Investigating household poverty determinants of the micro, small and medium enterprise sector in rural Sri Lanka

Abstract

Poverty in Sri Lanka is a predominantly rural phenomenon with more than 70 percent of the rural population. Even though rural poverty has shown a significant decrease in recent years, still many people are just above the poverty line and hence the risk of slipping back into poverty is high. Micro, small and medium enterprises (MSMEs) in the rural economy in Sri Lanka play an effective role as a means of income and employment generation resulting in a significant contribution towards reducing poverty. However, the real contribution is debated. Therefore, the main objective of this paper is to investigate the significant contribution of MSMEs towards household poverty reduction in the rural sector in Sri Lanka. This study utilized the questionnaire survey method and interview method to collect primary data. A multi-stage cluster sampling was employed to select a sample of 390 MSMEs in the Southern Province. Descriptive analysis revealed that manufacturing is the most popular business activity. The majority of entrepreneurs are sufficiently educated and experienced and finance through formal banking is the main source of capital. Key constraints demonstrated are demand problems, macroeconomic issues such as inflation, lack of finance, inadequate infrastructure and resources, and high competition. The main purpose of enterprising is the provision of basic needs for families and the majority of households generate sufficient earnings and living above the poverty line. Results of a binary logistic model showed that administrative issues; firm size, experience and business awareness, financial support, time to market, internal locus of control and entrepreneurial self-efficacy, are significant in reducing poverty in the rural sector. It is suggested to trigger MSME activities in the rural sector with necessary assistance i.e. increasing the availability of formal credit or financial access, provision of necessary infrastructure, implementing programs to improve entrepreneurial skills etc., would influence in triggering entrepreneur supply in the sector which, in turn, raises a positive impact on household wellbeing.