Integrated Approach for Inclusive Micro, Small and Medium-Sized Enterprise Development

Developing a business in Maldives is difficult. Steep start-up costs, insufficient market access, and inadequate labor skills and business experience have hindered the growth of small businesses.  Lack of access to finance aggravates this further. Outer islands have few banking facilities and credit policies can be restrictive with high collateral requirements for MSMEs. The cost of all these cuts into what little capital the enterprises have saved up.

Despite these, the MSME sector holds a lot of promise, with the potential to diversify the Maldivian economy. Such opportunities would particularly favor women and youth since jobs are hard to come by in the isolated atolls. Women experience greater difficulties than men when looking for jobs and venturing into businesses. 

Maldives is a small island nation in the Indian Ocean. Its archipelagic nature brings several challenges to businesses, which are further compounded by the country’s overdependence on imports and its susceptibility to natural disasters.

Inclusion is a major issue in the country. A third of its population lives in the capital island of Malé, the seat of government and the center of commerce. This continues to increase as more and more Maldivians migrate to the capital city due to lack of livelihood in the islands, especially after the 2004 tsunami. Many women and young people, however, lack the resources and experience to compete for jobs in the city.

Business support infrastructure

The IMSMEDP aimed to create a business climate conducive to establishing and maintaining MSMEs, especially for marginalized women and youth. It provided recommendations to improve the legal framework and streamline the business procedures under the Maldives Small and Medium Enterprise (SME) Act (2013). A provision under this act specifically encouraged women and youth participation in the MSME sector.

This project also enhanced the operational and human resource capacity of the business development service centers (BDSCs), expanded their geographical coverage to all seven provinces, and improved their services. The BDSCs can now offer 32 different types of services to MSMEs.

Access to finance

The project used three strategic approaches to widen access to finance for MSMEs:

- setting a credit guarantee scheme (CGS)  that reduced the collateral requirements for lending,

- reducing loan processing time, and

- introducing the Line of Credit Facility (LCF). 

The LCF was introduced by the Government of Maldives in 2014 to specifically cater to the credit demand by MSMEs. Through the BML, loans were provided to eligible MSMEs with reduced collateral requirements under the strict due diligence and commercial lending criteria. The LCF extended its reach by targeting women- and youth-led businesses. The success of the LCF helped develop the government and the BML’s capacity to introduce new market-based credit schemes for the MSMEs. The Government of Maldives recently established the SME Development Finance Corporation to further strengthen the access to finance for the MSMEs.

Use of information technologies

To facilitate access to finance and to improve the quality of lending by the financial institutions, the project helped upgrade the information technology (IT) infrastructure of the Credit Information Bureau (CIB) in Maldives - the central repository of the credit histories of the borrowers. Because of these upgrades, the CIB’s coverage of adult population reached 23.6% in 2019, significantly higher than the South Asia average of 4.8%.

It also launched the MSME business portal, providing a web-based hub for business registration, MSME loan management, online payments and other services by the BDSCs.

This project expanded and strengthened the MSME sector in Maldives by increasing the business registration from merely 39 in 2011 to 967 by June 2018. This figure includes those owned by women (175) and youth (294).

The expansion of the BDSCs made the sector more capable. A strong network of business support was established and more training programs on business development and planning, product development, and marketing were offered to entrepreneurs. They also assisted MSMEs by (i) providing legal, tax, and accounting related advice, (ii) business networking support, (iii) business incubator program for start-ups, and (iv) government-related services. The BDSCs provided a total of 532 training and technical programs and conducted 3,525 business consultations and technical business visits, benefiting a total of 17,465 participants. Fifty percent of these participants were women.

The LCF provided loans to 201 MSMEs from different sectors such as IT, retail, fisheries, and tourism across all seven provinces of Maldives and helped generate 1,182 jobs as of the first quarter of 2019. The second phase of the LCF provided credit to 66 women-led MSMEs under the Women Entrepreneurs Loan (WEL) scheme further strengthening the inclusion in the sector. As of March 2018, 65 loan applications were approved by the CGS and 72% of them were in the micro-enterprise category.

Due to strong commercial principles applied in selecting loan beneficiaries and credit due diligence, the non-performing loan ratio of the LCF was lower than the BML’s average ratio during the project period. The repayment capacity of the borrowers also remained strong. A survey among the beneficiaries showed that the LCF contributed to job creation, business growth and regional diversification of Maldives outside of the capital city.

The MSME portal streamlined business processes, with registration involving just six steps within a 12-day timeline at a low cost of 4% of income per capita. This procedure is faster and cheaper compared with the rest of South Asia, which has an average of 7.6 procedures in a 13.7-day timeline at 11% of income per capita.

The best evidence of the project’s success is the testimony and experience of its beneficiaries. Interviews with beneficiaries revealed that the project has increased their income, developed their entrepreneurial potential, and contributed to the economic development of local communities. Likewise, the project has made great progress in increasing women’s participation in the MSME sector.

Any project that strives for inclusion in Maldives must consider the obstacles posed by the country’s challenging geography. In this initiative, technology and the expansion of the BDSCs played a vital role to make the MSME sector more inclusive. An online portal that served as a one-stop platform for all MSMEs enabled the government to reach out to entrepreneurs even in remote atolls while streamlining business procedures.

Inclusion does not only refer to geography in this case, but to services and funds as well. Women and youth are traditionally marginalized in Maldives. By carrying out interventions such as the WEL scheme under the LCF, their active participation was encouraged.

The partnership between ADB and IDB was also critical to the success of this initiative. Together, they were able to provide upfront funds for operational expenses and capacity-building of the BDSCs. They also helped meet the growing credit demand of the MSMEs by funding the LCF.

Out of 190 countries, Maldives is ranked 139th in World Bank’s 2019 Ease of Doing Business Survey. Long-term engagement is required to overcome obstacles to private sector development, many of which are linked to the country’s geography. Future interventions need to focus on air and sea transport and connectivity, agglomeration of the scattered population on the larger atolls to create economies of scale for businesses, and trade facilitation and export orientation to reach world markets. Stronger links between local communities and tourism activities remain an untapped potential for MSME growth and job creation in Maldives.

Asian Development Bank. 2012. Republic of the Maldives: Inclusive Micro, Small, and Medium-Sized Enterprise Development Project.

ADB. 2019. Inclusive Micro, Small, and Medium-Sized Enterprise Development Project: Project Completion Report.