The Edition

Latest

The challenges faced by SMEs

Shahudha Mohamed
05 February 2020, MVT 08:55
SME Development Finance Corporation (SDFC) established as a specialized financial institution providing financial products and ancillary services to MSMEs and entrepreneurial start-ups. PHOTO: MIHAARU
Shahudha Mohamed
05 February 2020, MVT 08:55

Small and medium enterprises (SME), as small and medium as they may be, play a crucial role in the advancement of any country. In making a lasting impact on the economy, these small businesses which are directly connected to the livelihood of their owners, face numerous challenges. As a result, a lot of SMEs reach an abrupt but final end before ever reaching maturity, without being allowed a chance to live out their full potential.

A survey conducted by Asian Development Bank (ADB) in 2014 shows that, from all the countries included in the survey, SMEs make up as much as 90 percent of all businesses. If the survey results are broken down into statistics of separate countries, it shows that a staggering 59 percent of Indonesian businesses are SMEs. In Thailand, this number is at 37 percent, while in Malaysia, a still impressive 32 percent of businesses consists of SMEs.

The survey conducted by ADB highlights the four most challenging factors to keep a small to medium-sized business up and running for a long period of time.

Financial Difficulties

The biggest challenge facing any small or medium business is acquiring the money and assets needed for expansion. This challenge is further emphasized by the fact that most SMEs stem from a rather small capital investment, thus the income generated during the beginning of a business is often, less than ample. Due to this, acquiring bank loans can also become a complicated process. Since loans require borrowing against assets of a certain value, it is often not a feasible option for businesses of a lesser size. Moreover, such businesses also struggle to generate capitals to start up any creative side ventures.

Dean of Business Management in Villa College and SME Consultant Abdulla Nafiz speaks about the challenges for small and medium enterprises. PHOTO: AHMED MAANIS/ BRANDS OF MALDIVES

Dean of Business Management in Villa College, as well as notable SME Consultant, Abdulla Nafiz highlighted the importance of the government establishing a system that would allow SMEs to obtain the finances needed for their projects, in a more convenient manner. He also iterated policies that benefit SMEs such as the introduction of credit guarantee schemes.

Failure to conduct proper research

Since the existence of nearly all SMEs hinges on a minimal amount of capital, the process of conducting proper market research prior to launching can be quite troublesome. Once established, the lack of funds pose a difficulty in carrying out analysis that ensures the future of the business, which again plays out into preventing said business from reaching full capacity.

According to Nafiz, creative and innovative businesses require an especially comprehensive type of research, even more so than other types of enterprises.

“[Most] small businesses kick off without conducting market research. This is the reason why we observe shops changing location in Male’ within 2-3 months [from establishment]. A market can be better understood with even a minimal amount of research.”

Nafiz explained that exploring the reasons causing various small and medium enterprises to go out of business in virtually the blink of an eye, is a great way to understand which locations present the most ideal conditions for a new venture to flourish. He added that even the most ambitious SME owners are typically not as aware of the market sphere as they could be, owing to a lack of proper background study.

Difficulty in scoring the market

Smaller businesses have much to prove against larger companies. For instance, the familiar retail shop on the street corner is in constant competition with its neighbouring, better-established super-mart. While brand-savvy supermarts can juggle the option of slashing prices and selling goods below market rates, if an SME were to reduce their pricing to the same level, it would be akin to ‘welcoming bankruptcy’ in the near future.

Dean of Business Management in Villa College and SME Consultant Abdulla Nafiz speaks about the challenges for small and medium enterprises. PHOTO: AHMED MAANIS/ BRANDS OF MALDIVES

Speaking earnestly about the ways in which SMEs catering to diverse ‘niche’ demands all over the world, Nafiz stated his opinion that Maldives had not yet matured enough to reach such a stage. He speculated means that would allow the government to support smaller enterprises, suggesting that the administration open bidding for certain projects exclusively to SMEs, thereby eliminating the larger competition. “Big companies have an advantage in various aspects, including the pricing of goods. The government has the power to change this by especially giving opportunities to specific types of businesses”, Nafiz articulated.

Lack of familiarity with recent technology

In today’s world, declaring that technology develops at a shockingly fast rate, would likely be an understatement. Every household, and every individual within that household, utilizes smart technology and the use of smartphones, on a daily basis. In that vein, many Maldivians have also set up e-commerce businesses, which in comparison to SMEs, harbour a significant advantageous edge.

One of the most favourable factors attracting modern entrepreneurs to initiate an online business is being exempt from renting a physical work space. Such businesses also do not require a large number of staff, further adding to their list of advantages. However, SMEs cannot afford the same privileges, penalizing them in the ever-competitive economy. In fact, most small enterprises do not even own a dedicated webpage, let alone website.

According to research conducted by the World Bank in 2016, while 90 percent of the population use smartphones and internet, only 10 percent of SMEs utilize technology to provide the option of ordering their products or services online.

On top of it all, the tax system in the Maldives is poised to put further pressure on these struggling businesses.

“The revenue generated by SMEs are usually low. Growth is limited because employees have to be paid, company expenditures need to be handled and government tax is imposed. More lenient policies regarding BPT and GST are necessary”, he said.

The fate of SMEs act as a tipping point in the economy of countries all over the world. Such is the case for Maldives as well. Therefore, in order to boost the economy of a country, it is vital that Maldivians observe the journey taken by these SMEs on micro and macro levels, and that the governing administration and relevant institutions work together to guide these small and medium-scale companies towards a more lasting success.

MORE ON BUSINESS