMEs into the Cooperative movement by directing the Department of Cooperatives to set up dedicated MSME Thrift and Credit Cooperatives at Divisional level, and give Mother Lanka’s MSMEs a new lease of life in post COVID-19, by making available the special COVID-19 loan scheme at 4% p.a. through all banks and their branches. We would be glad to lend our expertise in this regard to make the above recommendation a reality and a success.

(The writer is the Founder of Avanka Lanka and can be reached via email at [email protected])