Catalysts For Growth: The Role of Microfinance Services in Empowering SME’s in Western Province, Sri Lanka

Abstract

This study investigates the impact of microfinance services on the financial performance of Small and Medium Scale Enterprises (SMEs) in the Western Province of Sri Lanka. Recognized as a crucial sector for economic growth, regional development, employment generation, and poverty reduction, SMEs in Sri Lanka benefit significantly from the tailored financial and non-financial services provided by Microfinance Institutions (MFIs). Despite the recognized importance of SMEs, many in Sri Lanka face significant challenges in accessing traditional financial services, hindering their growth potential. This study addresses the gap in understanding how microfinance services, including micro credit, micro savings, and training programs, contribute to the financial growth and sustainability of SMEs in the region. Primary data was collected through a structured questionnaire administered to a random sample of 162 SME owners in the Western Province. The analysis employed descriptive statistics, correlation, and multiple regression analysis to examine the relationships between these microfinance services and financial performance indicators, including net profit margin and return on assets (ROA). The results reveal that both micro credit and micro savings significantly impact SME financial performance, particularly net profit margin and ROA, while training programs, although beneficial, did not demonstrate a statistically significant effect on these financial outcomes. The findings emphasize the need for more tailored microfinance initiatives that focus on credit and savings services while improving the accessibility and relevance of training programs. These insights offer valuable implications for policymakers and microfinance institutions (MFIs) aiming to enhance the effectiveness of microfinance in fostering SME growth, regional development, and economic sustainability in Sri Lanka