Maldives SME Development Project

MALDIVES
Preparing the Small and Medium

Enterprise Development Project
TA 4745-MLD
Presented to
Asian Development Bank
6 ADB Avenue,
Mandaluyong City
0401 Metro Manila
The Philippines
Team Members:
Lord, Montague, Team Leader / PSD & SME Development Expert
Ehmann, Markus, SME BDS Expert
Slee, Laurence, SOE Privatization and Restructuring Expert
Waheed, Mohamed, PSD and SME Development Expert
Sattar, Shafeenaz, SME Financing Specialist
Hussain, Hisaan, Legal Specialist
30 September 2007
TA 4745-MLD: SME Development Project Draft Final Report
TABLE OF CONTENTS
0. LOAN AND PROJECT SUMMARY
I. THE SECTOR: PERFORMANCE , PROBLEMS, AND OPPORTUNITIES
1.
ECONOMIC AND REGULATORY CONTEXT
1.1 CHARACTERIZATION OF THE SMALL ISLAND ECONOMY
1.2 INTERNATIONAL COMPETITIVENESS
1.3 BUSINESSES REGULATOR ENVIRONMENT
2.
SECTOR AND REGIONAL ANALYSIS
2.1 KEY CHALLENGES AND OPPORTUNITIES
2.2 GOVERNMENT STRATEGY FOR PRIVATE SECTOR DEVELOPMENT
2.3 EXTERNAL ASSISTANCE TO SECTOR IN THE ATOLLS
II. PROPOSED SECTOR DEVELOPMENT PROJECT
3.
PROJECT COVERAGE AND IMPLEMENTATION PROCESS
3.1 OBJECTIVES, SCOPE AND STRATEGY
3.2 TARGETED SECTORS FOR SME DEVELOPMENT
3.3 TARGETED REGIONS FOR SME DEVELOPMENT
3.4 INSTITUTIONAL DELIVERY MECHANISM
3.5 POLICY AND REGULATORY FRAMEWORK
4.
KEY FEATURE: BUSINESS DEVELOPMENT SERVICES
4.1 EXISTING SITUATION IN THE MALDIVES
4.2 CLUSTER DEVELOPMENT STRATEGY
4.3 ORGANIZATIONAL STRUCTURE
4.4 CAPACITY BUILDING
4.5 BDS CENTERS IN TARGET REGIONS
4.6 TECHNICAL ASSISTANCE AND PROJECT COSTING
5.
KEY FEATURE: COST SHARING FACILITY
5.1 OBJECTIVE AND COVERAGE
5.2 OPERATIONAL FEATURES
6.
KEY FEATURE: CREDIT GUARANTEE FACILITY
6.1 FINANCING APPROACH
6.2 OPERATIONAL FEATURES
6.3 ORGANIZATION
7.
FINANCING PLAN AND IMPLEMENTATION ARRANGEMENTS
7.1 FINANCING PLAN
7.2 PROJECT PERFORMANCE MONITORING AND EVALUATION
III. TECHNICAL ASSISTANCE
IV. PROGRAM BENEFITS, IMPACT AND RISKS
V. SOE RESTRUCTURING AND PRIVATIZATION
8.
OBJECTIVES AND SCOPE
9.
PUBLIC ENTERPRISE ANALYSIS
10. PROPOSED STRATEGY
viii
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4
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29
30
31
33
35
35
38
40
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43
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49
49
52
55
iv

ANNEX A:
ANNEX B:
ANNEX C:
ANNEX D:
ANNEX E:
ANNEX F:
ANNEX G:
ANNEX H:
ANNEX I:
DESIGN AND MONITORING FRAMEWORK

GOVERNMENT STRATEGY FOR PRIVATE SECTOR DEVELOPMENT
MSME SURVEY OF THREE REGIONS
CLASSIFICATION OF ENTERPRISES
EXTERNAL ASSISTANCE
CREDIT GUARANTEE FACILITY
BUSINESS DEVELOPMENT AND COST SHARING FACILITY
IMPLEMENTATION ARRANGEMENTS
REFERENCES
57
60
63
72
74
83
89
93
100

CURRENCY EQUIVALENTS
(as of June 2007)
Currency Unit
MRf. 1.00 = US$ 0.0774
US$ 1.00
= MRf. 12.92
ABBREVIATIONS
6NDP
7NDP
ACDBP
ADB
ADFs
ADSL
BCMW
BDS
BML
CIP
EA
EDU
ESTP
gdp
HIES
IAS
IATA
ICA
IDA
IFAD
IFC
IGAs
IMF
IPO
IWDCs
LC
MACI
MCPI
MEDT
MEL
MFLC
MMA
MHREL
MOAD
MoCPI
Sixth National Development Plan

Seventh National Development Plan
Atolls Credit and Development Banking Project
Asian Development Bank
Revolving Credit Funds
Atoll Development Project for Sustainable Development
Building Construction and Mechanical Works
Business Development Services
Bank of Maldives
Commercially Important Passenger
Executing Agency
Enterprise Development Unit
Employment Skills Training Project
Gross Domestic Product
Household Income and Expenditure Survey
Island Aviation Services Limited
International Air Transport Association
Investment Climate Assessment
International Development Association
International Fund for Agricultural Development
Finance Corporation
Income Earning Opportunities
International Monetary Fund
Initial Public Offering
Island Womens Development Committees
Letter of Credit
Maldives Association of Construction Industry
Ministry of Construction and Public Infrastructure
Minister of Economic Development and Trade
Employment and Labor
Maldives Finance Leasing Company
Maldives Monetary Authority
Ministry of Human Resources, Employment and Labor
Ministry of Atolls Development
Ministry of Construction and Public Infrastructure
vi

MOFAMR
MOFT
MPL
MRf
MTCC
MWASS
NDB
PE
PEMEB
PPTA
PSD
PWC
RDMOS
SADP
SIE
SME
SME-DP
SOE
STO
SWOT
TA
ToR
UN
UNDAF
UNFPA
UNICEF
UNV
WHO
Ministry of Fisheries Agriculture and Marine Resources

Ministry of Finance and Treasury
Maldives Post Ltd
Maldivian Rufiyaa
Maldives Transport and Contracting Company
Ministry of Women Affairs and Social Security
National Development Bank
Public Enterprise
Public Enterprise Monitoring and Evaluation Board
Project Preparation Technical Assistance
Private Sector Development
Public Works Corporation
Regional Development and Management Offices
Southern Atolls Development Project
Small Island Economy
Small and Medium-Sized Enterprise
Small and Medium-Sized Enterprise Development Project
State Owned Enterprise
State Trading Organization Plc
Strengths, Weaknesses, Opportunities, and Threats
Technical Assistance
Terms of Reference
United Nations
United Nations Development Framework
United Nations Population Fund
United Nations Children's Fund
United Nations Volunteers
World Health Organisation
vii
LOAN AND PROGRAM SUMMARY

Borrower
Republic of Maldives
Proposal
The proposal consists of a loan of US$6.9 million for the development of The
Maldives Micro, Small and Medium Enterprises Development Project Loan,
preceded by US$1.7 million for activities related to capacity building.
Classification
Targeting classification: General intervention

Sector: Industry, agriculture, services and trade
Subsector: Small and medium enterprises (SMEs)
Themes: Sustainable economic growth, private sector development
Environmental
Assessment
Category C
Social Sector
Assessment
Category C: Involuntary resettlement
Program
Rationale
The Maldives is a Small Island Economy (SIE) consisting of 26 natural atolls with a
total land of less than 300 square kilometers spread over 900 kilometers. It has
one of the fastest growing economies in the world, driven by its two leading sectors
of tourism and fishing that has created linkages to other subsectors like local
handicrafts, tourism-related activities and boatbuilding. Yet the benefits of
economic growth have not been equitably distributed to the population at large.
Decentralization of economic activity has been undermined by the lack of
infrastructure, a poorly developed inter-island transportation system, financial
system constraints to credit for businesses, and legal and regulatory barriers.
Greater opportunities for people living in Male has produced a fourfold population
expansion in the past 20 years, and it has given rise to a population density in
Male that is among the highest in the world, a situation made all the more severe
by the recent tsunami.
Category C: Impact on indigenous people
In an effort to ameliorate regional inequalities and reverse migration to the capital,

the Government placed regional economic growth and diversification as a key
objective of economic development in the Seventh National Development Plan
(7NDP) for 2006-2010. As part of 7NDP, the Government is developing regional
centers that are designed to have social and infrastructure facilities, and that will be
complemented by focus islands on different atolls acting as atoll service hubs and
growth centers. The focus islands identified under the 7NDP are to serve as growth
centers, fostering employment and income generation opportunities by
concentration of development efforts and provision of a higher level of
infrastructure to achieve economies of scale. The Government expects that these
efforts will reduce regional differentials and promote growth and employment
opportunities outside of Male.
Objective and
Scope
The objective of the MSME Development Project Loan is to support the

Governments efforts to (i) develop the entrepreneurial climate and support
services that will facilitate growth, (ii) provide the necessary conditions for
converting existing entrepreneurial potential into innovative and successful
business activities, (iii) attract entrepreneurial leadership from other regions of the
country, and (iv) establish broader regional centers for SME activities that are
viii
driven by growth nodes or networked clusters for supporting activities. To achieve

the aforementioned objective, the project loan focuses on the following:
bolster human resource development by creating business development

service centers that provide training programs in entrepreneurship,
management, and technical skills for MSMEs and develop appropriate
materials for such training, as well as help to identify commercial opportunities
in specific sectors;
improve access to finance by developing innovative financing schemes using
alternative financial instruments such as equity financing, while encouraging
the development of cooperatives and associations;
promote a market-driven process through the public and private sector that in
the short to medium-term will target specific types of activities in selected
regions of the country; and
enhance the catalytic role of public sector for facilitating commercial activities
in the atolls and strengthening MSME activities by improving the policy and
regulatory environment.
The project framework is attached in Annex A.

Loan Amount and
Terms
Counterpart
Funds
A loan of US$ 6.9 million with the guarantee of the Republic of Maldives from
ADBs ordinary capital resources will be provided under ADBs London interbank
offered rate (LIBOR)-based lending facility. Prior to the loan, US$ 1.7 million in
assistance will support activities related to capacity building.
The policy framework for the program includes specific components that bear
distinct costs of structural adjustments and improvements in the regulatory
environment. The Government will provided assurances that necessary funding will
be made available to cover these costs.
Executing Agency
Ministry of Economic Development and Trade (MEDT)
Risks and
Assumptions
Risks include lack of Government capacity to implement program, and

inadequate inter-ministerial coordination of private sector development initiatives.
Technical
Assistance
The ADB will provide US$1,000,000 in 2008 to build the capacity for MSME
development in the atolls. Under the loan and in 2009-2011 the Government will
finance US$1.2 million of capacity building activities related to MSME development
in the atolls. Support will be given for specific activities designed to (i) establish and
sustain programs in the BDS centers, (ii) provide capacity building to the Enterprise
Development Unit of the Ministry of Economic Development and Trade (MEDT)
and business member organizations (BMOs), and (iii) ensure sustainable access to
MSME financing.
ix
I. THE SECTOR: PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

1. ECONOMIC AND REGULATORY FRAMEWORK
1.1. Characterization of the Small Island Economy
1.
SIE Features: The Maldives is a Small Island Economy (SIE) consisting of 26 natural
atolls with a total land of less than 300 square kilometers spread over 900 kilometers around
the equator. 1 There are 1,190 islands in the archipelago, of which 198 are inhabited by a
population of 309,000. 2 Only 28 islands have a land area greater than a square kilometer. 3
Only four islands have a population greater than 5,000 people, and 70 percent of the
inhabited islands have a population of less than 1,000 people. In addition to the inhabited
islands, 87 islands have been designated and developed as tourist resorts, with an additional
11 islands currently being set aside for development. With a total land area of 2 square
kilometers , the capital island of Male is home to a third of the population. It is the seat of the
Government of the Maldives (Government) and the centre of commerce and business.
Concentration of the population in the capital is growing, especially after the December 2004
tsunami destroyed the means of livelihood in many islands.
2.
Special Challenges: The Maldives has a number of economic disadvantages similar
to other SIEs that undermine the countrys international competitiveness. In small economies
like the Maldives the percentage deviation of costs from a medium-size economy are over 70
percent for sea freight, nearly 50 percent for electricity and telephone service, more than 30
percent for both unskilled labor and fuel. 4 In sectors like tourism, these high costs translate
into a 60 percent overall increase in the cost of tourism, which can be passed onto the highend consumer of tourism activities but are not readily transferable onto products like
handicrafts, agro-industrial products and manufactured goods that compete in fairly
homogeneous international product markets. From a policy perspective it does not suggest
the need for protection against the rest of the world, but rather proactive policies that seek to
overcome, or at least partially compensate for the economic disadvantages associated with
the high production and trading costs.
3.
Economic Growth: Despite its intrinsic competitive disadvantages, the Maldives has
one of the fastest growing economies in Southeast Asia. Two sectors, tourism and fishing,
have been the driving forces behind the expansion of Gross Domestic Product (GDP) and
employment generation, and have created linkages to other subsectors like local handicrafts,
tourism-related activities and boatbuilding. In 2006 the sharp rise in real GDP reflected a
1
For administrative purposes, these atolls are grouped in 20 atolls.

Based on 2002 census.
3
Most islands are part of large atolls that surround large lagoons, and all are low lying with none having an altitude
higher than 1.8 meters above sea level. The surrounding barrier reefs act as natural protection for the islands from
adverse weather conditions during the monsoon seasons. Although no official reference could be identified for the
2
land-mass estimate, the 300 km figure is quoted in reports such as the UNEP State of the Environment Report and
the FAO Agricultural (Horticultural) Crop Sector Report (FAO, 1994). More recent estimates based on satellite data
2
estimate the area at 227.45 km (Naseer and Hatcher, 2004).
4
Based on a survey of SIE relative to other countries using the World Banks World Economic Indicators and Global
Business Cost Survey, as well as the United Nations trade database (Comtrade), and reported in Winters (2003).
2
resumption of growth following the devastation that occurred throughout the country as a
result of the tsunami on 28 December 2004 (Table 1). The recovery has been largely driven
by tourism sector and brings the country back to its steady-state growth path of around 6
percent a year. GDP per capita has expanded from US$ 2,094 in 2002 to an estimated US$
2,757 in 2006, the highest in the South Asia region. The economy is largely driven by service
industries, which account for about 79 percent of GDP. The main service industries, other
than tourism, are real estate, wholesale and retail trade, transport and communications,
government administration and financial services (Table 2).
Table 1: Maldives General Economic Indicators, 2000 - 2006
2002
2003
GDP at 1995 constant price (USD mn)
546.3
593.0
Real GDP Growth (%)
6.5
8.5
Population (thousands)
306
315
GDP per capita (USD)
2,094
2,197
Consumer price inflation (avg %)
0.9
-2.8
Current account balance (USD mn)
-35.7
-32.0
Exchange rate (avg Rf/USD)
12.8
12.8
Source: Ministry of Planning and National Development; Maldives Monetary
Monetary Fund (IMF), World Economic Outlook database.
2004
2005
649.4
613.5
9.5
-5.5
325
335
2,482
2,350
6.3
3.3
-129
-287
12.8
12.9
Authority (MMA); and
2006
693.3
13.0
345
2,757
7.0
-358
13.0
International
Table 2: Maldives Sectoral Contributions to GDP (percent), 2000 - 2005

Primary Sector
Agriculture
Fisheries
Coral and sand mining
Secondary Sector
Manufacturing
of which, fish preparation
Electricity and water supply
Construction
Tertiary Sector
Wholesale & Retail Trade
Tourism
Transport & communications
Financial services
Real estate
Business services
Government administration
Education, health and social services
Financial services, indirect measure
GDP total
2000
9.4
2.8
6.0
0.6
14.4
8.0
2.1
3.2
3.2
80.1
4.5
33.0
14.5
3.4
7.8
2.9
11.8
2.2
(3.9)
100.0
2001
9.5
2.8
6.1
0.6
15.1
8.1
2.3
3.4
3.5
79.3
4.4
31.9
14.2
3.4
7.7
2.9
12.7
2.1
(3.9)
100.0
2002
10.4
2.7
7.1
0.6
15.6
8.8
3.0
3.5
3.3
77.9
4.2
30.9
14.3
3.4
7.6
2.9
12.6
2.0
(3.9)
100.0
2003
9.7
2.6
6.6
0.6
15.6
8.5
3.0
3.6
3.5
78.6
4.1
32.7
14.2
3.3
7.2
2.8
12.4
1.9
(4.0)
100.0
2004
9.7
2.6
6.6
0.6
15.6
8.5
2.7
3.6
3.5
78.6
4.1
32.7
14.2
3.3
7.2
2.8
12.4
1.9
(4.0)
100.0
2005
9.1
2.5
6.1
0.6
16.1
7.9
2.5
3.8
4.4
78.8
3.9
32.3
15.2
3.2
6.9
2.7
12.8
1.8
(4.0)
100.0
Source: Ministry of Planning and National Development Statistical Yearbook of Maldives 2006.
4.
Regional Growth Inequalities: Notwithstanding the countrys high economic growth
rates in the past ten years, the benefits of that growth have not been equitably distributed to
the population at large. Average household income in the atolls is 55 percent of that in Male,
according to the 2002-03 HIES by the Ministry of Planning (2004). Decentralization of
economic activity has been undermined by the lack of infrastructure, a poorly developed
2
inter-island transportation system, financial system constraints to credit for businesses, and
legal and regulatory barriers. Greater opportunities for people living in Male has produced a
fourfold population expansion in the past 20 years, and it has given rise to a population
density in Male that is among the highest in the world, a situation made all the more severe
by the recent tsunami. 5 Lack of infrastructure in the atolls, underdeveloped inter-island
transportation, a lack of financial services, and legal and regulatory barriers have all
contributed to the wide disparity in average per capita income of Male, resorts and industrial
islands, on the one hand, and other islands in the outer atolls, on the other.
5.
Regional Development Strategy: In an effort to ameliorate regional inequalities and
reverse migration to the capital, the Government placed regional economic growth and
diversification as a key objective of economic development in both the Sixth National
Development Plan (6NDP) for 2001-2005 and the present Seventh National Development
Plan (7NDP) for 2006-2010. As part of the 7NDP, the Government is developing regional
centers that are designed to have airports, ports and other social and infrastructure facilities,
and that will be complemented by focus islands on different atolls acting as atoll service hubs
and growth centers. The focus islands identified under the 7NDP are to serve as growth
centers, fostering employment and income generation opportunities by concentration of
development efforts and provision of a higher level of infrastructure to achieve economies of
scale. Islands that are of importance to the population consolidation program are likely to have
the following characteristics: (a) sufficient land area to support greater numbers of population;
(b) proximity to atoll capital; (c) substantial existing infrastructure; and (d) potential for growth
because of land area, agricultural, fishery or other commercial activity. The Government
expects that these efforts will reduce regional differentials and promote growth and
employment opportunities outside of Male. It also plans to address poverty among the most
vulnerable groups, who may not be able to benefit from the growth strategy, by developing
special targeted income support programs.
1.2. International Competitiveness
6.
Effective Exchange Rate: The international competitiveness of the Maldives is reflected
in the real effective exchange rate (RER), which takes into account both general price
movements in the country relative to that of each of its trading partners, and the cross exchange
rate between the Maldives and each of its trading partners. 6 The Maldives has effectively
pegged the rufiyaa against the U.S. dollar since 1994. Between 1995 and 2001 that policy
5
In 2006, 35% of the population was located in Male compared with 27% in 2000, according to the Ministry of
Plannings 2006 census (Ministry of Planning, 2006).
6
The real exchange rate is a measure of the relative price of non-tradables to tradables and, as such, it measures
the cost of producing a good domestically. A relative price rise, for example, reflects an increase in the domestic cost
of producing tradable goods, since it makes production of tradables less profitable and induces resources to move to
the non-tradables sector. While the concept is straightforward, its empirical measurement is difficult for a country like
the Maldives where price series for tradable and non-tradable products are not readily available. Two alternative
measures of the real exchange rate can be constructed within the context of the countrys data limitations. The first
uses partner-country and domestic price measured in terms of CPI data to construct a real exchange rate index that
represents the ratio between non-tradable and tradable prices. Specifically, the real exchange rate is defined in this
r
n
f
n
f
case as e t = P t/P t, where e is the nominal exchange rate, P is the foreign currency price of goods purchased
abroad, and P is the domestic price level. The second uses purchasing power parity (PPP) definition to correct the
nominal exchange rate by the relative price of domestic to foreign prices, as measured by CPI data. Using this
r
n
n
f
n
f
approach, the real exchange rate is defined as e t = (1/e )t P t/P t , where e is the nominal exchange rate, P is the
foreign currency price of goods purchased abroad, and P is the domestic price level.
caused a 35 percent appreciation of the rufiyaa's real effective exchange rate, which
undermined the countrys international competitiveness, discouraged tourism and fish exports
and prevented economic diversification. Large inflows of foreign direct investment and tourism
created Dutch disease symptoms as the overvaluation of the rufiyaa made non-tourism exports
such as fisheries and agricultural products less competitive. The large proportion of spending on
imported goods and local spending on domestic non-traded goods such as construction also
created pressure for capital and labor to move away from the traditional export sector, with a
concurrent weakening of the countrys competitiveness and further loss of export incentives for
the fisheries and agricultural sectors. Since the depreciation of the dollar since 2002, the ruffia
has become increasingly undervalued relative to the Euro.
7.
Competitive Potential: Among the major factors inhibiting enterprises from competing
effectively in the local, domestic, resort and foreign markets are the lack of equal treatment to
them given by resorts and their inability to supply high quality products and services. Costing of
services products is not considered to be a major constraint to competing in the various markets
by enterprises. Indeed,
Table 3: Maldives Real Cross-Rates Indices (1995=100)
according to the World
Real Cross-Rates
World
Europe
Asia
America Mid.East
Oceania Banks recent Investment
Climate Assessment (ICA),
1995
100.0
100.0
100.0
100.0
100.0
100.0
1996
104.9
105.7
105.2
104.7
101.4
100.4 only 30 percent of material
1997
119.8
124.8
119.0
112.8
111.9
112.3 inputs and supplies
1998
129.5
125.7
135.6
116.6
112.7
136.2 originate from domestic
7
1999
134.9
137.0
137.5
121.2
117.4
138.4 sources. A fairly similar
2000
134.8
145.8
131.9
112.7
116.3
143.6 pattern exists in
2001
134.9
145.6
133.1
111.3
110.4
148.7 manufacturing and
2002
126.8
133.3
127.8
109.7
102.5
134.8 transport logistics, where
2003
111.7
109.1
117.7
97.8
95.7
108.2 more than one-half of the
2004
109.1
103.1
116.2
95.4
100.3
98.0 enterprises in
2005
105.5
103.1
110.1
90.2
98.3
91.7 manufacturing and
2006
101.9
100.7
104.8
86.6
98.5
90.4 transport logistics purchase
Source: Calculations based on average annual exchange rates and wholesale their material inputs and
price indices.
supplies directly from
foreign sources.
1.3
Business Regulatory Environment
8.
Effect on Business: The Maldives ranks fairly high in several areas of the regulatory
environment affecting the ease of doing business, but its comparative position has recently
declined because of increased burdens in a number of areas that especially impact on MSMEs.
Downgrading has occurred in (a) ease of employing workers, (b) starting a business, (c)
protection of investors, (d) contract enforcement, (e) trading across borders, and (f) ease of
closing a business (Table 3). In the remaining four areas of the business regulatory environment
there has been no change in the countrys comparative ranking from a year earlier, that is, there
has been no comparative improvement in the business regulatory environment (World Bank,
2007).
World Bank, "The Maldives: Sustaining Growth and Improving the Investment Climate". Finance and Private Sector
Development Unit, South Asia Region, June 2006.
9.
Starting and Closing Businesses: The Maldives is the only country in South Asia that
has a legal requirement on the minimum start-up capital. Under the company law, entrepreneur
are required to deposit a sum equal to 7
Table 4: Maldives Global Ranking of Ease of Doing
percent of the countrys income per capita
Business, 2006 versus 2005
before starting operation. In contrast, the
2006
2005
Change
Maldives is ahead of other South Asian
Overall
53
49
-4
countries on the time and number of
Paying Taxes
1
1
0
procedures needed for business start-up,
Employing Workers
5
1
-4
although it ranks behind Sri Lanka and
Dealing with Licenses
9
9
0
Bhutan on the cost of those start-ups. The
Starting a Business
31
33
2
country is also ahead of others in South
Protecting Investors
60
58
-2
Asia in terms of the ease of dealing with
Enforcing Contracts
83
81
-2
licenses because of the simplicity of the
Trading Across Borders
91
84
-7
process, but there is room for
Closing a Business
114
109
-5
improvement on the time and cost need to
Getting Credit
143
143
0
obtain building and occupancy permits. In
Registering Property
172
172
0
Source: World Bank, Doing Business 2007. Washington, DC.
general, reforms to facilitate business
start-up are easy to implement, as
evidenced by the fact the in 2006 over 40 countries eased business entry requirements.
10.
Operating a Business: The 2006 ICA of the Maldives points to a number of areas in the
operation businesses that require attention (World Bank, 2006). Although most of the surveyed
enterprises were in Male Atoll, the ICA points to a number of constraints to doing business in
the Maldives that are also likely to apply to businesses operating in other atolls. The top five
obstacles identified by the businesses surveyed were (i) lack of access to finance; (ii) high cost
of finance; (iii) lack of access to land; (iv) lack of skilled labor; and (v) corruption. There is,
however, a high degree of diversity across sectors with respect to the relative significance and
severity of other constraints affecting enterprise performance. Access to and cost of finance
nevertheless emerged as the major obstacle to businesses in all major sectors, including the
construction, handicraft, and agriculture sectors.
11.
Legal Enforcement: According to the ICA survey findings, there is considerable
variation in the degree of confidence in the rule of law among businesspersons. Only about 40
percent of entrepreneurs in manufacturing and tourism had confidence in the judicial systems
ability to enforce contractual rights in business disputes; in the transport and logistics sectors,
the level of confidence was only 27 percent. Major problems remain in enforcing contracts and
closing a business, and there are severe exit barriers. Enforcement of a contract takes 665
days, compared with an average of 385 days in other South Asian countries. The bulk of these
delays are in the 485 days that it takes to execute judgments, following the average of 165 day
average that it takes to give a judgment (World Bank, 2007). Since insolvency is nonexistent
and there is no bankruptcy law, it can take as long as seven years to close a business,
compared with four years in other countries of the region. The ICA study also shows that
investor confidence in the judicial system is about one-half of that that in Sri Lanka and India.
12.
Access to Land: Land access is one of the biggest obstacles to business growth in the
Maldives. The majority of business operations are being carried out in rented or leased land and
buildings, with the average contract length for land varying from seven years in transport and
logistics to between 10 and 14 years in manufacturing and tourism. According to the ICA, more
than one-third of the firms in tourism and logistics and about one-fourth in manufacturing have
made an attempt to acquire rights to new land or buildings. However, over 60 percent of
5
manufacturing respondents, around 45 percent of respondents in the tourism industry and

transport-logistics have been unsuccessful in acquiring land. Moreover, a comprehensive and
transparent regulatory framework for housing and urban management is lacking in the Maldives,
and planning and building standards and regulations have been developed in an ad-hoc
manner. Following the implementation of the 2002 Land Act, the Government is taking steps to
create a market for land sales and is conducting a cadastral survey. Uncertainty nevertheless
remains in a number of areas, including the ability of enterprises to transfer land.
Table 5: Strengths, Weaknesses, Opportunities, and Threats (SWOT) Analysis of MSME
Development in Atolls
Factors
Internal
Positive
S - Strengths
External
O Opportunities
Geographical location near tourist resorts
Improvement of logistics through inter and intra-island

transportations system
Artisan tradition and culture
Communication system enhancements through mobile

phones and internet
Regional development planning
Possibilities to use existing facilities for BDS activities

and services
Low cost skilled workers
Political commitment to private sector development
Schools system for creating knowledgebase society
Development of entrepreneurial infrastructure for MSME

services
Cultural, recreational and tourism capacities
Existence of experienced entrepreneurs

Opportunities for agricultural commercialization, tourism
related activities, handicrafts and small processing
capacities
Location of growth modules in targeted regional
developmental centers
Negative
W - Weaknesses
T - Threats
Tradition of large enterprises
Lack of entrepreneurial mindset
Narrow economic structure
Few people oriented to modern working environment
Lack of entrepreneurial and managerial

knowledge and skills
Dependence on government for action
Lack of support for entrepreneurs
Delays in privatization and restructuring of SOEs
Lack of finance for MSMEs
Impact of government involvement on business decisions

in enterprises
Fragmentation of the agricultural land; little

experience with cooperatives
Corruption and lack of good governance

Lack of financial resources
Lack of coordination of development activities, especially
transportation and communication
13.
Access to Financing: The lack of clarity on property rights is a major constraint to
accessing finance, as lenders are unwilling to take land as collateral if they are unable to sell it
freely upon the borrowers default. Partly for this reason, access to credit is ranked as the
number one impediment to doing business in the Maldives, according to both perceptions of
entrepreneurs as reported in the ICA and actual financing conditions relative to those of other
countries, as reported in the World Banks business survey (World Bank, 2007). The ICA reports
that only one-third of businesses use bank loans for their activities. Instead, firms rely on
internal funds for working capital. Domestic commercial banks contribute 11 percent to existing
working capital and international commercial banks only 3 percent. Indeed, only 25 percent of
respondents to the ICA questionnaire reporting making any efforts to apply for loans. Nearly 60
percent of the credit that has been extended is for the tourism sector, followed by commerce
6
(import-export operations) and the fisheries sector. Together these three sectors absorb over 85
percent of existing loans. Differences in financial sector development and the regulatory
environment often determine the magnitude of SME lending in countries. In Asia countries like
the Maldives that have limited SME financing also lack banking intermediation, have weak
legislations and poor public finance management, whereas those that have well-development
financial sectors tend to have high SME financing. 8
2. SECTOR AND REGIONAL ANALYSIS
2.1
Key Challenges and Opportunities
14.
Business Environment in the Atolls: Our survey of business conditions and
perceptions by MSMEs in three key regions of the Maldives reveal significant differences from
those identified by the World Banks ICA for businesses operating in the capital of Male. Table
5 summarizes the major opportunities and challenges to entrepreneurs and businesses in the
Northern, Southern and South-Central Development Regions of the country. These findings are
based on SWOT analysis of the enterprises in each of the regions by team members and differ
from the more detailed MSME survey conducted in those atolls.
15.
Internal Constraints:
Table 6: Ranking of Internal Constraints
Table 6 shows the ranking of
Region
South-Central
Total
Northern
Southern
key internal constrains on
Technically skilled labor
4.6
4.4
3.2
4.1
enterprises in the Northern and
Labor costs
3.7
3.9
3.5
3.7
Southern Development
Accounting
skills
4.4
2.1
4.4
3.6
Regions. Lack of technically
Market
information
4.2
2.2
4.2
3.5
skilled labor, labor costs, and
Management
staffing
4.4
2.0
4.2
3.5
accounting skills are the
Technology
4.0
1.9
4.4
3.4
principal concerns of business
Capital
2.7
4.4
2.0
3.0
in both regions. Availability of
Source: MSME survey in Northern, Southern and South-Central Regions.
capital is only a major problem
for enterprises in the South-Central Region. In contrast, technology and management staffing is
a major problem in the Northern and Southern Regions, but they rank below alls in the SouthCentral Region.
16.
External Constraints: High utility prices are ranked high by enterprises in the atolls
(Table 7). They also perceive access and cost of financing to be a threat to their operations.
Land as well as transport issues in both air and sea transportation are also major constraints
reported by enterprises. The fact that telephone and internet costs are experienced as costly is
significant to potential efforts to provide business development services through extension
activities in the atolls. Among the factors having a negligible impact on the enterprises are labor
relations, foreign competition, customs and trade regulations, business licensing and operating
permits. Perceptions about cost and access to finance are largely due to the dependence on
family and own financial resources. Because of the difficulty of obtaining credit, few enterprises
actually consider using external financial sources. SMEs operating principally in Male also
reported access and cost of finance, as well as access to land as among the top five constraints
RAM Consultancy Services Sdn Bhd, SME Access to Financing: Addressing the Supply Side of
SME Financing. ASEAN Secretariat, REPSF Project No. 04/003, July 2005.

Table 7: Ranking of External Constraints
Region
High utility prices
Access to finance
Cost of finance
Water and/or electricity access
Land
Shipping and sea transportation
services
Air transportation services
Competition with domestic
competitors
Access to land
Telephone and/or internet
access
Too high taxes & duties
Other fees and unofficial
payments
Business licensing & operating
permits
Customs and trade regulations
Labor regulations
Competition with foreign
competitors
Northern
SouthCentral
Southern
4.7
4.7
4.6
4.5
4.2
4.7
4.6
4.5
4.5
4.3
4.8
4.4
4.4
4.4
4.5
Total
4.7
4.6
4.5
4.5
4.3
4.6
4.5
4.4
4.2
3.9
3.7
4.3
4.1
4.3
3.4
3.9
3.4
3.2
3.4
3.8
3.4
to doing business. 9
Corruption, which is ranked
among the top five
constraints in Male, is
considered to as a
somewhat lesser constraint
to doing business in the
Northern, South-Central
and Southern Development
Regions.
17.
Private Sector
Perception
of
3
3.2
3.5
3.2
3.4
3.3
3
3.2
Government: Enterprises
have a mixed perception
2.8
3.0
3.4
3.1
about their relationship with
the central and local
2.9
3.0
3.2
3.0
governments. About one2.9
2.9
2.8
2.9
fourth perceive central
2.9
2.7
2.2
2.6
government as helpful,
2.8
2.4
1.7
2.3
while over one-half have an
unfavorable perception of
the governments activities. The remaining enterprises surveyed either had a neutral perception
or lacked experience with the government or were therefore reluctant to express an opition.
There are generally concerns about the lack of a clear demarcation between public and private
sector activities. The Government has initiated reform efforts in the legal and regulatory
framework to facilitate investment and promote the private sector. In 2005 the Government
introduced several reforms covering compliance monitoring with enforcement of court decisions
by the Attorney General, the introduction of an examination for practicing lawyers, establishment
of a Bar Association and draft a Code of Ethics for judges, and the preparation of a three-year
civil-justice action plan.
18.
Table 8: Constraints on Competitiveness of Enterprises

Legal and Regulatory
Region
Constraints: The current legal
Southframework is not sufficiently
Total
Northern
Central
Southern
comprehensive to provide an
Differentiated treatment
5
3.5
5
4.5
appropriate PSD enabling
by resorts
4.7
4.5
5
4.4
environment. One of the major
Quality of products
problems of administrating
Differentiated treatment
4.3
3.5
3.9
4.1
justice is the court system,
by authorities
3.8
3.4
3.1
3.4
especially in islands where
Production scale
constraints include lack of
3.5
2.5
1.8
2.6
Price of product
trained personnel and
substantial bureaucratic delays.
People from the atolls and outer islands have to travel to Male for the appeal process or what
9
World Bank, The Maldives: Sustaining Growth and Improving the Investment Climate. Washington, DC: World
Bank, South Asia Region, Finance and Private Sector Development Unit, April 2006.
are often complex commercial issues. The courts lack trained judicial persons throughout all
magistrate courts. Nor does the court system have an effective summons procedure or a
comprehensive judgment enforcement process. The Government needs to formulate
legislations on taxation, bankruptcy, banking and taxation. It also needs to introduce accounting
and auditing standards for the private sector. Minimum wage levels need to be introduced as
well. Finally, it is essential that impact assessments be carried out a part of the formulation of
major pieces of legislations to measure their impact on PSD and MSMEs in particular. Based on
a review of relevant commercial and investment laws and regulations, including accounting
standards, land tenure and property rights, the focus of support to MSME activity in the atolls
should be based on realistic and sustainable approaches for strengthening the MSME policy,
legal, regulatory, and accounting framework, and one that contains a detailed strategy and timebound action plan for MSME development.
19.
Transportation: At present the transport of cargo between Male and the outer islands
relies on the traditional cargo and passenger vessels operating on a fairly unscheduled basis,
while the transport of passengers relies on these same vessels and, where possible, on the use
of air transport services. There is a fairly significant network of transport operations within
islands in the same atoll and between islands of adjacent atolls. While Male remains the centre
of the transport system, there are growing numbers of hubs. Two regional ports are opening in
Kulhudhufushi and S. Hithadhoo, while State Trading Organization Plc (STO) imports cargo
directly into S. Gan, and Fari Maldives Pvt. Ltd imports cargo directly into Theefaridhoo. 10 The
domestic aviation network is largely dependent on seaplanes for the tourist market and wheeled
aircraft for the local population. Plans exist to increase the number of domestic airports from
four to eleven. Limited ferry routes exist, but regular services tend to be unscheduled and
subject to weather conditions. From time to time, foreign companies have established regular
ferry services, but these have been short-lived.
20.
Skills Deficiencies: According to the 7NDP, the Maldives has one of the lowest labor
force participation rates in South Asia (47.7 percent). Youth unemployment is also substantial
and has been increasing in recent years, with the result that 40 percent of young women and
over 20 percent of young men are currently unemployed. One of the problems is the lack of
appropriate skills needed for existing employment opportunities in the Maldives. Educational
and vocational institutions have not inculcated enterprise as a career option or provided
appropriate business orientation and support skills. According to the ICA survey, most schools
only offer commerce subjects and the average pass rate is 25 percent, while the pass rate for
English is only 6 percent. In contrast, the pass rate for chemistry, physics, commerce, fisheries,
and science ranges from 25 to 45 percent. Difficulty in access to gainful employment has
increased the incidence of drug use and delinquency. Despite some improvements, lack of local
skilled labor continues to be a major problem in Maldives. Moreover, unskilled worker from a
foreign country collects an average monthly pay of MRf 2,000, while a local person needs to be
paid at least MRf 2,500 per month. This situation has creates reliance on migrant labor from
neighboring countries. In 2004 there were 38,413 expatriates employed in the Maldives,
compared with 33,765 in 2003 because of the growth and expansion of business activities.
21.
Getting credit: Historically, most of the credit in the Maldives has been channeled to
larger corporations, and the upper end of the medium size market. Particularly small enterprises
as well as low and middle-income households still lack access to adequate financial services, in
10
ADB, Domestic Maritime Transport Project. Draft Final Report. TA 4395-MLD, August 2005.
particular long-term finance either for capital investment or permanent working capital needs.
The lack of suitable collateral, viable qualitative information, financial statements and accounts
usually places the MSMEs in the high-risk category and they are therefore considered nonbankable. In general, the Maldives ranks 143rd worldwide on the comparative ease of getting
credit, which is well below most other South Asian countries. The poor ranking is largely due to
the complete absence of a public or private credit registry to facilitate the exchange of credit
information amongst lenders. The legal rights of borrowers and lenders are also deficient in
most respects because the law requires a specific description of the assets in the security
agreement. As a result, it is impractical to use a changing pool of assets (such as in an
inventory or accounts receivable) as security for a loan. The secured lender has no priority right
to the collateral either in or outside bankruptcy, reducing the chances of loan recovery. If a
borrower defaults, creditors are required to go through a lengthy court enforcement process.
The lack of a bankruptcy law further reduces the chances of loan recovery in the event a
borrower becomes insolvent. All this makes security agreements for MSMEs highly risky, costly
and difficult to enforce. The situation could improve if the authorities carry through on plans to
set up a credit information bureau with the assistance of the World Banks International Finance
Corporation (IFC). The Bank of Maldives is also planning to introduce mobile phone banking,
which will improve outreach in the atolls.
22.
Financial Sector: The financial sector of the Maldives is narrow. There is one locally
owned commercial bank, Bank of Maldives (BML), branches of three South Asian state-owned
commercial banks, and a branch of HSBC international bank. The BML is jointly owned by the
Government (51 percent), island communities (25 percent), and other government agencies (24
percent). The BML has 18 branches that include five mobile branches (dhonis). All these banks
follow normal international banking practices and offer letter of credit (LC) facilities and other
financing. Banking is regulated by Maldives Monetary Authority (MMA), which acts as the
central bank. Banks seldom extend loans with maturities of more than three to five years and
the spreads remain high. Lending rates vary from 8 to 13 percent for domestic currency and
7.75 to 13 percent for foreign currency; similar rates apply to the Government. This situation,
gives rise to serious impediments to sustained growth of the private sector in the Maldives
because of the lack of available information and mechanisms to collect information that makes
lenders unable to identify enough profitable projects in a risky environment. The provision of
financial services is consequently restricted to low-risk clients or based on excessive collateral
requirements instead of a credit analysis relying on financial statements and business plans.
Experience from other countries shows that a more flexible and dynamic credit information
system will improve the accuracy and cost-effectiveness of credit risk decisions made by
financial institutions that, in turn, results in improved access to financial services, in particular for
small businesses and individual borrowers.
23.
Non-Banking Financial Sector: The non-bank financial sector consists of a
government provident fund, a finance leasing company, a housing bank, two insurance
companies registered in the country, and some agents for overseas insurance companies. The
Maldives Finance Leasing Company (MFLC) provides medium and long-term capital equipment
financing. The company was established with assistance from International Finance Corporation
(IFC), with technical assistance provided by the National Development Bank (NDB) of Sri
Lanka. To date, it has provided lease financing for capital equipment mainly to the tourism
sector (nearly 80 percent of the total) for such items as speedboats, live-aboard safari and
fishing vessels, dhonis, computers, and excavators. There are limited capital market operations
securities trading. Three SOEs are quoted on the stock exchange (BML, State Trading
10
Organization (STO), and the Maldivian Transport and Construction Company). The Government
plans to list more enterprises on the stock exchange.
24.
Lack of Capacities of Domestic BDS Providers. An effective method to build
captioned capacities within the MSMEs is to incorporate external business development
services. However, the MSME sector in the Maldives is characterized by an almost complete
lack of use of these external services, mainkly because of the limited market for BDS that is
almost wholey concentrated in Male. Government spending on BDS is limited, which in turn
effectively constrains the size and development scope of commercial BDS markets. Opening
these markets to commercial operators would effectively optimize the allocation of government
funds by increasing employment opportunities for the skilled work force in innovative markets,
ensuring a more market-oriented BDS with immediate benefits to clients and reduced cost per
trainee by allowing for competition.
25.
Weak business linkages. Though The Maldivess tourism sector is booming, impact on
the development of rural enterprises and in particular rural manufacturing industries is low due
to weak or missing links in value chains e.g. agriculture, agro-industries and tourism. Although
the Government has adopted a clusters approach in its 7NDP, it is neither effectively and
systematically supporting the development of those clusters nor strengthening of value chains
through well-targeted BDS support programs in close cooperation with private sector
stakeholders and private BDS providers, which could otherwise build the capacity to sustain and
disseminate such programs.
26.
Limited Instruments and Capacities to Coordinated MSME Development Policies,
Programs and Projects. One of the greatest risks to MSME in the Maldives is the possibility of
a continued lack of Government capacity to implement the MSME development program due to
inadequate inter-ministerial coordination of private sector development initiatives. At present,
the development of a common MSME development and implementation strategy suffers from a
profound fragmentation of strategy formulation and decision making, weak communication and
weak coordination among government ministries and agencies. These weaknesses have
prevented the formulation and implementation of a common MSME development strategy, as
well as programs and projects that complement and build on one another. At present, the interministerial MSME Policy Committee is chaired by the Ministry of Economic Development and
Trade and consists of representatives from the ministries of finance and treasury, economic
development and trade, atolls development, planning and national development, agriculture and
fisheries, transport and communications, youth and sports, and higher education and
employment. The Committee needs to be strengthened to ensure involvement of senior officials
from the ministries and it should meet on a recurrent basis to monitor and maintain quality
control of the technical assistance, as well as ensure full participation by key ministries and
coordination of existing strategies, programs and projects.
2.2
Government Strategy for Private Sector Development
27.
Government Strategy: There are a number of principles underlying the strategy of the
Seventh National Development Plan (7NDP) that point to the leading role of MSMEs in private
sector development, especially those in the atolls and outer islands, as well as the supportive
role of the public sector in creating an enabling environment for the private sector. The
Governments strategy as it relates to the private sector in the regions outside the capital of
Male aims to improve economic growth by increasing the number and coverage of MSMEs
activities and reducing or restructuring state owned enterprises (SOEs).
11
28.
Sectoral Strategies by Line Ministries: At the sectoral level several development
strategies aim to enhance the capabilities of the private sector, specifically microenterprises in
the atolls. In the past, many of these took the form of financial arrangements targeting
microenterprises, but these have mostly been eliminated. 11 These schemes include loans to
boat purchase and repairs and to fish processing by the Ministry of Fisheries Agriculture and
Marine resources (MOFAMR), micro-credit to disadvantaged women by the Ministry of Women
Affairs and Social Security (MWASS), the Atolls Credit and Development Banking Project
(ACDBP) and the Southern Atolls Development Project (SADP) by the Development-Banking
Cell (DBC) of the Bank of Maldives, and the Atoll Development Project and Atoll Development
Funds of the Government, UNDP and International Fund for Agricultural Development (IFAD).
The Atolls Credit and Development Banking project is part of a long-term program for the BML
to operate as a development finance institution and support its financial service operations in
outer atolls. 12 The project has been costed at $6 million with IFAD contributing $3 million, the
Government of Maldives $2.5 million and UNDP $0.5 million. The project covers 15 out of 19
outer atolls in the Northern and South-Central regions, specifically Haa Alifu, Haa Dhaalu,
Shaviyani, Noonu, Raa, Baa and Lhaviyani, in the Northern atolls; and Vaavu, Meemu, Faafu,
Dhaalu, Thaa, Laamu, Gaafu Alifu and Gaafu Dhaalu in the South-Central atolls. It targets 3,250
atoll households directly from credit access and to benefit 6,000 indirectly through improved
earning opportunities. The target population comprises households with a per capita income
below MRf 2,000 per annum, equivalent to MRf1,000 per month for a family of six persons. The
objective is to develop a credit delivery system for the outer atolls, thereby reducing income
disparities between the outer atolls and Male by increasing the employment opportunities and
income levels.
29.
Institutional and Infrastructural Goals: Line ministries have increasingly shifted their
goals to the enhancement of private sector development through institutional and infrastructural
enhancements as a means of facilitating growth and development of MSMEs in the atolls. The
Ministry of Human Resources Employment and Labor has established two important programs
for matching vocational training and higher education with employment opportunities and needs
in the country. The first is the program to expand and improve the quality of vocational and
technical education, and the second is the program to expand post-secondary education
opportunities. The former includes increased youth skills training opportunities focusing on
employable skills for youth, and the latter includes increased numbers of private training
providers offering career oriented vocational and technical training. The Ministry of Transport
and Civil Aviation has recently focused its efforts on identifying strategies for the development of
domestic maritime transport, largely because of the recognition that private sector development
has been hindered by the undeveloped status of the countrys transport network. In an effort to
ensure adequate access among all inhabited islands, the Ministry is working to implement
greater access to all inhabited islands, as well as to establish a sustainable harbor maintenance
program. At the same time, the Ministry of Fisheries Agriculture and Marine Resources is
making efforts to enhance the role of the private sector and facilitate investment in some areas
and activities that will benefit small scale industries in the atolls. Current programs are
supporting the establishment and development of a mariculture industry, and implementing
fisheries community development programs that provide extension, and other services and
11
H. Abdullah and Z. Ismail, An Overview of Micro credit and SME financing activities in the Maldives. Country
Paper for SAARC Finance Seminar on Micro Credit Operations, Dhaka, Bangladesh, 21 Dec 2002.
12
EFAD, Atolls Credit and Development Banking Project Republic of Maldives: Atolls Credit and Development
Banking Project: Completion Evaluation Executive Summary. (Undated).
12
support to communities. It is also formulating schemes to improve access to knowledge,

technology and finance. In agriculture the Ministry is promoting commercial agriculture and
poultry farming with the introduction of new crop varieties and animal breeds require
comprehensive planning for the sustainable utilization of the nations limited land and water
resources. A study on agricultural commercialization was conducted to promote MSME
development based on a cluster approach to development of the sector in the atolls.
30.
Employment Targets: The 2006 Census revealed that 8.3 percent of the adult
population is unable to find suitable employment or lacks employment opportunities, thereby
being officially unemployed. 13 Of the total adult population, 22 percent are economically inactive
in the sense of not actively seeking work. The Government has not elaborated any specific
targets in its 7NDP to increase the number of economically active population, but is has
provided specific guidelines on its strategies to increase employment opportunities for
Maldivians. These strategies include (a) the preparation of a human resource needs
assessment and design, develop and deliver programs in the key sectors of tourism, fisheries
and agriculture, transport and the social sectors; (b) development and implement a national
apprenticeship scheme to train school leavers to meet the national skills demand; (c) institute an
Employment Act which would include provisions on unfair dismissal, equal pay, sexual
harassment and discrimination including an awareness campaign to make the public and
institutions and agencies with employment responsibilities familiar with the new provisions; (d)
Undertake a joint study with the Human Rights Commission and private sector organizations to
improve working conditions in accordance with national and international human rights
standards: (e) Establish Employment Services Centre in Male and job centers in Baa, Dhaal,
Lhaviani and Laamu atolls to provide employment advice to job seekers and employment
exchange services for employers and employees and establish job information kiosks; (f) Set up
a labor market information system in the Ministry of Higher Education, Employment and Social
Security to collect and analyze labor market data for policy development purposes; and (g)
promote youth interest in employment.
31.
Goals of 7NDP: The overall goal for economic and social development, as set out in the
7NDP and Vision 2020, is the eliminate poverty and improvement in the well-being of the
greatest number of Maldivians. The link between achieving this overarching goal and the private
sector development in the Maldives is formally recognized in the 7NDP. It explicitly targets
private sector participation as one of the key strategies to be pursued in 2006-2010, recognizing
that private sector development is critical to achieving the levels of sustainable economic growth
required by the country. It recognizes need for partnership between the Government and private
sector, a situation that in the past has not always existed and that will require a radical shift in
perceptions, attitudes and approaches during the 7NDP period.
32.
Private Sector Development Channels: The 7NDP sets out the following key
mechanisms needed for developing the private sector: (a) formalizing the economy; (b)
improving corporate governance and transparency; (c) promoting responsible business
13
Ministry of Planning and National Development, Maldives Population and Housing Census conducted
during 21-28 March 2006. Census 2006 was carried out in all the 196 administrative islands, 88 resort
islands and 34 industrial and other islands of the country. Data relating to the size, geographical
distribution and socio-economic characteristics of the population such as sex, age, educational
attainment, marital status and employment were collected and are presented in these tables. Four
questionnaires were administered for census data collection, namely: Household Listing Form, Person's
Listing Form, Household Form (includes household and persons information) and Establishment Form.
13
practices; (d) maximizing the potential of public-private partnerships, with a view to increasing;
(e) private investment in the national economy and to providing opportunities for SMEs and
small-scale entrepreneurs to participate in a more competitive environment; and (f) developing
linkages within the domestic and international private sectors to share knowledge, expertise,
resources, and technology. Within the various sub-goals of the 7NDP, those that apply to the
development of the private sector and SMEs are the following ones: (a) a diversified economy
(goal 3); (b) improved access and expanded opportunities (goal 4); (c) the elimination of
poverty, increased equity, and gender equality (goal 5); and (f) support for the rapid recovery of
sub-sectors damaged by the tsunami (goal 1).
33.
Measurable Indicators: Realization of these goals is recognized as too broad for
developing an action plan with policies, projects, programs and institutional mechanisms. In an
effort to operationalize the goals, the 7NDP establishes a set of measurable objectives to
increase private sector development, including SME and micro-enterprise development. Volume
II of the 7NDP lays out a set of roadmaps within 34 themes covering the 2006-2010 goals.
Annex B presents the specific benchmarks associated with actions to be taken in the area of
private sector development and related activities in the regulatory environment, skills
development and SOE restructuring and privatization.
2.3
External Assistance in the Atolls
34.
Asian Development Bank Strategy: The ADBs operational strategy for 2006-2008
encompasses (i) fiscal management, (ii) regional development, and (iii) the environment. 14
Fiscal management supports prudent control that is needed to support a stable and balanced
growth, currently projected at 5 to 6 percent a year. The longer-term concern, however, is
regional development. The ADBs support for regional development currently comprises
technical assistance for regional planning studies and assistance to prepare future social
infrastructural investment projects in specific regional growth centers. It is also assisting in
human resource development plans for education, health and population to increase the
countrywide availability of these services. Apart from the Tsunami Emergency Assistance
Program, it has the Outer Island Development Project ($12 million), the Outer Island
Electrification Project ($8 million), the Regional Development Project ($20 million), the PostSecondary Education Development ($21 million), Information Technology Development Project
($11 million), Domestic Maritime Transport Development Project ($8 million), and the
Strengthening Public Accounts and Governance ($5 million).
35.
ADB Lending Activity: Up to now the ADB has provided six loans to the Government
totally $33.9 million and primarily directed to the power and ports subsectors. The first loan
under the Inter-Island Transport Project was unsuccessful because it underestimated fuel costs
for two vessels purchased under the loan. 15 The second loan for an included five subprojects for
atoll harbors, power, and meteorological development. 16 The subsequent four loans mainly
benefited Male and had little direct benefit to the outer atolls. 17 Indeed, the ADBs 2006-2008
14
ADB, Country Operational Strategy Study: The Republic of Maldives. STS MLD 95017. October 2005.
ADB, Loan No. 513-MLD(SF): Inter-Island Transport for $1.0 million. Approved 18 June 1981. For a review of the
loan, see ADB, Interislands Transport Operations Review. TA No. 679-MLD. 25 April 1985.
16
ADB, Loan No. 681-MLD(SF): Multiproject, for $2.38 million. Approved 29 March 1984.
17
ADB, Loan No. 848-MLD(SF): Power System Development, for $6.1 million. Approved 28 October 1987; ADB,
Loan No. 911-MLD(SF): Male Port Development, for $6.4 million. Approved 20 October 1988; ADB, Loan No.
15
14
country operations strategy notes that, the Banks exclusive focus on Male has contributed to
the income disparities between those who live in Male and the surrounding areas, and those
who live in the atolls and more remote regions. 18 The ADB has also provided sixteen advisory
TAs totaling $4.75 million, a TA for the preparation of an environmental management strategy,
and six TAs for the preparation of loan projects for $0.87 million. These have supported, among
others, the preparation of the National Development Plans, including those supporting regional
development.
36.
United Nations: Five United Nations (UN) organizations maintain residences in the
Maldives, namely, United Nations Development Program (UNDP), United Nations Children's
Fund (UNICEF), United Nations Population Fund (UNFPA), World Health Organisation (WHO),
and United Nations Volunteers (UNV). Their activities are coordinated under the United Nations
Development Framework (UNDAF) for Maldives. 19 Of these, UNDP provides considerable
support to private sector development, and specifically microenterprises and SMEs. In recent
years it has provided assistance for agriculture development and credit schemes on the outer
atoll groups and for health, women in development, and population planning. Its projects include
Atoll Development and Local Governance, Social Mobilization, and a micro-credit fund for
schools, jetties and other activities amounting to $400,000.
37.
World Bank: The World Banks involvement in the Maldives has been somewhat limited.
Since 1979 it has financed six projects and produced five formal economic reports. Two
educational projects contributed to manpower development and upgrading of the airport in Male
supported the growth of tourism. Three projects helped modernize the fishing fleet and strengthen
public sector capacity in collecting, processing, and exporting fish. Apart from its Post-Tsunami
Emergency Relief and Reconstruction Project and Second Post Tsunami Emergency Recovery
Credit, the World Bank has a $16 million International Development Association (IDA) funded
Integrated Human Development Project. Its four components aim to strengthening delivery of
(a) education services; (b) health services; (c) employment services; and (d) community
services. The fourth component on strengthening community services will improve service
delivery by strengthening community services. The project will strengthen and improve
community groups by providing: (a) leadership and management skills training to community
based organizations; (b) financial support to community groups, through a community
development fund and cooperatives offering community-wide services; (c) support to the
development of multi-purpose buildings to consolidate the provision of services; and (d) the
development of broad networks on each focus island.
38.
International Finance Corporation: The IFC has a portfolio in Maldives that consists of
three investments, made up of $1.2 million of equity and $25.5 million of loans outstanding. Its
activities have supported private investment in tourism, logistics and the financial sector.
Specific projects that is has undertaken since 1995 are as follows: (a) Wataniya Telecom
Maldives Pvt. Ltd (August 2005; information sector); (b) Universal Maldiv (March 2005;
accommodation and tourism services); Taj Maldives Private Limited (April 2003) Maldives Villa
1121-MLD(SF): Second Power System Development, for $9.2 million. Approved 19 November 1991; ADB, Loan No.
1226-MLD(SF): Second Male Port, for $8.8 million. Approved 1 April 1993.
18
ADB, Country Operational Strategy Study: The Republic of Maldives. STS MLD 95017. October 2005.
19
United Nations, Development Assistance Framework for Republic of Maldives 2003-2007. Mal. 26 July 2002.
15
Shipping (February 2002; accommodation and tourism services); Maldives Leasing Company
(December 2000; finance and insurance); and Villa Shipping & Trading Co. Ltd (May 1995).
II. PROPOSED SECTOR DEVELOPMENT PROJECT
3.
3.1
PROJECT COVERAGE AND IMPLEMENTATION PROCESS

Objectives, Scope and Strategy
39.
Vision: The present project has been designed within the context of an overall SME
development vision in the atolls, and one that is driven by strategic and operational goals that,
in turn, define the programs to achieve those goals and projects to be implemented (Figure 1).
The SME development vision consists of the creation of conditions necessary for achieving
dynamic growth of SME activities for particular sectors and industries in targeted regions of the
country by 2010. These conditions will be realized by (i) developing the entrepreneurial climate
and support services that will facilitate growth; (ii) providing the necessary conditions for
converting existing entrepreneurial potential into innovative and successful business activities;
(iii) attracting entrepreneurial leadership from other regions of the country; and (iv) establishing
broader regional centers for SME activities that are driven by growth nodes or networked
clusters for supporting activities.
40.
Strategic Goals: The overall strategy and operational goals for SME development
support the creation and strengthening of institutional mechanisms that provide entrepreneurs
with business development services and financing on a sustainable basis. A clusters approach
integrates production, marketing and distribution activities for targeted sectors and geographic
areas, and policies and institutional support facilitate the public sectors involvement in enabling
MSME business activities in the atolls.
41.
Programs: Four broad-based programs aim to compensate for the unfavorable
competitive position that businesses in the atolls face relative to foreign goods and services by
lowering the transactions cost of doing business and ensuring the delivery of business services
and information where the market fails to provide them. These programs give special attention
to those activities that provide differentiated products and services to markets, those that target
niche markets, and those that contain high value added. The following key programs form part
of the operational strategy for achieving the goals set out for MSME development in the atolls,
and aim to translate the vision and operational strategy into reality:
A program to bolster human resource development by creating business development

service centers that provide training programs in entrepreneurship, management, and
technical skills for MSMEs and develop appropriate materials for such training, as well as
helping to identify commercial opportunities in specific sectors;
A program to improve access to finance by developing innovative financing schemes using

alternative financial instruments such as schemes such as equity financing, while
encouraging the development of cooperatives and associations;
A program to promote a market-driven process through the public and private sector that in
the short to medium-term will target specific types of activities in selected regions of the
country; and
16
A program to enhance the catalytic role of public sector for facilitating commercial activities
in the atolls and strengthening MSME activities by improving the policy and regulatory
environment.
Figure 1
SME Development Strategy for the Maldives
Vision
Create
conditions
necessary for
achieving dynamic
SME growth for particular
sectors and industries in targeted
regions of the country by 2010.
Strategic Goal 1
Develop Regional
Support of
Business Services
Strategic Goal 2
Enhance Financial
System for MSMEs
in Atolls
Strategic Goal 3
Strengthen
Institutional Support
at National Level
Strategic Goal 4
Improve
Environment for
Doing Business
Strategic Goal 5
Cluster Approach to
Integrate Target
Activities in Atolls
Programs to Achieve Goals

Business Development Services in Atolls
New Funding Sources MSMEs in Atolls
Institutional Capacity Building of Public and Private Sectors
Projects to be Implemented
BDS Centers in Target Regions
Credit Guarantee Program for MSMEs
Cost Sharing Facility
Media Campaign and SME Portal
Capacity Building of Economic Development Unit (EDU) in MEDT
Support for National Chamber of Commerce and Industries
42.
Projects: Operational activities focus on a set of projects designed within clusters
framework that ensure the mutual support of each activity. The projects are grouped into two
types of activities. The first is the set of activities that deliver business development services
both in the selected regions of the country and through public and private institutions at the
national level. They encompass the BDS regional centers, capacity building of the Enterprise
Development Unit of MEDT, support to the national chamber of commerce and industry, and the
media campaign and SME portal. The second is the set of financing mechanisms aimed at
expanding available funds for MSMEs in the atolls. These include the credit guarantee program,
cost-sharing facility and risk capital fund, as well as training and other support needed to ensure
their delivery. In several of the proposed pilot projects there exist one or more prerequisites that
17
could be immediately addressed as a means of providing the appropriate facilitating

environment for the commercialization activities. Effective implementation of these projects
depends upon one or more prerequisites that can be addressed within a short timeframe in
order to provide an appropriate facilitating environment for the project activities. These
prerequisites are in the form of policies to facilitate the use of productive and financial
resources, programs to support production, distribution and marketing of products, new or
enhanced institutional capacities, modifications in the legal and regulatory environment, and
infrastructural services and support, including transportation and communications.
3.2
Targeted Sectors for MSME Development
43.
Rationale for Prioritizing Sectors: Measurable results of MSME development in the
atolls will be gauged by the ability of the project to generate successful outcomes that produce
high-profile outcomes in a relatively short period of time. To achieve these outcomes, specific
sectors are given priority in terms of project support from BDS and financing from preferential
sources such as the cost-sharing facility and risk capital fund. Selection of the priority activities
has been based on wide-ranging interviews with private sector individuals, especially those
located in the atolls, as well as public sector officials in both the atolls and capital. Consideration
has also been given to the countrys strategic goals and objectives in the 7th National
Development Plan, as well as the broad directions established by Vision 2020, and the Strategic
Economic Plan (SEP) and the Integrated Framework (IF). 20
44.
Competitiveness and Development Impact of Prioritizing Sectors: The sectors that
have been selected as having high profiles with potentially large demonstrable effects on the
country share several common characteristics such as their strong competitiveness in domestic
as well as international markets in terms of high value added products having strong niche
market potential, as well as their potentially strong impact on economic development in the
atolls and large job creation opportunities. In agriculture, for example, several fruits and
vegetables have been identified as having a high commercial market potential, and their
selection criteria has been based on the degree of year-round availability, technology needs,
transportation and storage requirements, production costs, potential in the domestic, resort and
export markets, and value adding capabilities. Indeed, among the vegetable products having
commercial potential, medicinal plants score the highest because of their year-round production
capability, low storage and transportation requirements, large market potential for resorts and
export, and considerable value adding capabilities. In handicrafts, the local industry has suffered
from cheap substitute products from Indonesia, Malaysia and Thailand, but the potential for high
value-added handicrafts with authenticated product labeling is enormous. Skills development in
this sector would provide the basis for establishing supplies to both the booming tourism
industry and foreign niche markets in Europe and the United States. Tourism-related activities,
like handicrafts, have huge employment generating capabilities. They involve wide ranging
activities in the atolls related to housing, water sports, as well as handicraft activities in
woodworking and Kunaa (Thundukunaa) mats that are authentic to the Maldives. Similarly,
fish processing activities rank high in terms of their actual and potential contribution to atoll
development and employment generation, and they have a large market potential in the
domestic, resort and foreign sectors that have yet to be exploited. The prioritized sectors should
20
See Ministry of Planning and National Development (2005a), Strategic Economic Plan. Maldives: Republic of
Maldives; and Integrated Framework (2005), Integrated Framework Diagnostic Trade Integration Study for the
Maldives. Draft Report. Geneva, November 2005.
18
ultimately lead to (a) diversification and growth in activities in which the country has a
competitive advantage relative to other supply sources, (b) the generation of employment
opportunities in rural atolls and island communities, and (c) an equitable improvement of
livelihoods across the main regions of the country.
45.
Leading Business Activities in the Atolls: The survey conducted as part of this PPTA
on business activities in key regions of the country shows the types of enterprises that currently
operate in the atolls. In the primary sector, fisheries has traditionally dominated activity, with
processing limited to so-called Maldivian Fish that take the form of dried, salted and smoked
tuna fish products for local consumption and exports to Sri Lanka. Agriculture is the second
most important activity of the primary sector in the atolls and have a large, as yet untapped,
potential for its commercialization to the Male and resort markets, as well as foreign niche
markets. In the secondary sector, construction and maintenance of coastal vessels, mainly for
fishing, have are traditional island activities for SMEs and have received some support from
Government and development partners, especially in the aftermath of the tsunami. In contrast,
handicrafts as well as tourism-related service activities have been given little attention, despite
their enormous potential, and are therefore in an infant stage of development. Supporting sector
activities associated with traditional and emerging activities in the atolls cover transport and
communications, logistics, construction and professional services such as legal, financial and
business development. These are essential for all activities and therefore are closely linked to
the successful development of any type of business activity in the atolls.
Table 9:
Ranking of Sectors for MSME Development
46.
Ranking Sectors: Table 9 shows the
ranking
of sectors that are considered as
Ranking
having
important
potential for MSME
Handicraft
1
development in the atolls. The ranking is
Agricultural and Agribusiness
2
based on discussions with public and private
Tourism-Related Activity
3
sector individuals and scoring by the Team
Wholesale Trade
4
and the EDU/MEDT staff following field trips
Construction
5
to the atolls, as well as the compilation and
Fish processing
6
analysis of the survey results. Based on this
Transport
7
scoring the leading sectors are handicraft,
Source: Based on joint evaluations of Enterprise Development
agriculture and agro-processing and tourismUnit, Ministry of Economic Development and Trade, and PPTA
Team, as well as discussions with businessmen and public
related activities. Among the remaining
sector officials from other ministries.
sectors, fish processing construction and
maintenance of coastal vessels and wholesale trade are also ranked high, albeit lower than the
others.
47.
Handicrafts: In the past Maldivian craftsmanship of lacquer ware, woven mats, jewelry
made of corals, paintings and prints had a worldwide reputation of excellence, but with the influx
of cheap, foreign-produced handicrafts the local craftsmen now contribute less than one percent
of the domestic market for handicrafts, according to wholesalers interviewed. The reason for the
decline is the high cost of producing the products, due to high transportation costs, a
fragmented geography that gives rise to diseconomies of scale, and a scarcity of raw materials
relative to producers of handicraft products in other Asian countries. Yet the potential for
handicrafts to satisfy the growing demands of tourism is huge. Based on interviews with
handicraft producers, wholesalers, retailers and the Maldivian Association of Tourism Industry
(MATI), the potential volume of sales for the handicraft sector is US$30 million a year and is
19

expected to grow to US$50 million annually in five years. 21 The relatively high cost of
handicrafts is unlikely to drive away customers since the Maldives has successfully created a
brand name for its tourist industry and caters to up-market clients. The handicraft sector
therefore has the potential for local economic development, particularly in the Northern and
Southern Development Regions, through the creation of a handicraft clusters that would support
MSME development and generation income for poorer segments of the population, including
women. In addition to financing, there is an urgent need to introduce a certification system for
authentic products from Maldives. Other promotion activities that are simple to implement are
the establishment of a handicraft display center at the airport, support of these products by the
Tourist Promotion Board, and improved collaboration with resort owners to promote more
Maldivian handicrafts as an act of corporate social responsibility.
48.
Agricultural Commercialization: Post-tsunami reconstruction support by donors has
focused almost exclusively on the production side of agriculture, leaving many farmers with little
or no knowledge about the types of crops required by the market or how to market and
distribute the products in the local, Male and resort markets. The strategy for agricultural
commercialization in targeted atolls seeks to promote a market-driven process that in the short
to medium-term will support specific types of activities to the local, Male and resort markets. It
relies on the following key components: (a) develop distinctive crop types and agribusiness
activities for the domestic, resort and foreign markets; (b) adopt a phased approach to project
interventions, but provide priority programs to commercialization activities aimed for the
domestic and resort markets since development of those activities will provide parallel support
to subsistence farming in the inhabited islands; (c) provide for value-added processing
industries by facilitating high value-added agribusiness activities and developing a limited but
significant number of agriculture-based industries in different parts of the country; (d) adopt a
clusters approach to the integration of production, marketing and distribution activities for
targeted geographic areas; (e) enhance the catalytic role of public sector for kick-starting
commercial activities and strengthening private sector commercial activities through national,
regional and local projects and programs supported by the ADB and other development
partners; (f) provide for an institutional mechanism through the Business Development Services
centers in the atolls that will allow rapid decision-making processes to take place; and (g) target
the poorest in terms of activities that will combine subsistence and commercial production
activities, encourage an increased role of women in agribusiness activities at the local level, and
ensure an equitable distribution of benefits from commercial activities throughout the country.
49.
Tourism-Related Activities: In 2006 a new leasing process was initiated that
represents a significant departure from earlier policies and has caused concern among resort
owners and travel agents. Under the new initiative, the Government is leasing 35 new islands, a
number that compares with 87 resorts that were introduced to tourism over 30 years ago. The
new islands being set aside for resort development will expand resort locations to the Northern,
Southern and South-Central Development Regions. Existing and potential synergies of tourismrelated activities in the inhabited islands of the outer atolls are therefore expected to provide a
large number of new opportunities for MSMEs. Among the activities identified in the field trips
are village tours conducted in a culturally sensitive manner that exposes visitors to different
facets of Maldivian culture and to add value to traditional activities, some of which may be
21
The figures are based on 600,000 tourists currently visit the Maldives each year and per capita expenditures on
souvenirs and handicrafts of US$50. With more than thirty new resorts under construction and planned for the near
future, the Tourism Industry predict a million tourist arrivals by 2010.
20
disappearing, as well as the introduction of visitors to oral and intangible heritage, including
music, languages, oral traditions and the performing arts. Other tours could provide insights into
traditional agricultural and fishing activities, demonstration of traditional craft making and
description of traditional life styles by villagers.
3.3
Targeted Regions for MSME Development
50.
Governments Regional Development Strategy: Regional development under the 7th
National Development Plan (7NDP) continues to support the process initiated under the 6th
Development Plan (6NDP). Both Plans have identified the far north and far south regions as the
initial focal areas to be developed. The Northern Development Region (NDR) covers Haa Alifu,
Haa Dhaal, and Shaviyani Atolls, and the Southern Development Region (SDR) covers Gaafu
Alifu, Gaafu Dhaal, Gnaviyani, Gnaviyani and Seenu Atolls. The regional hub for the NDR is
Kulhuduffushi in Haa Dhaalu Atoll and that of the SDR is Hithadhoo in Seenu Atoll. During the
7NDP period the Government is establishing three additional development regions to cover the
remaining 13 atolls. They consist of the Northern Central Development Region (NCDR), Central
Development Region (CDR), and the Southern Central Development Region (SCDR). During
the 6NDPs first phase the objective was to increase the standard of living in the designated
regions by promoting economic development, provision of health care services, education and
infrastructure; in the second phase, sustainable development is being promoted by (i) increasing
employment and investment opportunities; (ii) ensuring adequate infrastructure planning in all
sectors; and (iii) improving social development and environmental protection.
51.
Growth Nodes: Within the regions 36 growth nodes are identified: (i) in the Northern
Development Region, growth nodes include Huvarafushi Island, which will serve as an
international transshipment hub, and Kulhudhuffishi Island, which will serve as the regional hub;
(ii) in the North Central Development Region there are six growth nodes, with Naifaru Island
serving as the regional hub; (iii) in the Central Development Region there are another nine
growth nodes that include the important islands of Thulhaadhoo, Eydhafushi and, to a lesser
extent, Kihaadhoo; (iv) in the Southern Central Development Region there are another nine
growth nodes, including the one in Funadhoo Island in Laamu Atoll; and (v) in the Southern
Development Region has as its regional hub Hithadhoo Island on Addu Atoll, as well as the
important growth node in the island of Foammulah in Gnaviyani Atoll.
52.
Sequencing of Regions: As a means of ensuring successful implementation of the
project loan within the proposed funding level, the MSME development project will adopt a
sequencing approach that targets specific regions and subsequently expands the coverage
once the programs and atoll-level projects are well established in the selected regions.
Identification of the regions is based on discussions with public and private sector officials,
interviews with atoll and island chiefs and local business persons during several field visits, and
discussions with representatives of development partners that have ongoing projects in the
atolls. At the onset it was determined that the selected regions should be aligned with national
goals and objectives, particularly, those outlined in the 7NDP, as well as the broad directions set
by the Vision 2020, Integrated Framework and the Strategic Economic Plan (SEP). Five criteria
were used to rank and ultimately select the sequencing of targeted regions: (i) population; (ii)
land area; (iii) infrastructure; (iv) skill levels, traditions and culture conducive to business
development; and (v) economic environment conducive to MSME development. Table 10 shows
the ranking of the five regions. Based on the ranking, the priority regions are the Northern and
Southern Regions (see Figure 2). The secondary region to be targeted at some future date is
the South-Central Region.
21

Table 10: Ranking of Regions for MSME Development
Criteria
Population
Land area
Sector /
Industry
Existing
Infrastructure
Airports,
roads,
harbors
Skills,
traditions
and culture +
support
sectors
Conducive
environment
for business
Southern
Level
Rank
71,000
5
2,350
3
Northern
Rank
3
5
Level
56,000
3,951
South-Central
Level
Rank
46,096
3
2,297
3
North-Central
Level
Rank
55,954
3
1,720
1
Central
Level
Rank
26,843
1
1,005
1
High
Moderate
High
Low
Low
Agriculture
Moderate
High
High
Low
Low
Tourism
Moderate
Moderate
High
Low
Low
Low
Handicraft
Institutions
(Reg. Dev.
Office,
education,
Finance)
Economic
activity
Overall Ranking
Prioritization Level
High (mat
weaving)
Moderate
Low
High
lacquerwork
handloom
High
High
Moderate
Low
High
High
High
Moderate
Low
Low
High
4.3
High
4.0
Moderate
3.5
Low
1.8
Low
1.5
Primary Region
Primary Region
Secondary
Region
Other Regions
Note: High = 5; moderate = 3; low = 1.

Source: Based on joint evaluations of Enterprise Development Unit, Ministry of Economic Development and Trade, and PPTA
Team. Statistical data from Ministry of Planning and National Development (2006), Population and Housing Census 2006,
Preliminary Results. Male, Republic of Maldives; and Ministry of Planning and National Development (2005b),Statistical
Yearbook. Male, Republic of Maldives.
3.4
Institutional Delivery Mechanism
53. Institutional Framework: The design and implementation of private sector development
(PSD) programs and microenterprise and SME development is currently characterized by
profound fragmentation across ministries, and a lack of systematic participation from the private
sector. Inadequate coordination among those programs hinders the formulation and
implementation of an MSME development strategy in the Maldives. The establishment of the
Enterprise Development Unit (EDU) of the Minister of Economic Development and Trade in
2004 was designed to bring together these different PSD and SME development activities under
a single institutional mechanism. 22 Policy 4 of the 7NDP supports the development of private
enterprises by encouraging entrepreneurial development, technology transfer and private sector
innovation, and Strategy 4.1 proposes the introduction of private sector development programs
for small and medium enterprises (SME) by providing technical assistance to start-up
enterprises through the establishment of the SME development unit.
54. Delivery Channels: The present MSME development project builds on existing
institutional arrangements and expands its scope from what is currently a centralized system to
one focused on delivery of services to entrepreneurs in the atolls. Figure 3 provides a visual
summary of the organizational structure of the SME Development (SMED) project. The Ministry
of Finance and Treasury will act as Executing Agency and the Ministry of Economic
Development and Trade (MEDT) would be the Implementing Agency, with guidance and
oversight from the inter-ministerial SME Policy Committee. The EDU will operate as a semi-
22
Presidents Office letter 73 of October 7, 2004 approved the establishment of the small business unit. For details,
see Ministry of Economic Development and Trade, Enterprise Development Unit (EDU). Undated.
22
autonomous institution providing the necessary interface between the public and private
sectors. Business Development Services Centers (BDSCs) located in each of the targeted
regions will provide training and other business development support services needed to bolster
23
MSME activities, especially in the focal sectors. It will also support entrepreneurs in preparing
information needed for financing from three types of mechanisms developed under the present
projects. Both the structure and activities of the BDSCs and the financing mechanisms to be
developed are discussed in more detail in the next two chapters.
55.
Enterprise Development Unit: The basic organizational structure consists of the
following Divisions. (i) Policy and Information Division responsible for statistics that will serve for
monitoring and evaluation of the project; information gathering and processing; information
dissemination; web-site development; and coordination with line ministries and private sector
organizations; (ii) SME Services Division responsible for entrepreneurship training; preparation
of brochures; management and operation of the handicrafts center; networking of productive
and support activities for SME activities in the regions; and supporting linkages for SME
financing; and (iii) Regional Outreach Centers responsible for program extension to the atolls in
targeted regions; and information gathering and dissemination in the target regions. The
structure and functions of EDU will evolve over the course of its development, especially as new
staff are training and fielded.
56.
Monitoring and Evaluation: An independent unit comprising staff from the Chamber of
Industry and Commerce and the Ministry of Economic Development and Trade will provide
ongoing monitoring and evaluation (M&E) analysis of the project. It will define the strategy for
24
measuring, on an ongoing basis, the programs performance by identifying the main

performance indicators, sources of data and timetable for data collection. It will also set out an
evaluation strategy for the program in terms of outcomes related to MSME development in the
regions: (i) fostering enterprise development; (ii) contributing to the business environment of the
regions; (iii) encouraging the development of cooperatives and clusters in priority sectors; (iv)
providing access to relevant information; (v) raising awareness of enterprise development
issues in the atolls; (vi) increasing the competitiveness of businesses in the Male and resort
markets, as well as international niche markets. A key responsibility of the M&E unit will be
gathering and processing quantitative information needed to determine the extent to which
contributing programs support the achievement of the project objectives.
57.
M&E Indicators: M&E indicators will encompass input, process, output and impact
indicators. Input indicators will include (i) finance for line of credit; (ii) technical assistance and
training for staff of lending agencies, that is, Bank of Maldives branches in the target atolls; (iii)
Business Development Service Centers (BDSC) technical assistance to prepare entrepreneurs
for screening system; (iv) BDSC co-sharing portfolio management system and client tracking
system; and (v) BDSC technical assistance and training to potential borrowers, that is, how to
prepare a bankable project. Process indicators will cover (i) number of credit and grant-based
operations received and reviewed by the BDSC, Bank of Maldives branches and non-banking
sector entities (insurance and fund manager); (ii) total credits and grants approved; and (iii)
training of staff completed and number of staff trained. Output Indicators include (i) amount of
credit and grants distributed; (ii) loan repayment rate, that is, loan repayment as a percent of
repayments due; and (iii) transaction costs of each grant and loan facility. Impact Indicators
analyze (i) rates of growth of MSME, by type and location, in the target regions relative to that of
the economy as a whole; (ii) employment generation in MSME in each target region relative to
that of the economy as a whole. A similar set of input, process, output and impact indicators will
be developed for the Business Development Service Centers and is described in Chapter 4.
3.5
Policy and Regulatory Framework
58.
Legal Recognition of MSMEs: Official recognition of MSMEs will be an important
precursor to the establishments of laws and regulations affecting these types of enterprises in
the Maldives. The following legislation will need to reflect the status of MSMEs and grant special
concessions:
Bill No.
Legislation
10/96
Companies Act of
Maldives
31/79
Maldives Import
Export Law
9/96
Maldives
Partnership Act
N/A
Business Profit
Tax Bill
Observations and Proposals

Presently the Act does not distinguish MSMEs from larger companies except
in terms of registration fees based on the share capital of the Company.
The Act needs to introduce accounting systems and standards necessary for
different types of companies.
Review to award special concessions on import duty of raw materials for
MSMEs.
Currently this Act is targeted towards professional firms and has unlimited
liability.
Recognition of limited liability partnerships and silent partnerships can be
introduced.
Different types of accounting systems and standards should be introduced
for different types of partnerships.
This Bill should be revised to recognize the status of MSMEs and award
special tax concessions.
Simplified tax procedures should be set out for MSMEs.
25
59.
Regulatory and Legal Framework: Despite the existence of commercial legislation in
the Maldives, there remains the need to formulate legislations on bankruptcy and insolvency,
legislation on banking and taxation laws, as well as accounting and auditing standards for
Table 11: Regulatory and Legal Framework for MSME Development.
IDENTIFIED ISSUE
ACTION NEEDED
Business Registration
Objective: Reduce the barriers
and building the necessary
system of effective registration for
MSMEs.
Issue standard simple regulations to

recognise and govern sole proprietorships.
Introduce, implement and monitor
requirements for submission annual financial
reports for registered businesses.
Conduct pilot decentralization of business
registrations outside Male.
Plan for a one stop window program for all
licensing requirements of MSMEs.
Regulatory Review and

Recourse Mechanism
Objective: Develop and
strengthen regulatory
infrastructure needed for
business and enhance
governance of relevant
government agencies.
Establish regulatory review process for all

existing and proposed commercial legislation
Formulate a recourse mechanism to appeal
administrative decisions.
Commercial Legal Framework

Objective: Develop basic legal
infrastructure needed for
businesses.
Enact draft laws on Banking, Bankruptcy and

Insolvency.
Introduce standard court procedures to file
for bankruptcy under the Companies Act.
Review the draft Business Profit Tax Bill to
incorporate tax measures that support the
growth of MSMEs at most income levels
Introduce minimum wages and accounting
standards to all types of business including
sole proprietorships.
OTHER CONSIDERATIONS
Introduce facilities for
business registration process
in the BDSCs in each of the
targeted region.
Plan for online registration
system.
Introduce limited liability
partnership and silent
partnership enterprises into
the regulatory framework.
Introduce Regulatory Impact
Assessment (RIA) by
carefully reviewing existing
and proposed legislations and
regulations and exploring
more flexible alternatives to
regulation.
Include MSME legal and
regulatory strategies into Civil
Justice Action Plan to be
introduced by the Attorney
Generals Office.
Enact draft laws on secured
transactions, e-commerce
and information technology.
Develop corporate
governance guidelines and
disclosure requirements non
financial requirements.
Establish small claims court to strengthen

contract enforcement of MSMEs.
Enact legislation to establish commercial
arbitration, mediation and other types of
alternative dispute mechanisms.
Introduce effective judgement enforcement
and summon procedures in the civil court.
Engage in extensive capacity

building program for the
commercial court system.
Simplified Accounting and

Taxation Systems For MSMES
Objective: Facilitate enhanced
access to finance by reducing the
risk related to lack of appropriate
financial information.
Issue simplified accounting guidelines for

MSMEs including providing them with the
related templates.
Develop a simplified tax reporting system for
MSMEs.
Issue guidelines and specific requirements to
assist the MSMEs to adhere to the formal tax
system.
Train, develop and support

accounting professionals in
the country.
Credit Information Sharing

Objective: Facilitate enhanced
access to finance b y reducing
the risks associated with limited
information on potential
borrowers.
Establish an enabling legal frame for

operating of a credit information sharing
system including framework to protect the
rights of borrowers.
Leasing
Objective: Create enabling legal
framework for finance leasing.
Introduce legal framework on leasing

covering both financial and operating leasing.
Improving Judiciary
Objective: Strengthen rule of law
and increase confidence of the
business community in the civil
justice system.
26
Introduce accounting
standards for leasing.
business and minimum wage levels. A Business Profit Tax Bill has been drafted, which will offer
competitive corporate tax measures that support the growth of MSMEs. Nevertheless, MSMEs
will find compliance with the tax rules particularly onerous because they generally have limited
in-house resources to deal with complex tax deductions, credits and accounting requirements.
60.
Prior to introducing such measures the Government should take steps to simplify
compliance with tax rules. For example, the Government can provide single points of contact for
example in the BDSCs for MSMEs and on-line information and support services. The BDSCs
should also be equipped to answer queries on such matters and support MSMEs with self-help
taxation packages. The Government also needs to strengthen its monitoring of regulatory and
legal compliance of businesses, and it should facilitate information to MSMEs on regulatory and
legal compliance requirements. Table 11 summarizes actions needing to be taken for a
business environment that is conducive to SME development.
61.
Impact of Business Regulations: In Maldives regulators do not conduct extensive
research on impact of regulations on the target groups. Government is unaware of the possible
impact the laws and regulations can have on businesses. The resulting lack of an appropriate
framework for stakeholder participation prevents private sector from intelligently participating in
discussions and forming opinions on the objective of a regulation and its potential impact.
Moreover, laws drafted and enacted often lack operative details and usually are left to
regulations which are poorly considered.
62.
Regulatory Impact Assessment (RIA): The introduction of Regulatory Impact
Assessment (RIA) will help the Government to become a facilitator of private sector
development. An RIA mechanism will provide Government with an opportunity to weigh and
present the relevant evidence on the positive and negative effects of such interventions,
including reviewing the impact of policies after they have been implemented. Best practices
suggest the need to firmly embed RIA policy in the appropriate legal framework.
Institutionalization typically requires endorsement of RIA policy and establishment of a RIA
working group adopting a regulatory reform policy at highest political level and establishment of
a central regulatory body for the RIA process. The initiative to adopt a regulatory reform policy
will need to be endorsed at the highest political level and executed by a RIA task force to set out
a national RIA policy. At a minimum, the RIA policy will (i) specify procedures for creating and
changing a regulation, and how to apply RIA within the regulatory process; (ii) specify
mechanisms for consultation with stakeholders, as well as mechanisms for assuring
transparency within the stakeholder consultation process; (iii) specify types and level of
regulations subject for reviewing; and (iv) specify enforcement mechanisms, including rewards
and sanctions.
63.
RIA Monitoring Functions: Initially RIA functions will be assigned to the Monitoring and
Evaluation Unit of the project, with the objective of evaluating the impact of actual or proposed
regulations affecting MSMEs. The RIA activities will include prioritization of regulations that are
likely to have appreciable benefits and costs. The profession staff involved in RIA activities
should not be directly involved in the formulation of laws and regulations in other ministries in
order to maintain an appropriate level of independence in their monitoring functions.
27
4.
KEY FEATURE: BUSINESS DEVELOPMENT SERVICES

4.1
Existing Situation in the Maldives
64.
BDS Market: The BDS market is at an infant stage of development in the Maldives, a
situation reflected in the general lack of awareness on the part of entrepreneurs (demand side)
about these types of services in focused group discussions held with MSME stakeholders in the
atolls and in the survey of business conditions in the atolls. The few BDS products that do exist
are provided by the public sector and a limited number of private providers (supply side) in the
capital and consist mainly of skills-related training courses that do not necessarily induce
entrepreneurial activity. Yet BDS products are needed for microenterprises to start or to
graduate to SME status in the atolls and islands beyond Male, especially in the following areas:
(i) improved availability and access to information; (ii) access to markets, including transport and
logistics support; (iii) access to low cost finance; (iv) affordable technical consultancy and
training; (v) basic management training; (vi) start-up training and consultancy; and (vii) training
in entrepreneurship.
65.
Business Member Organizations: Development of the private sector needs to rely on
business member organizations (BMOs) rather than the public sector, but in the Maldives BMOs
only exist in the capital city and are limited in their range of activities and service. The four main
BMOs are (i) Maldives Association of Tourism Industry (MATI), a well-organized body
representing the tourism sector; (ii) Maldives National Chamber of Commerce and Industry
(MNCCI), which also acts as the umbrella organization for the Womens Entrepreneurs Council,
represent all sectors of business in Male with more than 400 paying members and at the early
stage of institutional development with little coverage of the atolls; (iii) Fishermens Association
of Maldives (FAM) is a voluntary organization whose activities are limited to Male Atoll; and (iv)
Maldives Association of Construction Industry (MACI) representing the construction sector in the
capital. With some institutional development support, MNCCI could become an influential BMO
for MSMEs in the atolls by providing services such as market information, lobbying and
independent M&E of the present projects. Indeed, all BMOs have expressed their readiness to
broaden their support of the sectors in which they are involved. MATI volunteers as champion
for the development of the handicraft cluster.
4.2
Cluster-Based Development Strategy
66.
Clusters as a Means of Overcoming Size Constraints: Small island economies like
the Maldives lack economies of scale that allow them to compete effectively in a globalized
economy. MSMEs are unable to capture market opportunities that require large quantity
production, homogenous standards, regular supply and reliable access to markets. They also
encounter difficulties in achieving scale economies when purchasing inputs such as equipment
and raw materials and accessing financial, consulting and marketing services. Small size also
constitutes a significant obstacle to internalize functions such as training, market intelligence,
logistics and technology innovation and it can also prevent and effective intra firm division of
labor. One approach to overcoming the size constraints of MSMEs is through the use of industry
clusters and business networks. The success of these clusters relies on (i) the presence of
functioning networks and partnerships; (ii) strong innovation base, with supporting research and
development (R&D) activities; and (iii) the existence of a strong skills base. Four other factors
also contribute to successful cluster development: (i) adequate physical infrastructure, (ii)
presence of large firms, (iii) strong entrepreneurial culture, and (iv) access to finance.
28
67.
Cluster Experiences: The Maldives has already used clusters approaches in its
development planning. The Strategic Economic Plan (SEP) and the Integrated Framework (IP)
program both have explored clusters as a means of developing the countrys core sector of
tourism, fisheries and agriculture, as well as new activities in information and communications
technology (ICT) and logistics. 23 Both studies note that successful development of these sectors
will require bolstering of key elements in their respective clusters, notably (i) financial services in
domestic banking, insurance and reinsurance, (ii) professional and business services in
accounting, legal, management consulting, education and training, architecture and
engineering, (iii) transport and logistics infrastructure and services, and (iv) communication and
telecommunication infrastructure and services.
68.
Strategy: Although successful clusters share some common elements with others, each
is unique in its ability to addresses a specific set of strengths and weaknesses. For the
Maldives, the proposed strategy for cluster development consists of the following elements: (i)
bottom-up approach that evolve from local atoll conditions; (ii) separation of responsibilities
between the atolls and BMOs and public sector in the capital; (iii) enhanced public-private
partnership, with cluster development led by private sector-based leadership groups in the atolls
and the public sector and BMOs playing a facilitating role to address common constraints of
most clusters in a given sector such as regulations or bottlenecks in the supply chain; (iv)
capacity building in both atolls and capital that not only ensures appropriate responsibilities are
carried out effectively, but develop dynamic leadership roles in each cluster and eventually
development of champions for the clusters.
69.
Implementation: Based on these elements, the cluster development strategy for MSME
development in the atolls will combine cluster building with reverse planning using a bottom-up
approach and an integrated local economic development planning. Rapid implementation of this
approach will be achieved through the following six steps: (i) gather SME stakeholders and
select the cluster based on predefined criteria such as the employment impact potential; (ii) form
the clusters; (iii) conduct participatory rapid economic appraisal (REA) identifying comparative
and competitive advantages of the atolls; (iv) develop short-term action plans for local economic
development (LED) based on simple and do-able plans; (iv) set up a matching grant fund for
light house projects of LED; (v) train local facilitators of LED; and (vi) replicate successful
activities in other atolls.
70.
Capacity Building: The cluster approach aims to achieve its outcomes by helping the
various cluster agents to develop a consensus-based approach for the cluster as a whole and
by strengthening their capacity to act upon such a approach. Capacity development is based on
two components. The first component aims to reduce fragmentation of knowledge, and
concurrently to provide an opportunity for MSMEs to draw attention to a common and often very
innovative agendas for addressing networking activities in the atolls. The second component of
the approach aims to enable the various cluster agents to overcome limitations associated with
un-networked traditional practices and put in their place adopt a sustainable, autonomous
governance framework which will keep the local economy in a dynamic growth path long after
technical assistance has withdrawn from the clusters.
4.3
Organizational Structure
23
See Ministry of Planning and National Development (2005), Strategic Economic Plan. Male, Republic of
Maldives; and Integrated Framework (2005), Integrated Framework Diagnostic Trade Integration Study for the
29
71.
Functions: The Business Development Service Centers will be the principal vehicle for
delivery of BDS products to MSMEs and will facilitate cluster development in the atolls. Each
focal region will have a BDSC offering a wide range of services to MSMEs and cooperative
initiatives at cost-based prices. As neither start-ups nor established MSMEs have been exposed
to the concept of professional, demand-oriented delivery of BDS at market prices so far, and are
therefore unprepared to pay the cost-based price for such services, a Cost Sharing Facility
(CSF) will be established as the principal funding mechanism for the development of a
commercial BDS market. The CSF will enable the BDSCs to initially offer services at a low,
subsidized price. It will also support the BDSCs in developing service products and provide
substantial income to the Centers during the three-year funding of the CSF. The Centers will
have a business plan indicating core activities, required investment and planned revenue
streams. They will develop a clear strategy comprising a vision, mission, goals and line of
activities, as well as an annual operational plan.
72.
Objectives: The BDSCs will have the following three objectives: (i) provide BDS
products to start-ups and established MSMEs; (ii) facilitate Local Economic Development (LED)
and cluster development in their respective regions; and (iii) link start-ups and other types of
MSMEs to financing opportunities. To meet its objectives the BDSCs will offer a wide range of
services classified into four categories: (i) consulting services for business planning and
business counseling, identification and provision of information, and coaching; (ii) training
services on costing and pricing, marketing and sales, accounting and entrepreneurship; (iii)
facilitation services for market access facilitation, accessing finance and facilitating the
formation of cooperatives; and (iv) government-related services covering support for business
registration and licensing, linking to government databases, and linking to government
extension services. To sustain its operation following the termination of the three-year Cost
Sharing Facility, the BDSC will become an independent and market oriented service provider
with a development and commercial objectives.
4.4
Capacity Building
73.
Needs Identification: One of the major constraints to the effective development of
MSME in the atolls is the lack of capacity in enterprise development services. The ability of the
proposed project to successfully deliver the type of support needed by MSMEs in the atolls will
depend on capacity development in the three main channels for BDS (i) The Business
Development Services Centers (BDSCs) in each of the targeted regions; (ii) the Enterprise
Development Unit (EDU) of the Ministry of Economic Development and Trade (MEDT); and (iii)
the Maldives Chamber of Commerce and Industries.
74.
Cluster Development: It should be emphasized that capacity building cannot be
confined to a once-and-for-all initiative such as the identification/provision of a BDS previously
unavailable to the cluster MSMEs. Instead the aim is to enable the various cluster actors to
tackle new challenges and to seize upon more ambitious visions on a sustainable basis. Such
an objective involves, for example, strengthening the capacity of the target sector businesses to
convey their requests to the BDS providers, lowering the risk perceived by BDS providers in
doing business with MSMEs, enabling BDS providers and MSME owners to identify institutional
partners able and willing to co-finance the development of new BDS, and identifying more
effective procedures to assess BDS impact.
75.
Enterprise Development Unit (EDU): The EDU is one of the main pillars of the
Governments efforts to create an effective and competitive private sector throughout the
country. Following its establishment under MEDT by Letter 73 of the Presidents Office in
30
October 2004, the EDU currently operates with seven recently hired staff, who are relatively
young and in need of experience in facilitating market development and promotion to MSMEs.
At the onset, the EDU will need to undertake a strategic planning process consisting of the
following steps: (i) assess and adjust its organizational structure in response to the new project;
(ii) ensure that all EDU staff works towards a common goal established by the project; (iii)
identify the HRD requirements and gaps; (iv) conduct an intensive HRD development program;
and (v) focus the relatively limited resources of its staff on key activities.
76.
Business Development Service Centers (BDSCs): Since SME development by
delivery of BDS is a fairly new concept in the Maldives, an international BDS expert will need to
be contracted on an intermittent basis during the first three years of the project. The task of the
expert will comprise the following activities: (i) elaboration and fine tuning of the BDSC concept;
(ii) acquisition of the BDSC staff; (iii) development of appropriate BDS products; (iv) coaching
staff in elaboration of operational plans; (v) on-the-job training of BDSC staff; (vi) monitoring and
evaluating project progress; and (vi) knowledge management through workshops, seminars,
conferences on the BDSC concepts. Additionally three types of capacity building activities will
take place in the BDSCs. The first is training in business planning for start-ups, which consists
of developing entrepreneurial competencies, identifying project ideas, business administration
training, and elaboration of business plans, including their submission to financial institutions.
The second activity involves SME consulting services in the area of enterprise creation, problem
and solution identification, organization and management, market analysis, product marketing,
finance, and management effectiveness. The final activity is training of trainers in adult
education methods, communications and learning methods, training seminar, curriculum design,
monitoring the performance of participants, and training skills.
77.
Maldives National Chamber of Commerce and Industries (MNCCI): MNCCI has
about 460 members, of which 60 to 80 percent are MSMEs, and it provides a range of services
in advocacy, lobbying, liaison with Government, and trade fairs. Its effectiveness, however, is
undermined by the lack of regional chapters in the atolls, a lack of strategy and plan of activities,
and the absence of any BDS products for its members. The major constraints of MNCCI are the
lack of a clear cut strategy, lack of professional staff and lack of funding. To address these
constraints, SMED project will support MNCCI in its strategic planning process that includes the
elaboration of an operational plan and a HRD plan. MNCCI will get an involvement in the
operation of the BDSCs in the regions and will be represented in the appraisal committee of the
Cost Sharing Fund.
4.5
BDS Centers in Target Regions
78.
Functions: The principal vehicle for delivery of BDS products to MSMEs in the atolls are
the Business Development Services Centers (BDSCs). Each target region will have a BDSC
with a clear mandate and a business plan, indicating core activities, required investment and
planned revenue streams. The BDSC will have the following three objectives: (i) facilitate Local
Economic Development (LED) and cluster development in its respective region; (ii) provide BDS
products to start-ups and MSMEs; and (iii) link start-ups and other types of MSMEs to financing
opportunities. Key services to be provided include business counseling, business planning and
training in finance, sales, accounting and entrepreneurship; support for business registration
and licensing; provision of database, library and information facilities, as well as internet access;
support for financing applications to equity providers; market access facilitation; general support
for communications technology. The legal form of the BDSC and the physical accommodations
and staffing need to be elaborated with MEDT.
31
79.
Staffing: BDSC staffing will consist of both a permanent staff located in each Center,
and cross-Center staff that will provide services to all Centers on a rotating basis. Each BDSC
will be headed by the Centre Manager, who is familiar with LED methodology and able to direct
the operation of the Centre. The professional staff will be composed of SME trainers and a
technical expert for each priority cluster, who will also provide technical training and consulting
at other Centers. The cross-Center staff will be composed of a team of three MSME promoters
and Local Economic Development (LED) facilitators who can provide expertise in a wide range
of areas of business development and financial support. At the onset, it is important that a
strong incentive scheme be created to attract and retain qualified staff.
80.
Sequencing: Establishing the community-wide recognition of BDSCs will be critical to
the success of the project as a whole. Three stages are proposed for their establishment:
Initially government agencies will use the Centers for the provision of their MSME development
services in the atolls. Once the Centers gain recognition in the local community, the Centers will
finance their activities from the provision of services leading up to entrepreneurs obtaining
financing for their activities. These mechanisms include the provision of grant-based facilities
that are conditional on using part of the funds to pay for training and other BDSC products, as
well as commissions for helping entrepreneurs to obtain commercial financing of their activities.
In the final stage of BDSCs development, only commercially viable products will be supported
to ensure the economic sustainability of the Centers.
81.
Performance Measurement: The BDSCs will establish mechanisms, systematic tools
and formal systems for measuring operational results related to its activities, including financial
support to the entrepreneurs. Among the information gathered by the Centers on a quarterly
basis will be the following: (i) number of businesses analyzed; (ii) number of business plans
prepared; (iii) number of financial applications processed for each of the financing mechanisms
supported by the BDSC; (iv) breakdown of clientele by sector, geographic location, and size of
enterprise; (v) number of courses provided and participants in each course; (vi) participant
evaluations of each training course; revenue from conditional support for successful applications
to various financing mechanisms; other revenue sources; co-sharing grant management,
allocation, and monitoring analysis. Each BDSC will be responsible for establishing a resultsbased management and accountability framework and providing for appropriate mechanisms for
measuring and presenting results in relation to its objectives. This process will be established by
the Monitoring and Evaluation Unit using systematic, uniform and user-friendly tools for the
continuous measurement of results achieved by each BDSC.
32
Table 12: BDS Centers

Phase I
2008
INCOME
1000 US$
Income from BDS and co-financed from CSF
1000 US$
Income from MSME share of matching grants
1000 US$
Cost-Sharing-Facility (CSF) Interest Income (4.5%)
1000 US$
Target Income from Other BDSC Activities
1000 US$
Cost Coverage
Percent
0%
EXPENDITURE
1000 US$
58.8
Gross Salaries
58.8
1000 US$
BDS Officers
3.0
Person-Years
Administrative Staff
Person-Years
1.0
Salary of Business Developers (US$1,500/mth)
1000 US$
18.0
Salary of Administrative Staff (US$400/mth)
4.8
1000 US$
54.0
Total Salary of Business Developers
1000 US$
Total Salary of Administrative Staff
1000 US$
4.8
Total Gross Salary
1000 US$
58.8
Consultancy and Training
1000 US$
Number of Specialists (Consultants)
Person-Years
Remuneration (US$2,500/mth)
1000 US$
Per Diem
1000 US$
Travel
1000 US$
Training Materials and Related Costs
1000 US$
Overhead Costs
1000 US$
Marketing
1000 US$
Utilities
1000 US$
Transport and Staff Per Diem
1000 US$
Contingencies
1000 US$
58.8
TOTAL OPERATING COSTS 1000 US$
Fixed Assets
1000 US$
Office Building
1000 US$
Office Furniture and Equipment
1000 US$
Inter-Island Transport Vessel
1000 US$
TOTAL CAPITAL INVESTMENTS 1000 US$
Percent
Performance Indicator Goal a/
Unit of Acct
4.6
2009
109.2
15.6
31.4
41.3
20.9
10%
757.2
127.2
6.0
4.0
18.0
4.8
108.0
19.2
127.2
120.0
2.0
72.0
24.0
12.0
12.0
50.0
10.0
12.0
18.0
10.0
297.2
460.0
300.0
60.0
100.0
460.0
37%
Phase II
2010
2011
Sub-Total
182.8
313.7
605.7
33.6
46.8
96.0
56.4
81.4
169.2
29.9
11.1
82.3
62.9
174.5
258.3
33%
100%
44%
310.5
313.7
1,381.5
131.0
134.9
393.2
6.0
6.0
18.0
4.0
4.0
12.0
18.5
19.1
55.6
4.9
5.1
14.8
111.2
114.6
333.8
19.8
20.4
59.3
131.0
134.9
393.2
132.0
133.8
385.8
2.2
2.4
6.6
79.2
86.4
237.6
26.4
28.8
79.2
13.2
14.4
39.6
13.2
7.2
32.4
47.5
45.0
142.5
7.5
5.0
22.5
12.0
12.0
36.0
18.0
18.0
54.0
10.0
10.0
30.0
310.5
313.7
921.5
460.0
300.0
60.0
100.0
460.0
59%
100%
66%
Technical Assistance and Project Costing
82.
Technical Assistance: Project costing for the BDS component consists of technical
assistance and the project loan. The allocated US$ 1.14 million for technical assistance during
the period of the project loan (2009-2011) will be used for capacity building of the three major
vehicles of SME development. The first is the BDSCs where an international BDS expert will
support (a) the conceptualization, startup and further development of the two Centers for 14
months on an intermittent basis over three years, (b) training in business planning of BDSC staff
and selected EDU and MNCCI staff, (c) consulting of MSMEs, and (d) training of trainers. The
second part of the technical assistance will be directed towards the support of the EDUs
strategic planning process, as well as the EDUs staff training to facilitate its economic
development activities. The staff will be exposed to best practice techniques through overseas
training courses and seminars and through intensive training in development tools and the use
of the cost sharing facility. The third part of the technical assistance will help MNCCI prepare for
its proactive role in MSME promotion through a professional strategic planning process that will
enable the organization to operate outside of Male, open regional chapters and develop a wider
range of services for its members.
83.
Business Development Services Centers: For the BDS Centers (BSDCs) the budget
allocation is US$ 1.38 million over three years (Table 11). That amount covers the
establishment of two Centers in the Northern and Southern Development Regions, including the
33
building and equipping of an office and the purchase of a boat for inter-regional transport by
staff members of each Center. It will also cover the competitive salaries of six (6) professional
and four (4) administrative staff members, as well as the overhead costs for running the
Centers. Technical assistance in the amount of US$ 385,000 will cover the design and
implementation of cluster development projects the target sectors.
Table 13: Enterprise Development Unit
Unit of Acct
EXPENDITURE
Gross Salaries
SMED Project Coordinator
Monitoring and Evaluation Officer
Communications Officer
Administrative Staff
Salary of Professional Staff (US$1,000/mth)
Salary of Administrative Staff (US$500/mth)
Total Salary of Business Developers
Total Salary of Administrative Staff
Total Gross Salary
Promotion
Media Campaign
MSME Portal and Registry
Overhead Costs
Rent
Marketing
Utilities
Transport and Staff Per Diem
Contingencies
TOTAL OPERATING COSTS
Fixed Assets
Office Furniture and Equipment
TOTAL CAPITAL INVESTMENTS
Person-Years
Person-Years
Person-Years
Person-Years
1000 US$
1000 US$
1000 US$
1000 US$
1000 US$
1000 US$
1000 US$
1000 US$
1000 US$
1000 US$
1000 US$
1000 US$
1000 US$
1000 US$
1000 US$
1000 US$
1000 US$
1000 US$
Phase I
2008
94.9
6.0
0.5
12.0
6.0
6.0
6.0
81.1
81.1
7.8
12.0
3.0
3.0
1.8
94.9
-
2009
251.2
36.0
1
1
1
1
12.0
6.0
24.0
12.0
36.0
157.0
35.0
122.0
33.2
24.0
10.0
6.0
12.0
5.2
226.2
25.0
25.0
25.0
Phase II
2010
2011
105.0
98.4
37.1
38.2
1
1
1
1
1
1
1
1
12.4
12.7
6.2
6.4
24.7
25.5
12.4
12.7
37.1
38.2
37.5
32.5
17.5
17.5
20.0
15.0
30.5
27.7
24.0
24.0
7.5
5.0
6.0
6.0
12.0
12.0
5.0
4.7
105.0
98.4
-
Sub-total
454.6
111.3
3
3
3
3
12.4
6.2
74.2
37.1
111.3
227.0
70.0
157.0
91.4
72.0
22.5
18.0
36.0
14.9
429.6
25.0
25.0
25.0
84.
Enterprise Development Unit: The salaries of a BDS coordinator, the CSF coordinator,
a Monitoring and Evaluation Officer, the Communications Technical Administrator and an
Administrator are budgeted at US$ 111,000 for the three years of the project (Table 12). For
developing and conducting a media campaign for the stimulation of entrepreneurial activities
and the propagation of programs under the BDSCs and the establishment and maintenance of a
SME web portal an amount of US$ 227,000 are earmarked. It is expected that the BDS
component will operate through office rental of the EDU and, for that purpose, US$ 116,400 has
been allocated over the three years of the project.
34
5.
KEY FEATURE: COST SHARING FACILITY
5.1 Objective and Coverage

85.
Framework: The Cost-Sharing Facility (CSF) has an initial capital contribution of $ 1.0
million (MRf 12.7 million), which aims to assist about 300 MSMEs and 25 Local Economic
Development (LED) projects related to the four targeted clusters in the Northern and Southern
Development Region. The facility will generate activity in the following areas: (i) Business
Development Services (BDS); (ii) selected investments, especially for startups and young
entrepreneurs; (iii) seed capital to start a business; and (iv) institutional capacity-building for
Box 1: BDS Case Study for Start-Up Small Enterprise

Shafeenaz Abdul Sattar recently completed a tailoring training course at the Ministry of Youth and
Sports in Kulhudhuffushi, capital of Haa Dhaalu Atoll in the northern part of the Maldives. She is
very interested in becoming an entrepreneur and starting her own tailoring shop. Last week she
hear a radio announcement saying that the Business Development Service Center (BDSC) in
Kulhudhuffushi is promoting the start-up of enterprises in the Northern Development Region.
The next day, Shafeenaz visits the BDSC and inquires about the type of support that is being
offered. The BDS Officer, Mohamed Luveiz, explains the services of the BDSC and asks about
her specific requirements. Ms. Sattar needs a business plan, advanced training in design and
tailoring, and equipment for her shop that she plans to put in her home. Mr. Luveizs knowledge
about the local market and his appreciation of Ms. Sattars ideas suggest to him that it is a viable
income-generating enterprise with good growth potential.
Together they draw up an application for support through the Cost-Sharing Facility (CSF). They
estimate that the business development services component of the project amounts to MRf
8,000, of which Ms. Sattar will provide MRf 1,600 and the CSF will provide MRf 6,400 as a
matching grant. They submit the application to the CSF Committee, which approves the BDS
matching grant.
Mr. Luveiz finds that there are four other applicants wishing to start a tailoring and/or design shop
in the Northern Development Region. A suitable trainer is identified with the help of the
Communications Officer located in the Enterprise Development Unit (EDU) in Male. Within two
weeks, the BDSC organizes a training program that consists of the advanced technical training
as well as a more general Start Your Own Business course consisting of market analysis,
organizational and financial planning. After the training the BDSC supports Ms. Sattar in finalizing
her business plan for the tailoring shop.
During the course of the training sessions, the BDSC helps Ms. Sattar to prepare a loan
application with the business plan. Since she has no collateral, the bank rejects her loan
application, and she proceeds to request a matching grant for the investment capital that she
needs to start her business. Ms. Sattar orders the equipment and pays her MRf 10,000 share of
the project investment to the BDSC. The BDSC then pay the suppliers directly, which totals MRf
50,000, and keeps ownership of the equipment in its name for anywhere between six months and
a year, before turning the title over to Ms. Sattar. A short while after receiving the equipment that
shes ordered, Ms. Sattar opens her tailoring shop.
clusters and associations. Its purpose is twofold: first, to motivate new and young entrepreneurs
to start a business by encouraging MSMEs to request non-financial business support from BDS
Centers through assistance provided to entrepreneurs lacking access to bank loans in the form
35
of a maximum individual support amounting to $ 4,000 (MRf 50,000); secondly, to assist a

limited number of cooperative efforts (lighthouse projects) in local economic development in the
defined clusters along the line of non-financial business support and joint investments with a
maximum individual support of $ 40,000 (MRf 500,000).
Table 14: Cost-Sharing Facility
Unit of
Acct
Phase I
2008
Fund Value
Start of Year
1000 US$
End of Year
1000 US$
1000 US$
Fund Management
20
Fund Coordinator (1 person)
1000 US$
12
Administrative Assistant (1 person)
1000 US$
3
Travel Costs
1000 US$
3
1000 US$
Office Equipment
Contingencies
1000 US$
2
Matching-Grant Disbursements
Small Matching-Grants
Number of Matching Matching-Grants Number
1000 US$
Average Matching-Grant Size
1000 US$
Maximum Matching-Grant Size
1000 US$
Outlay on Small Matching-Grants
Large Matching-Grants
Number of Matching-Grants
Number
1000 US$
Average Matching-Grant Size
1000 US$
Maximum Matching-Grant Size
1000 US$
Outlay on Large Matching-Grants
Total Matching-Grants
Number of Matching-Grants
Number
1000 US$
Total Outlays
MSME Contribution to Projects
Percent Contribution from MSME
Percent
Total Value of MSME Contribution
1000 US$
Percent Contribution from SMEs
Percent
1000 US$
1000 US$
MSME Contribution to Investment-Related Matching-Grants
Percent Contribution from MSME
Percent
1000 US$
Percent Contribution from SMEs
Percent
1000 US$
1000 US$
-
2009
Phase II
2010
2011
Sub-Total
1,000
836
50
24
6
10
5
5
836
492
52
25
6
10
5
5
492
54
26
7
11
5
5
155
75
19
31
16
14
50
2.0
4.0
100
100
2.0
4.0
200
150
2.0
4.0
300
300
2.0
4.0
600
4
16.0
40.0
64
9
16.0
40.0
144
12
16.0
40.0
192
25
16.0
40.0
400
54
164
109
344
162
492
325
1,000
20%
25
20%
50
20%
75
20%
150
20%
6
20%
6
20%
6
20%
19
31
56
81
169
20%
20
20%
40
20%
60
20%
120
50%
32
50%
72
50%
96
50%
200
52
112
156
320
86.
Definition: The CSF provides a flexible business support instrument to introduce
financial incentives into a range of MSME-support initiatives and cooperative ventures, which
would otherwise not be viable. It is directed towards entrepreneurs who are planning to start a
business, invest, or get BDS for an existing business or cooperative efforts in the field of
handicrafts, agriculture, fish processing and tourism-related activities. In practice, CSF-support
appears as a discount on market prices by matching part of the cost of a particular service or
investment, as in the case of a business plan development or purchase of irrigation equipment.
36

Figure 4: Cost-Sharing Facility Process for Cluster Development Initiatives
MSME
Entrepreneur
Business
Development
Services Center
(BDSC)
Submit
proposal and
details on
business and
financing
Review
proposal and
determine if
entrepreneurs
matching funds
are available
Commercial
Banking
Institution
CSF Project
Appraisal
Committee
CSF Coordinator
Identify BDS
needs and
financing gap
Submit loan
application to
Financial
Institution
Assess loan
application
Forward
decision to
BDSC
Inform MSME
about maximum
loan eligibility
Review
financing plan
and request for
matching grant
Check
documents for
CSF application
Propose terms
of CSF
assistance
Forward
documents to
CSF Project
Appraisal
Committee
Final eligibility
check and site
visit
Project
appraisal and
final decision
Sign CSF
Agreement
Transfer
matching-grant
to BDSC
account
Request
applicant to pay
matching funds
Deliver BDS
Pay suppliers
and service
providers
Monitor and
evaluate
business
development
Supervise and
monitor project
Small grants will cover up to 80 percent of the BDS or investment costs for MSMEs, while large
grants will cover up to 80 percent on the BDS and up to 50 percent on the Investment on cluster
activities. A key feature of the CSF is the quick decision-making process that allows
disbursement, possibly within four weeks of the application submission. A broad range of BDS
will be covered, including technology upgrading, market and product development, international
37
standards, business and financial planning, training and skills development, management
development, and general business strategy.
87.
Rationale: A limited range of enterprises operate in the target regions and most of them
have few opportunities to invest in skills development. Small entrepreneurs are nevertheless
aware of the importance of human resource investment and know-how development. Without
that know-how, these entrepreneurs tend to postpone investments, especially in human
resource development (HRD) and information development, which in turn impedes (i) the
establishment of new businesses, (ii) competitiveness and growth of existing businesses, and
(iii) diversification of activities. Many of the constraints on individual entrepreneur could be
resolved through cooperative arrangements, and those areas that have a large potential for
economic development, as in the case of the priority sectors identified for development, could
be developed through these cooperative efforts. The Government has made it a priority to
accelerate private sector development and company growth by supporting businesses in
overcoming the prevailing constraints in the outer islands. The proposed co-financing
development scheme will contribute to enterprise growth, generate additional employment
opportunities in the outer islands, and thereby help alleviate pressure from job seekers on Male
and its vicinity. It will also help entrepreneurs by encouraging their financial participation through
matching grants, and ensuring that they received counseling from the BDSC.
5.2
Operational Features
88.
Functions: One of the prerequisite for entrepreneurs to receive CSF support is the
completion of an application that needs to be submitted to the CSF Project Approval Committee.
The application form covers information about the nature of business, the purpose of the
project, details about requested support, market coverage, existing and needed equity,
enterprise experience, expected employment generation, and contribution to island
infrastructure. In general, support for MSMEs from small matching grants is targeted to all
entrepreneurial activities, whereas cluster development efforts from larger matching grants are
directed at selected activities in high-priority sectors of the outer atolls. Applications from
individuals and groups will be encouraged, especially from cooperatives or cluster-based
groups. Examples of the types of activities supported by the CSF are training from business
management courses, hiring a consultant to create new handicraft designs, hiring an expert to
improve on the quality and efficiency of fish processing, and supporting the purchase of capital
investments. Ideally the facility would supplement commercial funding sources rather than
replace them.
89.
General Eligibility Criteria: The following criteria will be used to determine CSF
eligibility: (i) business domicile in the outer atoll islands that are served by a BDSC; (ii) business
plans having favourable market prospects;(iii) suitable professional background or management
experience of applicant; (iv) cluster or cooperative project proposal in a priority sector; (v)
ineligibility for a bank loan; (vi) ability of applicant to provide matching funds.
90.
Types of CSF Assistance: The procedures for application and disbursement of funds
depend on the type of CSF assistance requested. In the case of matching grants for BDS and
relatively small investments, the MSME will submit an application to the Regional CSF Project
approval Committee. Once approved, the BDSC will submit appropriate documents to the CSF
Coordinator in Male. In the case of matching-grants for BDS and investment for cluster
development initiatives, the procedure for approval of a grant for investment is more complex as
it usually involves higher amounts (Figure 4).
38

Box 2: BDS Case Study for a Targeted Cluster-Based Activity
Mohamed Waheed is a farmer in Hithadoo Island on Addu Atoll in the Southern Development
Region. Hes been involved in agriculture during the last ten years and since the Tsunami has
been supported by a donor-based grant to help with production-based activities. However, he
has little if any knowledge about the markets for agricultural products. He also needs help with
transportation to the markets and would like to purchase a tractor but does not have the capital
needed or scale economies for the capital investment.
The BDS Officer, Mariyam Nisha, has heard about Mr. Waheeds and finds that it is similar to
the situation of other farmers in Hithadoo Island. She organizes a meeting of the farmers and
the idea of forming a cooperative is discussed. Together the farmers agree to establish the
cooperative and they submit a request to the BDSC for a support package. That package
covers the formation of the cooperative, business and marketing plans, and training on
cooperative management, with a total cost of MRf 100,000. The proposal is submitted to the
CSF Committee, which approves a matching grant of MRf 80,000. The farmers deposit their
matching share of MRf 20,000 at the BDSC and the Center then organizes the necessary
services for the soon-to-be-formed cooperative. Those services include help in linking the
cooperative to the nearby resorts.
When the cooperative is created and registered with MEDT, the members of the cooperative
agree that the need cold storage facility, tractor, and some other tools, which together cost MRf
800,000. They can mobilize MRf 400,000 and need another MRf 400,000, which they initially
request from the Bank of Maldives branch in Hithadoo. Because the land on which they farm
cannot be accepted as collateral, the loan is rejected. Mohamed Waheed then asks the BDS
Officer, Mariyam Nisha, for assistance in finding other funding sources. Ms. Nisha suggests the
use of another matching grant, which in this case would cover the investment component of the
project, and together they complete the necessary application to the CSF Committee.
The CSF Coordinator travels to Hithadoo Island to assess the feasibility of the project and,
having found it to be viable, submits the application to the CSF Committee. The Committee
approves the matching grant and the accounting officer sends MRf 400,000 to the BDSC. The
cooperative accountant deposits MRf 400,000 in matching funds in the BDSC, which in turn
administers the MRf 800,000 capital investment. For that service, they charge a 1.0 percent
management fee, which helps support the sustainability of the Center.
A year later the cooperative is supplying produce to the two newly established resorts in Addu
Atoll. However, transportation services are unreliable and costly, and the cooperative members
therefore decide to purchase a boat. They calculate that they will need MRf 1,000,000 for the
boat and equipment, and they determine that they will need a loan of MRf 500,000.
The newly established Credit Guarantee Facility (CGF) allows the Bank of Maldives to extend
the requested loan to the cooperative using the cold storage facility and tractor as collateral.
With that loan, the cooperative is able to provide the resorts with regular delivery of their
products and their success serves as a model for other businesses in the region.
91.
Organizational Structure: The CSF will be a key SME Development instrument
operated by the newly established Enterprise Development Unit (EDU) of the Ministry of
Economic Development and Trade (MEDT). It will be organized as follows:
Staffing: MEDT will hire a coordinator for the CSF and appoint an auditor.
Authorization for Disbursements: The facility will be coordinated and administered by the
CSF Coordinator and projects supported by the facility will be approved by EDUnominated CSF Project Approval Committees. These committees will operate at the
39
national level for cluster development projects and at the regional level for smaller
MSME projects.
CSF Coordinator Activities: The CSF Coordinator will be responsible for the
development and annual revision of the business plan, development of appropriate
application, disbursement and monitoring procedures and the disbursement of grants to
the BDSCs, as well as the approval of business service providers like consultants,
trainers and technicians.
EDU Responsibilities: The EDU will develop rules and regulations, define sectors and
target groups, as well as other priorities that govern the facility.
BDSC Responsibilities: The BDSCs will support eligible MSMEs that apply for CSF
assistance and they will also identify eligible cluster activities.
6.
KEY FEATURE: CREDIT GUARANTEE FACILITY

6.1
Financing Approach
92.
Background: The general banking practice in the Maldives limits loan amounts for
businesses in the atolls to 50 percent of the assessed value of houses and registered vessels.
Assets such as motor vehicles, office equipment, inventories and accounts receivables are not
accepted by banks like the Bank of Maldives due to the difficulties in monitoring these assets
and the lengthy procedures of foreclosures in cases of defaults by the borrowers. 24 With only
about 10 percent of construction built on same titled land, there is extremely limited collateral
that business can use to acquire loans. 25 There is therefore a need for new financial instruments
that can overcome existing lending restrictions to enhance working capital and encourage
investment, without unduly increasing commercial lending risks.
93.
Overview: The proposed CGF is a special reserve fund for credit enhancement of SMEs
managed by a financial guarantee agency, represented by Allied Insurance Company of the
Maldives Pvt. Ltd (hereafter Allied Insurance). The fund size will be $2.5 million, preceded by an
initial capital of $0.5 million during its pilot operations. The maximum loan size for individuals is
$80,000 (MRf 1 million) and the anticipated average size is $40,000 (MRf 0.5 million).
Implementation of the scheme will be based on a selective approach in which guarantees are
extended on a case-by-case basis. Loan guarantee coverage will be targeted to a limited
number of enterprises selected from enterprises having less than 50 employees and having
operations in the target clusters and focused regions of the SMED project. Administration of the
facility by Allied Insurance, the only Maldivian insurance company in the country, has been
agreed upon with its board members and plans are underway to incorporate the activity within
its organization. Insurance coverage will be given to all applying financial institutions for
investment and working capital loans to eligible SMEs that have adequate cash flow and
securities, based on independent CGF risk assessment and well-defined eligibility criteria.
During the implementation of the pilot facility, ADB will cover the costs pertaining to salaries of
the manager and support staff, marketing and travel to the focus regions, and Allied Insurance
24
Inventory and accounts receivables are nonetheless often used as collateral in other developing
countries, especially for SMEs.
25
Nearly all enterprise owners report needing business loans in excess of their bank-accepted collateral value,
according to the survey of MSMEs in the atolls.
40
will cover office and administration costs. At the beginning of the second phase, the CGF capital
will be fully paid prior to commencing operations and interest earnings from its long-term deposit
with commercial banks will contribute to the coverage of claims and administration costs. Box 3
summarizes the facility.
94.
Selective Approach: The present scheme adopts a selective approach, whereby
guarantees are extends on a case-by-case basis to SMEs. The potential borrower and
guarantor will reviews the project and, once agreed upon, the guarantor will issue an advance
guarantee approval to the borrower who, in turn, can use it to negotiate a loan contract with a
commercial bank. Under this mechanism, a direct relationship between the guarantor and the
borrower exists since the former investigates submitted loan applications and selects the ones
to be guaranteed. This reduces the probability of moral hazard on the part of the commercial
bank during the screening process and ensures that guaranteed borrowers are indeed in the
targeted category intended by the CGF. 26 The recommended institutional structure and CGF
process flow follows international best practices and lessons learned from other countries. 27
Box 3: Credit Guarantee Facility: Coverage and Organization
Fund size
Max loan
Avg loan
Loan target
Annual fee
Up-front fee
Risk coverage
US$
US$
US$
Number
end of
year
%
%
%
Phase 1: Pilot
Operations
(2008)
$500,000
$ 80,000
$ 40,000
5 loans in 2008
1.5%
1.5%
80%
Phase II:
Regular
Operations
(2009 onward)
$2,500,000
$ 80,000
$ 40,000
10 (2009)
40 (2010)
90 (2011)
1.5%
1.5%
80%
26
Characteristics of the Facility

Functional Approach:
Based on a selective approach in which guarantees
are extended on a case-by-case basis
Eligibility Criteria:
(a) Number of employees less than 50
(b) Activities focused on target clusters
(c) Operations based on one or more focus regions
Financial Guarantee Agency:
Allied Insurance Company of the Maldives Pvt. Ltd.
The alternative approach is the so-called portfolio approach whereby commercial banks can attach guarantees to
loans within an eligible category without prior consultation with the guarantor. Eligibility criteria can be
defined in terms of the characteristics of borrowers, that is, in terms of size, sector or cluster of operation
and location of the enterprise. In contrast to the selective approach, the portfolio approach excludes direct
contact between the guarantor and the borrower. Instead, the borrow deals directly with the commercial
bank, who charges a premiums for the higher risk coverage by the guarantee facility. This approach enables
a considerable expansion of activity by reducing time-consuming and cost-intensive screening procedures;
moreover, economies of scale associated with increased business volumes allow more cost-effective
operations. The disadvantage, however, is that there is less vetting of borrowers and a large proportion of
the low risk borrowers awarded guarantees might also qualified for non-guaranteed loans, thereby
undermining normal bank operations. Higher default rates occur under the portfolio approach than in the
selective approach because all borrowers within a specific category are eligible for the guarantee and
because commercial banks often try to reduce their screening costs and are therefore less diligent. The
selective approach is therefore more efficient than the portfolio approach since the total cost of mobilizing
additional credit is lower than for the portfolio approach, and the quality of loans guaranteed under the
selective approach is likely to be higher because screening and monitoring are performed with greater
depth. For details, see A. Green, Credit Guarantee Schemes for Small Enterprises: An Effective Instrument
to Promote Private Sector-Led Growth? United Nations Industrial Development Organization (UNIDO).
SME Technical Working Papers Series, Working Paper No. 10, August 2003.
2727
For a case study on the reasons underlying the failure of some lending programs, see M. Bechri, T. Najah and
J.B. Nugent, Tunisia's Lending Program to SMEs: Anatomy of an Institutional Failure? February 6, 2000.
41
87.
Phase of the Program: The first phase of the program will focus on institutional
organization and staffing, capacity building, and the implementation of a pilot facility in the
amount of US$0.5 million that will aim to provide five (5) credit guarantees during the course of
2008. The second phase will establish regular operations of the facility with a capital
contribution of US$2.5 million. During the first three years of regular operations, the number of
credit guarantees in the portfolio will be targeted as follows: 10 loans at end of 2009, 40 loans at
end of 2010, and 90 loans at end of 2011.
6.2
Operational Features
95.
Eligibility Criteria: The target group eligible for guarantees can be delimited in terms of
size, age, ownership, sector, and location of income generating activities. Best practices
suggest the following criteria for eligibility in the present scheme:
Enterprises with less than 50 full-time or seasonal employees
Enterprises that have been operating for over a year
Privately owned enterprises in the form of sole proprietorship, private limited liability
companies, or cooperatives
Enterprises with their main operating in one or more of the atolls in the focus regions,
that is, the Northern and Southern Development Regions
Enterprises producing goods and services in the priority sectors, that is, handicraft,
agricultural commercialization, tourism-related activities and fish processing
96.
Type of Finance and Size of Loans: Both working capital or funds for investments will
be guaranteed. Maximum amounts guaranteed for single borrowers will ensure diversification
and sustainability for the fund. The maximum loan amounts for eligible businesses are as
follows:
o Working Capital: US$ 40,000 (MRf 500,000)
o Fixed asset purchase: US$ 80,000 (MRf 1,000,000)
o Contracts with government agencies and bona fide medium and large enterprises (for
example, selected resorts): US$ 80,000 (MRf 1,000,000).
The reason for the differentiation in the ceiling amounts is that, while targeting investment
capital is likely to create more additionality, loans for investment have longer repayment periods
and are likely to require a larger amount of collateral. They are also less accessible than
working capital to borrowers without guarantees.
97.
Terms and Risk Coverage: Fees are charged as an annual premium to the amount of
the loan guaranteed and as a one-time advance fee. The charge to borrowers will be an annual
fee of 1.5 percent, plus a front-end fee of 1.5 percent on the value of the loan. 28 The front-end
fee is an administration or registration (commission) fee and is intended to discourage
unjustified applications. The share of the lending institution in the risk of non-payment by the
28
Best practices recommend charging borrowers annual fees in the range of 1%-2% on top of a modest front-end
fee of 1%-2% of the value of the loan. For details, see J. Levitsky, Best Practice in Credit Guarantee
Schemes. The Financier, Vol 4, No. 1 and 2, 1997.
42

borrower is 20 percent. 29 Borrowers must pledge any assets acquired with the guaranteed loan
as collateral. Commercial banks will be given adequate incentives to maximize loan repayment
by borrowers and use a standard means of identifying arrears, including a relatively short and
clear-cut maximum period of arrears before being compensated by the CGF. It is proposed that
the CGF guarantee up to 80 percent of the outstanding loan principal and up to 80 percent of
the foregone interest income during the first three months of arrears. The reimbursement
excludes penalty fees and additional administrative costs.
98.
Screening and Monitoring: Under the present selective approach, the guarantor has
an important function to perform in determining the creditworthiness of the potential borrowers.
There should be a clear division of responsibility between guarantor and the commercial bank in
approving applications and monitoring borrowers to ensure that functions are not duplicated
unnecessarily and that costs and delays are kept low, especially as it relates to bank
requirements to fill in additional documents for the guarantee. Allied Insurance has a good
working relationship with Bank of Maldives and other commercial banks, and experience has
shown that processing times can be considerably reduced by the guarantee scheme through
the division of screening and approval functions between the guarantor and commercial bank.
99.
Defaults and Claims: The default rate is a prime determinant of a schemes viability. A
claim rate between 2 percent and 3 percent should be targeted, and the maximum acceptable
rate should be 6 percent of outstanding guarantees. A higher rate would suggest that borrowers
were not properly screened or that the guarantee coverage was too high or fees too low; in
contrast, a rate below 2 percent implies that the scheme is overly cautious in granting
guarantees. For the present facility the upper rate of 6 percent has been used in assessing the
funds sustainability.
100. Marketing: Decentralization of the scheme through branch networks in the focal regions
would ensure would facilitate information dissemination about the facility and ultimately assist in
the risk assessment. Given the relatively modest number of loans being targeted in the initial
years, however, a branch network is not justified. Moreover, the network would require
additional staff and overhead facilities that would increase the operating costs of the facilities
and possible make it unsustainable. As the facility gains acceptance and recognition among
SMEs in the atolls, consideration can be given to incorporating CGF officers in the BDSC of the
focal region. In the meantime and during the start-up period, the scheme will need to be proactive in gaining recognition and acceptance by potential borrowers and commercial banks. In is
important to emphasize that the scheme should not be marketed as a form of social banking but
as a measure to service, profitable business segments outside of Male. Moreover, in all
marketing efforts, care should be taken not to increase moral hazard by suggesting that credit
will not have to be repaid because defaults will be refunded by insurance firm. On the contrary,
the involvement of a private insurance company in the scheme should underscore the
consequences of non-payments on the loan.
6.3
Organization
101. CGF Staffing and Responsibilities: A CGF Manager and staff located will form a new
CGF Division of Allied Insurance. The division will consist of the manager, account officer,
29
The share falls within the desired range of 20% to 30% identified in best practices for credit guarantees. See M. G.
Maiangwa et al, A Review of Institutional Alternatives to Collateralized Lending. African Development
Review. Volume 16 Issue 3 Page 472 - December 2004.
43
accountant and support staff. The projected revenue and expenses of the facility suggest that
the facility will be economically viable based on estimated operating costs of $45,000 and
$120,000 interest and operating earnings at the start of regular operations. Details of the
organization, staffing and cash flow projections are presented in the annex to this report.
Table 15: Credit Guarantee Facility
Unit of Acct
Fund Value
Start of Year
End of Year
Expenses
Manager
Account Officer
Accountant / Secretary
Support staff
Travel (Costs per Domestic Trip)
Rent, electricity, water (500 sq ft)
Telephone , internet
Sundry office expenses, others
Revenue
Interest from Fund Deposit (4.5%)
Operating Result (Gross)
End-of-Year Balance
1000 US$
1000 US$
1000 US$
1000 US$
1000 US$
1000 US$
1000 US$
1000 US$
1000 US$
1000 US$
1000 US$
1000 US$
1000 US$
1000 US$
1000 US$
Phase I
2008
500.0
500.0
26.5
9.4
4.7
0.9
3.9
5.3
1.9
0.4
26.5
22.5
4.0
500.0
Phase II
2009
2,500.0
2,557.2
62.4
18.8
9.4
4.7
3.8
7.8
10.5
3.8
3.8
119.7
112.5
7.2
2,557.2
2010
2,557.2
2,637.4
68.9
19.6
9.8
4.9
3.9
11.7
11.0
4.0
4.0
149.1
115.1
34.0
2,637.4
2011
2,637.4
2,712.8
73.5
20.5
10.2
5.1
4.1
13.7
11.5
4.2
4.2
148.9
118.7
30.3
2,712.8
Sub-Total
2,712.8
2,925.6
204.9
58.8
29.4
14.7
11.8
33.2
33.1
11.9
11.9
417.7
346.3
71.4
2,925.6
102. Business Plan: The draft business plan in the Annex and its summary in Table 15
demonstrate that the facility is financially viable during its regular operations. A low start-up fund
during the pilot phase of the project is unlikely to be sustainable but, once the full funding occurs
in 2009, the facility will be able to sustain itself after the completion of the SMED project in 2011.
103.
CGF Process: Box 4 illustrates the operational process of the scheme for a particular
group of entrepreneurs in Addu Atoll in the Southern Development Region, while Figure 5
provides a visual representation of the process for all types of guaranteed loans under the
scheme. The case study builds on the earlier example of a cooperative seeking to
commercialize its activities and using the cost sharing facility. Having established the
cooperative and used the BDS facility for training and investment activities, the cooperative now
seeks to purchase a boat with the help of the credit guarantee facility to ensure the reliability of
its deliveries of produce to the two nearby resorts.
7.
FINANCING PLAN AND IMPLEMENTATION ARRANGEMENTS

7.1
Financing Plan
104. Expenditures: The Government of the Maldives has requested a loan of US$6.9 million
equivalent from ADB for a MSME project to support regional development and enhancement of
private sector participation in the economic development of the country. The loan takes into
account the strategic importance of developing the private sector in the atolls and the cost of
investments and adjustment costs associated with the adoption of the elements in the policy
matrix. In addition to the loan, counterpart funding will be used for costs associated with
regulatory reforms. Table 16 summarizes the project costs. The investment costs include
technical assistance that represents 17 percent of the loan amount.
105. Program Management and Implementation: Ministry of Economic Development and
Trade (MEDT) will be the main implementing agency and other ministries will implement pilot
projects. Ministry of Finance and Treasury (MOFT) will be the executing agency for the
responsible for managing and overseeing the flow of funds for the credit line and grant facilities.
44

Box 4: CGF Case Study
A year after helping to establish a the Agricultural Cooperative Traders (ACT) in Hithadoo Island on
Addu Atoll in the Southern Development Region, the cooperative is supplying produce to the two newly
established resorts in Addu Atoll. But transportation services are unreliable and costly, and the
cooperative members therefore decide to purchase a boat. They calculate that they will need MRf
2,000,000 for the boat and equipment, of which MRf 1,000,000 will need to be in the form of a loan.
Mohamed Waheed, president of ACT, hears an announcement on the radio about a credit guarantee
facility for SMEs that supports the types of activities of the cooperative operating in the region. The
facility provides up to MRf 1,000,000 for SMEs like that of ACT, which has been operating in the area
of agricultural commercialization for over a year in the southern region. He believes that he is eligible
for the guarantee and contacts Aishath Rasha, an officer of the Credit Guarantee Facility Division in
Allied Insurance. She explains that for the purchase of a boat to facilitate transport to markets, ACT is
eligible for a guarantee on the MRf 1,000,000 loan using the boat as collateral.
The cooperative has already received training in business development from the BDSC in Hithaddo
Island and Mr. Waheed uses that training to elaborate on the original business plan to include the new
investment. He submits the business plan along with the completed application for the Credit
Guarantee Facility (CGF) given to him to Ms Rasha at Allied Insurance. The Credit Guarantee Division
processes the application and determines that ACT is eligible for the credit guarantee. Following a field
trip to Addu Atoll to discuss the project with the ACT accounting officer and to discuss with the
managing directors of the two nearby resorts the potential purchase of fruits and vegetables supplied
by ACT, Ms. Rasha and the division director determine that the enterprise is creditworthy and the
business plan is viable. Based on these results, the CGF Division of Allied Insurance issue an advance
credit guarantee approval to ACT for MRf 1,000,000 loan to purchase the boat.
Since the Bank of Maldives has a branch in Hithaddo Island, Mr. Waheed decides to approach that
bank for a loan and informs Ms Rasha of his plans. Allied Insurance then forwards to the Bank of
Maldives a letter of intent with the advanced guarantee approval for the loan. Because Allied Insurance
has a good working relationship with the bank, it is able to share its credit report and other verifications
of documents on the loan request. Based on the work carried out by Allied Insurance and its own
analysis, it approves the loan to ACT with 80 percent guarantee coverage from Allied Insurance, with
terms of 10 year repayment at the market interest rate plus 1.5 percent premium for the guarantee, and
an additional 1.5 percent one-time fee for processing the loan through Allied Insurance. Bank of
Maldives transfers the cash to the boat owner and retains title of the boat during the period of the loan.
In the case that delays in the loan repayment were to arise, the loan contract of the Bank of Maldives
and the guarantee issued by Allied Insurance contains clear guidelines for the timely, efficient and
transparent procedures for triggering claims. Since the guarantee issue is a second liability, Bank of
Maldives would first need to sell ACTs pledged asset, the boat, before it could call in the guarantee
covering its actual losses. This procedure ensures that Bank of Maldives has an incentive to pursue
ACT for further collateral collections before it calls in the guarantee from Allied Insurance. Any amounts
recovered would be shared between the Bank of Maldives and Allied Insurance, according to the risksharing proportion of the loan specified in the guarantee contract. Fortunately, ACT is able to make all
of its payments on time and, with the newly purchased boat, it is able to guarantee delivery of its
produce to the resorts, thereby ensuring a flourishing relationship with its customers.
The newly created Enterprise Development Unit of MEDT will be responsible for ensuring the
participation of all relevant government agencies and business member organization in
regulations and policies governing MSMEs, as well as formulation of project activities related to
business development services and finance under the project. The period for implementation of
the project will be 36 months.
45
Possible use of
BDSCs to draw
up business plan
2
Eligible SMEs
prepare business
plan
1
Dissemination of
information to SMEs
about credit
enhancement
program and
eligibility criteria
Submit application
with business plan to
Financial Guarantee
Agency
Determine if
potential borrower
meets eligibility
criteria, review
business plan, and
assess its
creditworthiness
10
Use advance
guarantee to
negotiate loan with
commercial bank
Accept loan and

apply to enhance
working capital and/
or for investment
Guarantee
approved?
Yes
Issue advance
guarantee approval
to entrepreneur for
borrowing from
commercial bank
Issue 80% coverage

of outstanding debt
No
Media
campaign
Terminate
process
Commercial Bank
Financial Guarantee Agency
SME Entrepreneur
Figure 5: Credit Guarantee Facility (CGF) Process Flow
7
Negotiate loan using
guarantee to
enhance credit to
SME
Loan
approved?
No
Terminate
process
46
Yes
Issue loan with 1.5%

interest premium
and 1.5% up-front
fee
Table 16: Project Cost Estimates and Financing Plan ($1000)

Phase I:
ADB
Cap.Dev.
A. BDS Component
1,034.6
1. BDS Centers
58.8
Operating Costs
58.8
Capital Investments
2. Enterprise Development Unit (EDU): BDS Development
94.9
Operating Costs
94.9
Capital Investments
3. Cost Sharing Facility (CSF)
19.8
Fund Management
19.8
4. Technical Assistance for Capacity Building
861.1
BDS Centers
353.6
419.1
MNCCI
88.4
B. Financial Services Component
665.4
1. Credit Guarantee Facility
526.5
Fund Capital
500.0
Operating Costs
26.5
2. Technical Assistance
138.9
Bank Branch Training Modules
22.1
Training of Financial Guarantee Agency
116.8
C. TOTAL COST
1,700.0
1,000.0
2. SME Development Project
700.0
D. FINANCING
1,700.0
1. Capacity Development Assistance
1,700.0
2. Project Loan
-
SME Development Project (Phase II)

2009
2,559.3
757.2
297.2
460.0
251.2
226.2
25.0
1,049.5
49.5
1,000.0
501.4
341.4
137.9
22.1
2,590.2
2,562.4
2,500.0
62.4
27.8
5.5
22.3
5,149.5
529.2
4,620.3
5,149.5
5,149.5
2010
809.9
310.5
310.5
105.0
105.0
51.7
51.7
342.6
254.1
77.5
11.1
93.8
68.9
68.9
24.9
2.8
22.1
903.6
367.5
536.2
903.6
903.6
2011
760.9
313.7
313.7
98.4
98.4
54.1
54.1
294.7
244.1
45.1
5.5
86.0
73.5
73.5
12.4
1.4
11.1
846.9
307.1
539.7
846.9
846.9
Total
4,130.0
1,381.5
921.5
460.0
454.6
429.6
25.0
1,155.3
155.3
1,000.0
1,138.7
839.5
260.5
38.7
2,770.0
2,704.9
2,500.0
204.9
65.1
9.7
55.5
6,900.0
1,203.8
5,696.2
6,900.0
6,900.0
106. Capacity Building: Prior to the loan, capacity building assistance will aim to improve the
enabling environment for SMEs by supporting the development of market links and business
services, and by addressing financial constraints to credit availability for SMEs. The assistance
will include US$1.0 million in capacity building for the BDS and financial services components in
the form of support for the development of the BDS Centers, the Enterprise Development Unit
and MNCCI. In order to provide that support, assistance will also need to be directed towards
enabling the BDS Centers, the EDU and the cost sharing facility. The assistance also
contemplates providing a pilot fund for the Credit Guarantee Facility in the amount of US$ 0.5
million, and supporting the staffing and overhead needed for the operation of pilot fund.
7.2
Project Performance Monitoring and Evaluation
107. Monitoring and Evaluation: Quarterly reports will be submitted to the ADB on
monitoring of project progress. At the outset of the project an independent M&E unit will be
established by MEDT and MNCCI, and a project performance management system (PPMS)
created within 6 months of project commencement. The monitoring team will work with EDU and
each BDSCs to ensure that benchmarks are collected by these units on an ongoing basis.
Benchmarks will include BDS-related indicators for training and other product assistances at the
atoll level, classified by types of enterprise owner, gender, region and remuneration rates; while
financial indicators will cover amounts and numbers of grants and loan types supported and
outcomes. To assess incremental benefits from the project, basic enterprise and household
data for BDS clients will be maintained. Information will also be maintained on the number of
staff associated with BDS and lending support activities, as well as the number of individuals
participating in courses and workshops. During the preparation of the final project completion
47
report, the data collected will be used to evaluate the impact of the project at the atoll and sector
level, including its effect on women and vulnerable groups.
III. TECHNICAL ASSISTANCE
108. The technical assistance will be provided in two phases. Phase I will start in 2008 and
concentrate on the provision of capacity building assistance aimed at assisting the Government
to build institutional capacity to effectively manage the development process, address existing
capacity deficiencies, while helping to meet the demands that are likely to be generated by the
envisioned creation of new institutions under the Governments Roadmap for Reform
Agenda. 30 Phase II envisions an integrated project assistance in SMEs, as well as other
sectors like transport and the regulatory framework. In the case of the SME development
project, technical assistance will support the implementation of various measures to support
MSME development, as specified in the program, as well as to provide key institutional capacity
building support to the implementing agencies.
Table 17: Technical Assistance for Capacity Building
Phase I
2008
BDSC
International BDS Expert
Number of experts
Phase II
2009
2010
2011
Sub-Total
1000 US$
354
341
254
244
839
1000 US$
265.2
165.0
109.9
109.9
384.8
0.8
0.5
0.3
0.3
1.2
Fees
1000 US$
216.0
135.0
89.1
89.1
313.2
Per diem
1000 US$
43.2
27.0
17.8
17.8
62.6
Travel
Training in Business Planning
Consulting SMEs
EDU
person-years
1000 US$
6.0
3.0
3.0
3.0
9.0
1000 US$
44.2
58.8
44.2
44.2
147.2
1000 US$
44.2
117.6
99.9
89.9
307.5
1000 US$
419.1
137.9
77.5
45.1
260.5
33.2
Strategic Planning
1000 US$
88.4
22.1
11.1
Facilitators Training
1000 US$
44.2
9.3
Training of Trainers
1000 US$
88.4
29.5
14.7
7.4
9.3
51.6
Overseas Training for Staff
1000 US$
66.0
33.0
29.7
26.7
89.4
1000 US$
132.1
44.0
22.0
11.0
77.1
MNCCI
Strategic Planning
BoM/AI
1000 US$
88.4
22.1
11.1
5.5
38.7
1000 US$
88.4
22.1
11.1
5.5
38.7
1000 US$
138.9
27.8
24.9
12.4
65.1
1000 US$
22.1
5.5
2.8
1.4
9.7
Training on Credit Guarantee Facility

TOTAL
1000 US$
116.8
1,000.0
22.3
529.2
22.1
367.5
11.1
307.1
55.5
1,203.8
1000 US$
109. Table 17 summarizes the main technical assistance activities, which include (i) technical
support to the EDU in its efforts to create a more effective and efficient institutional setup for
MSME support, (ii) technical support for the establishment of the BDS Centers, (iii) technical
support to MNCCI as the most appropriate private sector representative to promote MMSEs in
the outer atoll areas, and (iv) technical support to the banking sector and financial guarantee
agency. Consultants will be recruited in accordance with ADBs Guidelines on the Use of
30
Asian Development Bank, Memorandum of Understanding, CPS Formulation Mission, South Asia Department, 1323 May 2007, Male, Maldives.
48
Consultants and other arrangements satisfactory to ADB. Procurement under the TA will be in
accordance with ADBs Guidelines for Procurement.
IV. PROGRAM BENEFITS, IMPACT AND RISKS
110. Benefits: The project will enhance MSME growth and competitiveness in the atolls and
increase the private sectors role in accelerating economic growth and poverty reduction in the
country. The project will support the Governments development framework for private sector in
general and MSMEs in particular through BDS and financing support for MSMEs and
entrepreneurial opportunities for the poor. The project will also help develop policy, regulatory,
and institutional reforms that are conducive to MSME development. The project will (i) support
the Governments preparation of an MSME development strategy targeting the atolls and outer
islands; (ii) provide technical support to strengthen the policy framework and enabling
environment for MSME development; (iii) develop MSME business support networks and
improve access to affordable BDS, financial services, and financing in the atolls; and (iv) create
entrepreneurial and job opportunities for economically vulnerable people in the atolls.
111. Impact: The impact of the project will be evaluated annually based on comparative
analysis of post-project information relative baseline information established at the beginning of
the project. Data will be evaluated at the enterprise level, at the level of the BDFCs in each
region, at the sector level for targeted activities to be supported under the project, and at the
level of the central BDS provider level in the public and private sectors.
112. Risks: The largest risk to the project is the lack of capacity within the Government to
implement the various activities of of the project loan, as well as regulatory reforms. The
Enterprise Development Unit has little, if any, experience with the formulation and
implementation of MSME programs and policies and lacks most of the urgently needed
technical expertise. To address this risk, technical assistance has been integrated into the
project that focus capacity building measures on EDU officials, regional BDFCs, providers of
financial services related to the proposed MSME financing instrument, and the independent
monitoring and evaluation unit. There is also a risk associated with the lack of inter-ministerial
and agency coordination within the Government. Because the project covers sectors related to
different ministries involved in agriculture, tourism and fisheries, it requires close consultantion
and collaboration among government agencies. The project design addresses this risk by
strengthening the newly created EDU to support the overall implementation of the project and
thereby address the issue of inter-agency collaboration in MSME development in the atolls.
V. SOE RESTRUCTURING AND PRIVATIZATION 31
8. OBJECTIVES AND SCOPE
113. Importance of Public Enterprises: In 2001-2005 Public Enterprises (PEs) accounted
for 16 to 19 percent of Government income, and registered an overall growth of 69 percent over
31
This chapter summarizes the report prepared by the SOE privatization and restructuring expert of the Team,
entitled, ADB TA 4745-MLD. Preparing Small and Medium Enterprise Development Project: Working Paper 2.
Public Enterprise Privatization and Restructuring. March 2007. The present summary does excludes (a) the
technical assistance on for capacity building to improve governance, and (b) the detailed analysis and
recommendations that have been prepared on each of assigned public enterprises. For details, see annexes 5-12 of
that report.
49

the four-year period. Three of the PEs accounted for nearly 80 percent of the turnover. 32
Maldives Airports Company Ltd (MACL) and Dhiraagau registered the highest revenue growth,
measured in terms of absolute values; Island Aviation and Maldives Inflight Catering had the
highest growth rates; while State Electric Company, Maldives Post, and Government Hotels
experienced negative growth during the period.
114. Government Objectives from Privatization: The privatization and restructuring
objectives of the Government and associated policies remain unclear. Ministries lack a common
understanding about the objectives to be achieved from privatization, and the priorities for
selection of enterprises and the associated privatization or restructuring strategies. Effective
restructuring and privatization of state owned enterprises (SOEs) will require the development of
a common approach within the Government before proceeding with specific actions.
115. Strategic Issues: Two major initiatives are needed for privatization. First, a corporate
tax regime should be introduced to guarantee ongoing revenue streams from the existing
institutions once they are fully or partially privatized. Otherwise, the Government will gain a oneoff windfall cash injection from the sale, but lose the ongoing dividend streams currently
received from profitable public enterprises (PEs). Adequate lead time will be required in excess
of 12 months to enable all enterprises sufficient time to implement the financial records required
to assess tax liability. Secondly, adequate regulatory regimes should be put into place prior to
privatization, not only in areas that will continue to provide monopoly services such as water,
sanitation and electricity supplies, but also across the wider competitive market.
116. Other Prerequisites: Current levels of governance, particularly for PEs, have scope for
improvement. The capital market and operations of the stock exchange lack appropriate
conditions for private ownership development. Adequate contract law and an independent
judiciary will influence market attractiveness for foreign investment. Practices such as requiring
all shareholders to be present during a court hearing will reduce willingness of overseas
investors to consider investing in the country, and therefore the price likely to be received for
assets. The Maldives Securities Act (Law 2/2006) applies to all companies considering local
floatation on the stock exchange. There are no additional requirements for companies being
privatized. However, the Public Enterprises Accountability Bill 2002 still needs to be enacted, as
does proposed legislation on banking, and the Business Profits Tax Bill.
117. Proposed Action: Attention should focus on (i) formulating clear policies and objectives
on privatization and restructuring, including the treatment and costing of land or rental premises;
(ii) introducing the proposed corporate tax regime; and (iii) developing adequate regulatory
regimes that will provide safeguards for the national interest in the event that the level of private
sector participation is increased in areas traditionally managed by Government.
118. Minister of State for Finance and Treasury-Based Prioritization: All enterprises
covered in the present analysis have been corporatized with the exception of Public Works
Services, which may revert to the status of a Department of the Ministry of Construction and
Public Infrastructure. Discussions with the Minister of State for Finance and Treasury (MoFT)
indicate that the following criteria have been applied when determining privatization or
restructuring priorities:
32
Maldives Industrial Fisheries Co (Mifco) has been declared a candidate for privatization,
which will hopefully occur before private sector development of the fishing industry
adversely affects its attractiveness.
Dhiraagau 33%; Maldives Airports Authority 28% and State Trading Organization 17%
50
Maldives National Shipping Line is a priority for privatization because of inadequate

returns.
Housing Development Finance Corporation will be floated in 2007 through an Initial

Public Offering of 60% of shares, a perquisite for raising $20 million loan finance.
Allied Insurance is planned for privatization in 2007; preparatory work has already
commenced.
Nasandhura Palace Hotel will be privatized; the benefits of land sale as opposed to a
going concern still need to be evaluated.
Maldives Ports could become a Regulator if the proposed transshipment port plans are
approved; under these circumstances the Maldives Ports Company could become Male
Port Company.
Stelco will be restructured in order to address losses made on island generating plants
and to position the company for possible foreign investment or public-private
partnerships.
Hulemale Development Corporation is a priority for a restructuring review because of

the lack of a financial return to Government.
Maldives Airport Company Ltd. is being considered for a management contract.
Villingilli Investments is a priority for review; it has been characterized as being like
dumping money into the open sea.
119. PriceWaterhouseCoopers-Based Prioritization: The consultancy conducted by

PriceWaterhouseCoopers (PWC) selected Maldives National Shipping Company, Nasandhura
Palace and Mifco for privatization and Stelco for restructuring. No weighted criteria appear to
have been used, and only some priorities coincide with those of the Government. The terms of
reference for a technical assistance (TA) to address the needs of these enterprises were issued
by ADB during the time that this report was being prepared.
120. MoFT versus PWC Criteria: Two criteria for establishing priorities exist: (i) those
developed by MoFT in 2003, and (ii) those proposal proposed by PWC in a report submitted to
ADB entitled Review of State Owned Enterprises in Maldives (June 2006). These two
approaches are markedly different and should be consolidated into once single approach before
proceeding with action plans. The criteria developed by MoFT in January 2003 were based on
the objectives of increasing private ownership in the overall economy; encouraging savings and
attracting new investors. It assumed that legislation on company taxation would be implemented
in a timely manner. The MoFT analysis of enterprises used both quantitative and subjective
criteria to determine rankings. MoFT envisaged privatization through sale on Maldivian Stock
Exchange. Criteria used were as follows: (i) viability: 30%; current profitability: 20%;
management: 10%; stability: 10%; net worth: 10%; reserves: 10%; and other: 10%. In contrast,
the PWC report suggested the following four unweighted criteria: (i) strategic Importance; (ii)
legal and regulatory issues; (iii) future Impact on the government finances; and potential for
private sector interest. The results of the two approaches are quite different in terms of the
ranking of enterprises (Table 18). A third set of criteria that seems more appropriate to the
Governments strategic objectives is the following: (i) financial returns 40%; (ii)future investment
requirements 20%; (iii) current debt or guarantees 15%; (iv) strategic importance 15%, and (v)
market attractiveness 10%.
51
Table 18: Comparative Ranking for Privatization using PWC and MoFT Criteria
PWC Prioritization
Privatization
Maldives Industrial Fisheries Co Ltd
Maldives National Shipping Ltd
Nasandhura Palace Hotel
MoFT Prioritization
2007 Priorities:
34
Housing Development Finance Corporation
35
Allied Insurance
Maldives National Shipping Ltd
Maldives Industrial Fisheries Co Ltd
Nasandhura Palace Hotel (possibly land sale)
Stelco
Maldives Ports Co.
Hulhumale Development Corporation Ltd
Additional Priorities (2003)
Dhiraagu
Male Water and Sewerage Co. Ltd
36
Maldives Airports Company
Island Aviation Services Ltd
Maldives Post Ltd
Retention with Significant Restructuring

Maldives Transport & Contracting Co
State Trading Organization
Retention with no Restructuring
Maldives Port Company
Maldives Water and Sewerage Co
Bank of Maldives
Island Aviation Services
Hulhumale Development Corp Ltd
Total Score
33
42%
51%
45%
61%
80%
75%
64%
63%
34%
All loss making enterprises
Source: Based on information compiled from MoFT and PWC report entitled Review of State Owned Enterprises in Maldives.
Submitted to Asian Development Bank, June 2006.
8.
PUBLIC ENTERPRISE ANALYSIS
121. Public Enterprise Relationship to SME Development: There are three possible linkages
between PEs and SMEs: (i) SMEs as competitors to PEs; (ii) SMEs as suppliers; (iii) SMEs as
outsourcers. In the Maldives the largest opportunities for successful SMEPE linkages exist for
PE outsourcing to SMEs, though there has been little evidence of this activity to date.
Outsourcing involves contracting out services previously provided in-house. In many instances,
the initial approach is to contract existing employees for a specific period of time, after which
future contracts become contestable. From a PE perspective, outsourcing is used in conjunction
with wider strategic initiatives to reduce the cost structure, an approach that is widely adopted
by PEs in developed economies in early stages of commercialization and subsequent
privatization. It is also widely used in the private sector as a means of driving down costs.
122. Governance: Boards of Directors for PEs have been appointed by Government, with the
numbers ranging between four and ten. There appear to be no clear selection criteria for
appointment. Normally one would expect Directors to be appointed based on an appropriate mix
of skills for the enterprise concerned, such as finance, strategic planning, legal expertise,
33
2003 Ranking.
Planning substantially completed.
35
Planned for 2007.
36
Through Contract management.
34
52
industry expertise, marketing, and industry leadership. An early costless step towards
privatization would be to increase the number of private sector directors sitting on PE Boards.
123. Public Enterprise Monitoring and Evaluation Board (PEMEB): Government, as
shareholder, also exercises governance through the activities of the MoFT, specifically the
Public Enterprise Monitoring and Evaluation Board (PEMEB). Staff turnover within PEMEB has
reduced its current effectiveness and direction, and resulted in a loss of institutional memory on
where and how it can add most value on behalf of the shareholder to the overall performance of
the enterprises. Staff in PEMEB require additional training to enable them to add value. The
number of staff to receive this training will need to reflect the likely level of government
ownership of trading enterprises in the next two to three years. Technical assistance is
proposed for PEMEB to improve governance.
124. Public Enterprise Commission: MoFT has been considering the establishment of a 9
member Public Enterprise Commission employing 15 staff. Responsibilities would be somewhat
similar to the existing functions of PEMEB 37. It is difficult to see the justification for establishing
an additional institution to perform, absorb or duplicate the responsibilities of PEMEB. It is also
hard to consider that 15 staff is required to supervise PEs in a country with only 300,000 people.
There appears to be little scope for improved governance of PEs, and more detailed
development is required on what frameworks should apply.
125. PE Dividend Payments: Until a corporate taxation system is introduced, PE dividend
payments remain an important source of Government income. These are not necessarily paid
promptly. Outstanding payments from 2004 amounted to Rf 30 million. Total payments expected
in 2006 are Rf453 million, of which 24 percent was still outstanding at 31 August 2006. One
reason given is that this was to assist PEs with cash flow difficulties. This consideration would
normally have been applied at the time that the dividend was declared. The quality of
governance vary between different PEs. Some, such as MWSC, exhibit very high degrees of
competence; others, such as Island Aviation Services show strong management and awareness
of where improvements are required. Others have scope for improvement.
126.
Enterprise-Specific Findings: The following points summarize the key conclusions: 38
Addu Investments Ltd: Addu Investments is a development vehicle for a high value, up
market resort. Requirements will change once the resort has been fully commissioned. In
the short term Addu Investments offers no opportunities for MSME linkages, apart,
possibly, from contracts associated with the resort development, such as materials,
foodstuffs or specialist labor. In the longer term the resort operators may consider
opportunities such as contracts to operate souvenir shops, or recreational activities. Addu
Investments is not considered a priority for privatization or restructuring.
Housing Development Finance Corporation (HDFC): HDFC provides finance for house
construction or renovation. The Company is scheduled for privatization through an Initial
Public Offering of 60% of shares, to be made during 2007. All preparatory work has been
completed. HDFC offers no direct opportunities for SME development, because of the
37
Promotion of Corporate Governance and core business; monitoring PEs; recommending composition of Boards of
Directors; advising the shareholder on issues relating to policy, restructuring and privatization; advising the
shareholder on PE Statements of Corporate Intent, and formulation of PE investment policies and investments.
38
For details, see annexes to report prepared by the SOE privatization and restructuring expert of the Team, entitled,
ADB TA 4745-MLD. Preparing Small and Medium Enterprise Development Project: Working Paper 2. Public
Enterprise Privatization and Restructuring. March 2007.
53
economies of scale required for successful lending institutions. However, if the Company
moves into a vertically integrated real estate development model, then some synergies
could exist with the construction industry, both in terms of materials supply and small scale
construction.
Island Aviation Services Ltd (IAS): IAS provides a mix of services related to air travel,
including domestic air services, ground handling, cargo handling, general sales agency,
and the CIP lounge service at Male International Airport. The Company is also expanding
into regional air services. There is some competition for domestic air travel as well as
general agency business, but ground handling, cargo services and the lounge are all
monopolies. There are a number of strategic options for support to IAS. However, some of
these initiatives have already been activated by IAS, with support for such topics as
benchmarking and improved governance. Because of this, no specific action is proposed.
Most IAS services are capital intensive, thus limiting the scope for specific linkages with
SMEs. The major opportunity appears to be outsourcing some services such as cleaning.
Maldives Airports Company Ltd (MACL): MACL is responsible for providing or

contracting all airport services at Male International Airport, and for the provision of safety
and refueling services at regional airports. A Master Plan to position the Company for future
needs is currently being completed by international consultants. It is envisaged that this will
call for significant additional investments to enable the airport to cater for projected tourist
growth. Because of the major investments that may be identified in the detailed Master
Plan, no short term interventions are recommended at this juncture. The position should be
reviewed when specific development requirements have been identified. There may be
opportunities for small niche providers under the new Master Plan. However, any initial
investment costs may present a barrier to entry to this market segment.
Maldives InFlight Catering Ltd. (MIC): MIC is already a Joint Venture Company,
providing adequate financial returns, which are likely to increase when the construction of
additional hotel rooms at Hulhule Hotel is completed. There is no pressing need for
restructuring or further privatization initiatives. The main opportunities that exist are in the
area of foodstuff supplies. The Company already makes local purchases, but has
occasional problems regarding quality and reliability of service. It would prefer fewer, rather
than more, local providers.
Maldives Post Ltd. (MPL): MPL is currently a monopoly provider of postal services in a
deregulated market, and a competitive provider of other services such as courier deliveries.
Although MPL is fully corporatized and pursues commercial objectives it does fulfill the
social objectives of providing loss making mail services to island communities. The MPL
does not have an adequate information base to enable it to be aware of (i) how efficient it is
compared to other postal service operators, and (ii) profitability by business line, or the
extent of cross subsidization. Similarly, PEMEB has no measures of efficiency, except for
dividend yield. MPL perceives that its core business is at some risk from new market
entrants and possible future declining mail volumes as alternative technologies replace
written mail. It therefore wishes to diversify its operations to provide a greater spread of
revenue. The MPL is keen to receive assistance with (i) identifying the scope for improved
efficiency, using international benchmarking as a starting point in this process; (ii)
developing capacity for strategic planning and feasibility studies into new venture.
Technical assistance has been discussed and ToR drafted and agreed upon by the MPL
Director in order to achieve these goals.
54
Male Water and Sewerage Co. Pvt. Ltd. (MWSC): MWSC is a joint Venture operation,
and the dominant provider of water, and the sewerage operator for Male, including
Villingilli, and Hulhumale. License limitations prevent growth in revenue and profitability
beyond what will occur with population growth and increases in per capita consumption.
MWSC is therefore seeking to move into additional geographical markets, in particular the
northern and southern development nodes. Because of the limited population size, it will be
difficult for any operator to make these profitable. MWSC is therefore interested in exploring
alternative business models such as Build Own Transfer (BOT) or Build Own Operate
Transfer (BOOT) or a variant whereby MWSC remains on call to local operators. The
feasibility of such a study requires more detailed exploration. MWSC is also considering
moving into international consulting, to capitalize on their expertise in operating small scale,
island based water and sewerage services. Discussions have taken place with MWSC
senior management, who are interested in receiving technical assistance aimed at
assessing the feasibility of a BOOT scheme. The proposed technical assistance will require
6.5 and 9 person months of international and national consultants, at an estimated cost of
$202,000. The principal opportunity for improved SME linkages with MWSC lie in
outsourcing some existing services, such as security and cleaning. This is being explored.
If services are expanded to include the northern and southern nodes, and these are
operated locally, then additional opportunities will arise.
Public Works Services (PWS): PWS is the only PE included in the ToR for this
component of the study that is not fully commercialized and corporatized. A final decision
on whether to operate PWS as a Government Department or as a commercial concern is
still under consideration in the Ministry of Construction and Public Infrastructure (MoCPI).
Financial records are poor or non-existent; the absence of clear functions means that
forward planning is difficult, leaving management in a reactive mode, with no real
performance measures. It was suggested to PWS and senior staff at both PWS and MoCPI
that a TA funded by ADB could identify present levels of efficiency and scope for
improvement, and form the basis for strategic decision on the future shape of the institution.
The TA could also assist with the development of a regulatory framework for the
construction industry. The latter would facilitate further expansion in the construction sector
by SMEs. However, despite a number of follow ups by the consultant, no interest has been
shown in developing this concept. PWS has perhaps the greatest opportunity for
development of SMEs if functions can be divested to local institutions. One possible barrier
will be the relatively high level of expatriate labor employed by PWS, and the difficulties
local SMEs would have in offering similar employment opportunities.
9.
PROPOSED STRATEGY
127. Strategy: The proposed strategy is based on the assumption that a number of PEs will
remain in the ownership of the Government for at least the next two to three years, but that the
Government is now actively interested in pursuing privatization for selected enterprises. It also
assumes that successful conclusion of these transactions will demonstrate benefits to the
economy from greater private sector participation in businesses that previously have been the
function of the State.
128. Components: The proposed strategy has four components. The first two components
contain the overarching goals:
1) Improving governance for all PEs, with the objective of ensuring that all enterprises are
operated at internationally accepted and measured best practice standards of efficiency.
55
The work would be funded by ADB under the Capacity Building TA proposed in this
Working Paper, and
2) Creating the enabling environment in which there is no downside from future
privatization because an adequate company tax regime; regulatory environment and
commercial law procedures have been approved, making the Maldives an attractive
destination for international investors. The work would be championed by MoFT. No
ADB involvement is envisaged, as this is essentially a requirement to demonstrate
political will by enacting legislation that has already passed through the drafting stages.
The second and third components provide the strategic goals:
3) Address enterprise-specific privatization and/or restructuring initiatives in the
short run through detailed analyses of priority PEs agreed by the Government. These
can include those organizations already agreed between the Government and ADB, and
other PEs such as HDFC which have been identified independently by the Government.
Some of this work is already approved for funding by ADB, although specific
requirements are currently being reviewed.
4) Achieve additional performance improvements over the medium term in those
enterprises identified in the acting on priorities identified as underperforming, using
benchmarking or ratio comparisons. The actions required will vary. They could involve
privatization, strategic realignment, restructuring, efficiency and effectiveness studies
and business process reengineering; and management changes. This work could be
funded by ADB.
129. Component (1): Propose TAs detail the work on improving governance and two
enterprise-specific projects, in terms of feasibility studies for diversification of the
product/service range for MPL and the establishment of water supply and sewerage services in
the northern and southern development nodes, under the leadership of MWSC.
130. Component (2): The Government already has some initiatives that address the creation
of an improved and sustainable commercial environment, which includes approval by the Majlis
of legislation relating to company taxation, banking legislation. Further consideration needs to
be given to the regulatory environment for all enterprises, with a view to rationalizing the current
structure and introducing clearer controls. The consultant is aware that some discussions have
been taking place in relation to regulation in the electricity sector; that it is suggested that some
Ministries have potential conflicts of interest, and other regulators are permitting infringements
of regulations because of short term expediency. Further design may be required to identify the
scope of any regulatory review, but that is beyond the scope of this TA.
131. Component (3): ADB has already proposed that it provide assistance with privatization
for three enterprises, and some restructuring assistance, and the Government has already
completed preparatory work for privatization of other PEs such as HDFC and Allied Insurance.
There is scope here for additional assistance to be offered by ADB.
132. Component (4): This medium term intervention depends on satisfactory completion of
other components, notably component (1) on improved governance and component (2) on
creation of the environment for further privatization.
56
ANNEX A: DESIGN AND MONITORING FRAMEWORK
Design Summary
Goal
Development of the
Maldives micro, small
and medium
enterprises (MSMEs)
in selected regions
and targeted sectors
resulting in economic
growth, employment,
and poverty reduction
through accelerated
growth of MSMEs
Purpose
(1) Set up an
institutional
framework to support
effective MSME
sector development
Targets/ Measurable
Indicators
Monitoring
Mechanisms
Increased number of
registered and operational
MSMEs in selected regions
and targeted sectors
Economic reports
including MSME
monitoring and
evaluation report
and official
statistics, private
sector, and donors
ADB review
missions
Effective MSME
government office and
coordination of MSME
policies
Strengthened business
representative
organizations
Economic reports
public and sector
organizations, and
international
organizations
Interviews with
private sector
Consultant reports
Review missions of
ADB
(2) Enhance access to Increase access of business Monitoring reports
BDS products
development services that of EDU and M&E Unit
generate MSME activities
in the atolls
(3) Enhance access to Improved access to finance Reports and official
finance for MSMEs
for MSMEs
statistics from MMA
ADB review missions
(4) Improve the
Streamlined and
Official copies of
regulatory framework transparent government
decrees and
for MSMEs
regulations on business
regulations
operations
World Banks Cost
of Doing Business
Outputs
(1) Institutional and
Policy environment
(1) Support
MEDT approval of EDU
Government
EDU/MEDT:
expansion of activities to
decree
Development and
atolls
Budget plans of
57
Risks and Assumptions

General economic climate
remains positive
Sustained positive
development of the
Maldives economy
Political commitment to
undertake reforms at
both central and atolls
levels
Sustained capacitybuilding of the
Government
Lack of domestic BDS

providers' capability in
offering quality BDS
access to finance for MSEs
Government's close and
effective partnership with
the private sector
Sufficient technical skills

locally available

Targets/ Measurable
Monitoring
Design Summary
Indicators
Mechanisms
pilot testing of
Budget figures reflect (i)
MEDT
innovative BDS
increased manpower
approaches to value
requirements, (ii)
chain BDS, clusters
increased financial
in target regions
requirements for testing
of innovative BDS, and
BDS facilitation
(iii) financial
services and
requirements for
information
implementation of
services
activities.
(2) Access to BDS
products
Number of funded
BDS products and
projects
quality of service
providers are better
MSME market and
known by the clients
domestic BDS
MSMEs' increased sales, provider surveys
increased export sales, Financial
growth in profitability
statements of
and increased
selected MSMEs
employment
Accelerated growth of
businesses in atoll areas
(3) Access to finance
Finance to MSEs has

increased
Accelerated loan
appraisal process
Reduced collateral
requirements for MSE
loans
Periodic reports of
BDFCs and EDU
ADB review
missions
RIA activities included in

M&E unit.
Regulations are made
transparent to the
business community
Interviews with
private sector
stakeholders
World Bank report
on "Cost of doing
business"
RIA reports
Loan effectiveness ($6.6

million from ADB)
Program
documents and
Loan Agreement
(2) Enabling
Regulatory
Environment
Inputs for the

Program
1. Program Loan
58
Sufficient skills with

domestic BDS providers
available
Sufficient number of
skilled people willing to
work in atolls
Lack of skills of EDU and

BDSC staff to implement
institutional
strengthening measures
Willingness of Bank of
Maldives to implement
credit guarantee
program
undertake reforms at
both central and atoll
levels
Sufficient resources for
capacity building of
regulators
Assumption: Timely loan

effectiveness
Design Summary
2. Technical
Assistance
Targets/ Measurable
Indicators
Monitoring
Mechanisms
Government
contribution for the
program
MOFT budgets
Risk: Timely financial

allocation MSME project
implementation
TA to support program
implementation ($3.4
million) in 2008 - 2010
Signed TA letter
Review missions by
ADB
Reports by
consultants
Workshops and
seminars
Assumptions: Consultants
are selected in timely and
effective manner
59
Risk: Active ownership and

monitoring from
Government and ADB
ANNEX B: GOVERNMENT STRATEGY FOR PRIVATE SECTOR DEVELOPMENT

Government Strategy: There are a number of principles underlying the strategy of the Seventh
National Development Plan (7NDP) that point to the leading role of MSMEs in private sector
development, especially those in the atolls and outer islands, as well as the supportive role of
the public sector in creating an enabling environment for the private sector. The Governments
strategy as it relates to the private sector in the regions outside the capital of Male aims to
improve economic growth by increasing the number and coverage of MSMEs activities and
reducing or restructuring SOEs.
Goals of 7NDP: The overall goal of, as set out in the 7NDP and Vision 2020, is the eliminate
poverty and improvement in the well-being of the greatest number of Maldivians. The link
between achieving this overarching goal and the private sector development in the Maldives is
formally recognized in the 7NDP. It explicitly targets private sector participation as one of the
key strategies to be pursued in 2006-2010, recognizing that private sector development is
critical to achieving the levels of sustainable economic growth required by the country. It
recognizes need for partnership between the Government and private sector, a situation that in
the past has not always existed and that will require a radical shift in perceptions, attitudes and
approaches during the 7NDP period.
Private Sector Development Channels: The 7NDP sets out the following key mechanisms
needed for developing the private sector: (a) formalizing the economy; (b) improving corporate
governance and transparency; (c) promoting responsible business practices; (d) maximizing the
potential of public-private partnerships, with a view to increasing; (e) private investment in the
national economy and to providing opportunities for SMEs and small-scale entrepreneurs to
participate in a more competitive environment; and (f) developing linkages within the domestic
and international private sectors to share knowledge, expertise, resources, and technology.
Within the various sub-goals of the 7NDP, those that apply to the development of the private
sector and SMEs are the following ones: (a) a diversified economy (goal 3); (b) improved
access and expanded opportunities (goal 4); (c) the elimination of poverty, increased equity,
and gender equality (goal 5); and (f) support for the rapid recovery of sub-sectors damaged by
the tsunami (goal 1).
Measurable Indicators: Realization of these goals is recognized as too broad for developing
an action plan with policies, projects, programs and institutional mechanisms. In an effort to
operationalize the goals, the 7NDP establishes a set of measurable objectives to increase
private sector development, including SME and micro-enterprise development. Volume II of the
7NDP lays out a set of roadmaps within 34 themes covering the 2006-2010 goals. Table B.1
presents the specific benchmarks associated with actions to be taken in the area of private
sector development and related activities in the regulatory environment, skills development and
SOE restructuring and privatization.
Table B.1: Private Sector Development Strategy and Benchmarks in 7NDP
Theme
Policy
Strategy
Performance Target or Indicator
Policy 4: Support the development of private enterprises

Trade and
Investment
Strategy
4.1
Introduce private sector

development programs for small
and medium enterprises (SME) by
providing technical assistance to
start-up enterprises.
60
SME Development Unit established by end of

2006.
Business assistance package (including the
upgrading of MEDT website, brochures and a
multimedia CD) for SME2 developed by May
2007.

Theme
Policy
Strategy
Strategy
4.2

Facilitate the establishment &
growth of SMEs, especially ITbased firms through providing
access to business support
services at the Hulhumale
Business Park/Industrial Zone.
SME unit branch to be extended and established

in the Hulhumale.
Intellectual property legislation drafted and

submitted to the parliament by end of 2007.
Strategy
4.3
Encourage technology transfer,

innovation and creativity for
businesses.
Intellectual Property Office (IPO) established and

operational by early 2008.
E-Commerce Law Drafted and submitted to the
parliament by May 2009.
Establishment of an E-Commerce Registration

Authority (ERA) by September 2010.
Policy 2: Provide a stable and a transparent policy environment by enhancing corporate governance through a
strengthened legal and institutional framework.
Develop a legal framework and
Draft legal framework to strengthen corporate
accompanying institutions to
governance prepared by the end of 2006.
strengthen corporate governance
including: (i) a commercial
Strategy
arbitration tribunal; (ii) a mechanism Business Risk Rating and Good Governance
2.1
for rating business risk; and (iii)
Index introduced by June 2007.
creation of a Good Governance
Index.
A draft money judgment enforcement bill
Strategy
Enact a money judgment
submitted to parliament by end 2006.
2.2
enforcement bill.
Strategy
2.3
Establish a Maldives Association of

Accountants to regulate the
accounting profession and to
establish private sector accounting
standards.
Strategy
2.4
Achieve consistency in formulating,

monitoring and enforcing rules and
regulations governing business
activity.
Maldives Association of Accountants established

by 2008.
Review of legislation commenced in 2006 with all
regulations reviewed by the end of 2007.
Number of legislations reviewed and submitted to

parliament by 2007.
Policy 8: Strengthen institutional development of Ministry of Economic Development and Trade
Introduce online business registrations by 2nd
Enhance customer relations
Quarter of 2007.
through the provision of efficient
Strategy
Introduce online SME information services (e.g.,
business support services through
8.3
market and industry information) by 2nd Quarter
a web portal.
of 2007.
Employment
Policy 1: To conduct training needs assessments and deliver skills development programs.
Prepare a human resource needs
Number of people provided with competencyassessment and design, develop
based, occupation-specific and nationallyand deliver through the four
accredited training.
Employment Sector Councils 33
training programs in the key sectors
Strategy
of tourism, fisheries and agriculture,
1.1
Labor force participation rate increased to 57
transport and the social
percent by 2009.
sectors.(This strategy will form part
of the Employment Skills Training
Project)
Strategy
1.2
State Owned
Develop and implement a national

apprenticeship scheme to train
school leavers to meet the national
skills demand.
1,500 apprentices trained by 2008 in semi-skilled

and skilled jobs in demand by the tourism,
fisheries and construction sectors.
Policy 2: Reduction of government involvement in the functioning of SOEs
61

Theme
Enterprises
Policy
Strategy
Strategy
2.1
Increase the sense of corporate

Hold corporate governance awareness programs
ownership among SOEs.
Improve the performance of public
Competency-based boards appointed from 2006
enterprises by providing for the
in all SOEs.
appointment of competency-based
Strategy
boards and for accounting, auditing, Accounting, auditing, procurement and other
2.2
governance standards and guidelines issued by
procurement and other governance
2006.
standards and guidelines.
Policy 3: Gradually reduce direct government ownership in SOEs and promote private and joint private/public
ownership.
Partial divestiture of the Governments
Increase private sector participation shareholding in 2 enterprises per year from
2006-2010.
in public enterprises by partial
Strategy
divestiture of the Governments
3.1
Sell to private sector those businesses within
shareholding.
state owned enterprises that the private sector
can compete in, starting with 2006.
Source: Republic of Maldives, Seventh National Development Plan: 2006-2010. Volume II. Male, 2005.
62
ANNEX C: MSME SURVEY OF THREE REGIONS

C.1
General
Selection of atolls and islands: The survey was conducted in the three development regions;
Northern Region, South Central Region and the Southern Region. Islands for the survey were
selected on the basis of population size; four islands in the north, four in the south central region
and three in the southern region.
Table C1: Characteristics of Regions
Atoll
Population ranking
Northern Region
3
8
12
14
South Central Region
11
18
28
33
Southern Region
1
2
7
Island
Population (March 31, 2000 )

Both Sexes Male
Female
Households
HDH
HA
HA
HA
Kulhudhuffushi
Dhidhdhoo
Hoarafushi
Ihavandhoo
6,581
2,766
2,221
2,062
3,131
1,293
1,044
965
3,450
1,473
1,177
1,097
1018
438
341
253
L
L
TH
TH
Gamu
Fonadhoo
Thimarafushi
Guraidhoo
2,244
1,740
1,537
1,433
1,176
904
782
703
1,068
836
755
730
337
262
250
198
S
GN
S
Hithadhoo
Fuvahmulah
Feydhoo
9,461
7,528
2,829
4,184
3,464
1,262
5,277
4,064
1,567
1,408
1,251
464
Survey dates: The surveys were conducted during the following dates;
o
o
o
Northern Region: 5 to 8 September 2006

Southern Region: 12 to 14 September 2006
South Central Region: 27 February to 3 March 2007
Survey Questionnaire: The survey questionnaire consisted of five main sections;

o
o
o
o
o
Basic Data
Business Opportunities and Constraints
Skills
Business Finance
Business Development Service
Table C2: Number of interviewees and main business activities
Main Business
Tourism
Fisheries
Agriculture
Manufacturing
Services
Handicraft
Construction
Other
NA
Total Interviewed
Southern
0
1
4
7
50
0
4
0
0
65
Northern
0
18
2
14
55
1
3
2
2
91
S Central
0
12
14
8
36
0
4
4
0
72
Total
0
31
20
29
141
1
11
6
2
228
%
0%
14%
9%
13%
62%
0%
5%
3%
1%
Basic Data: Most businesses interviewed in the survey fall in to the most general category of
Services. These include retail shop operators, teashop and restaurant operators, and even
those engaged in activities such as transport.
63

Table C3: Registered Businesses
Region
North
South Central
South
Total
Total Interviewed
91
72
65
228
Registered
57
33
53
143
% Registered
63%
46%
82%
63%
Age of businesses: Of all 228 businesses interviewed in the three regions, 39% have started
their businesses during the last five years and 57% of the businesses were started during the
last ten years. Only 14% of the businesses were said to be older than 20 years. The South
Central has the highest proportion of businesses
North S Central South Total %
that started during the last five years with 47%. In
0to5
35
34
19
88
39%
the Northern region 38% of those interviewed
6to10
11
17
14
42
18%
started their businesses during the last five years,
7
8
23
10%
while in the South only 29% started their businesses 11to15 8
16to20
15
8
8
31
14%
during the same period. Five percent of those
>20
18
6
8
32
14%
interviewed were unable to state the age of their
n.a
4
0
8
12
5%
businesses.
91
72
65
228
100%
Ownership of businesses: All entrepreneurs

interviewed were Maldivian, and with one exception all businesses were privately owned. The
gender of business owners was as follows:
Seasonality of operations: Interviewees were asked about the number of months they run
their businesses in a year. While most of the businesses were operational throughout the year,
others were seasonal or operated during specific months.
Employment: The number of workers employed in the
businesses interviewed during the survey indicates the
size of the businesses in general. Many of the
businesses were owner-operated business, run with the
help of family members and many of them too working
part time.
Number of workers: Most (96%) of all business
interviewed employed less than 5 workers and the
average number of workers employed by all businesses
interviewed is less than 2.
No. of
months of
operations
6
7
8
9
10
11
12
seasonal
na
North
1
1
58
3
3
1
24
0
0
91
South
Central
0
0
0
0
0
2
62
2
6
72
Employment
North
S Central
South
Total
% of businesses with less than 5 workers
100%
91%
98%
96%
Total no. of businesses interviewed
91
72
65
228
Total workers in all businesses interviewed
119
179
103
401
Average no. of workers per businesses interviewed
1.31
2.49
1.58
1.76
South
0
0
0
1
1
0
59
0
4
65
The interviews also asked about number employed during peak and low seasons, number of
unpaid family members working in the businesses. Although interviewees answered the
questions it is likely to be highly inaccurate due to the small number of workers employed and
the level of informality and lack of consistency in payment terms especially to family members.
The total number of unpaid family members working in the 228 businesses interviewed is 208
which amounts to 51% of the total number of 401 employed in those businesses. Most of this
would likely be the owners of self employed businesses as they would have been counted as
64
unpaid family workers. 80 of the 401 workers employed in the 228 businesses interviewed are
female which amounts to 19% of those employed in the businesses interviewed in the survey.
Asset value: The businesses interviewed were asked to state the value of their business
assets. None of the interviewed maintained records of asset or asset registers neither had they
estimated it in the past on a regular basis, hence almost all interviewees estimated the value at
the time of the interview. Most business owners were not able to differentiate between assets in
their businesses and their personal assets. In other cases the assets overlapped each other as
in the case of shop owners and teashop and restaurant operators where the shop or the
restaurant is part of the house.
assets '000
<50
50to100
100to1000
>1mil
na
North
25
26
35
0
5
91
S Central
19
20
23
6
4
72
South
11
10
44
0
0
65
Total
55
56
102
6
9
228
Finally even in cases where some or most assets were

valued with some degree of accuracy, interviewees
often considered the purchase value of the asset as
their current value, without consideration for
depreciation or the current sale value of the asset.
Hence it is likely that asset values indicated are
overestimated.
C.2
Sales and markets
Markets: As would be expected with businesses of the

sell to
North S Central South
scale, the main market for the produce is the local market
Individuals
51
26
29
and individuals which would also be part of the local market.
Local Market 51
46
42
In the North where many businesses sell to Male, the
Intermediary
11
0
0
Male'
22
9
3
number of businesses which sells to intermediaries is also
Resort
7
0
2
high as expected, as a large proportion of the produce sold
Export
0
0
0
in Male is brought to Male through intermediaries and
middleman which includes traders as well as owners of boats which travel to Male with cargo
and passengers.
Monthly
sales '000
<50
50to200
200to500
>500
na
North
76
9
5
1
0
South
Central
56
11
3
1
1
South
35
22
8
0
0
All
167
42
16
2
1
228
% All
73%
18%
7%
1%
0%
100%
Tourism Markets: The Northern Region is

closer to the main tourism zone and therefore
some businesses have the opportunity to
market and sell to the tourism industry. At the
time of the survey only one resort is
operational in the Southern Region while
there is none in the South Central Region.
Sales Value: In almost all the cases the sales value given by the interviewees is also an
estimate of the sales. Few keep records of sales. The figures indicate that 73% of all
interviewed generates less than Rf. 50,000 monthly and only 2 of the 228 businesses
interviewed estimated their monthly sales to be above Rf. 500,000.
C.3 Communications
Means of communications
1phone
2mobile
3internet
4tv
5radio
North
33
75
5
14
9
S Central
3
68
0
0
2
South
33
56
20
6
2
Total
69
199
25
20
13
65
Means of communication: The most

common means of communications in all
three regions is mobile phones, the reason
being that the mobile phone is the most
commonly available means of
communication throughout the country. Although internet is available in most islands, it is not
widely accessible to the general public in most and is also new to the older generation of
businessmen and women.
North
26
26
21
16
S Central
0
32
28
9
South
7
21
8
1
Total
33
79
57
26
195
%All
17%
41%
29%
13%
100%
Perception on cost of communication: Most of

the people interviewed believe that the cost of
communications is moderate while only 13%
believe that it is excessively high. 58% believe
that it is either low or moderate. This is expected
in the context of reduction in mobile phone call charges during the two years proceeding the
time of the survey. Mobile phone call charges have been reduced by more than 50% during this
time.
1low
2moderate
3high
4excessive
C.4 Growth potential and constraints to growth

The majority of the interviewees believe that there is potential for growth in their businesses; out
of the 225 who responded to the question only 15 stated that there is no potential. There was a
limited response when asked about the constraints for growth. Out of the few who responded to
the question most stated that market access and finance are the greatest constraints for growth.
C.5 Opportunities and Constraints
Internal Problems faced by SMEs: Responses to
questions on internal constraints for the
development of SMEs indicate that the biggest
concern for most is the lack of capital. In all three
regions respondents marked the lack of capital as a
very big problem.
Finance
Market
Labor
Inputs/equipment
technical
Other
North
5
5
0
3
0
3
S Central
1
1
0
0
0
0
South
0
2
0
0
0
0
Total
6
8
0
3
0
3
Issues such as the lack of management and accounting skills, management staff and the level
of technology is not seen as a problem at the current stage of their businesses.
All Three Regions
Internal Problems
Lack of management/accounting skills
Lack of technically skilled labor
Lack of management staff
Low level of technology
Lack of market information
Lack of capital
High labor costs
Very big
7
35
13
9
15
114
20
Big
19
18
11
10
9
37
28
Medium
19
16
25
14
11
21
42
Small
13
9
12
12
10
8
12
No problem
159
128
146
126
133
41
103
Don't know
5
7
6
8
15
2
16
Total
222
213
213
179
193
223
221
Out of the 223 who responded to the question on lack of capital 151 (68%) perceived it as a
very big or big constraint. For the three regions together the next biggest concern is the lack of
technically skilled labor. 53 out of the 213 (25%) who responded to the question perceive it as a
big or very big constraint. However there is a significant difference in the way this is perceived
in the different regions. In the Southern Region 32.7% see it as a very big or big problem, in the
Northern Region 15% see it as such and in the South Central Region it is a similar concern only
for 4.2% of the respondents.
External Problems faced by SMEs: In the survey businesses were asked to categorize 16
possible external problems that may hinder the development of their businesses as very big,
big, medium, small, or as no problem.
66
Most serious external problems: High utility prices, access and cost of finance rank as the
most serious concerns for most businesses. High utility prices rank the highest in terms of the
highest number of very big or big responses. 69% of those who responded to the question on
access to finance also see that as a serious problem that affect their businesses.
All three regions
External Problems
High utility prices
Access to finance
Cost of finance
Water and/or electricity access
Land
Shipping and sea transportation services
Air transportation services
Competition with domestic competitors
Access to land
Telephone and/or internet access
Other fees and unofficial payments
Business licensing & operating permits
Labor regulations
Competition with foreign competitors
Very Big or Big

145
103
100
98
80
79
69
63
53
46
30
16
16
13
12
8
Total Respondents
222
176
152
222
218
207
176
220
158
219
174
162
177
149
152
173
%
65%
59%
66%
44%
37%
38%
39%
29%
34%
21%
17%
10%
9%
9%
8%
5%
Competition with foreign competitors is seen as the least important external constraint with only
8 marking it is a very big or big problem and 148 of the 173 who responded to this question
stating it as no problem.
Most serious external problems in the individual regions: Access to/cost of finance, high
utility prices and access to water and electricity feature among the most serious concerns in all
three regions, which also feature as the four most serious external problems in the survey as a
whole. Land and access to land is seen as the most serious external problem in the northern
region.
External Problems
Dont know
Business licensing & operating permits
36
34
Other fees and unofficial payments
34
34
Labor regulations
27
Awareness of external problems: For the survey as

a whole the highest number of dont know entries are
in the following areas. It is notable that all the
categories involve rules and regulations and business
formalities.
External facilities that facilitate businesses: For most people proximity to the market has
been the most important facility that has facilitated their businesses. The next most important
facility that has helped businesses is seen to be the proximity to reliable transport.
External Facilities that facilitate their businesses
Near Resort
Near Process Center
Near Market
Near reliable transport
Near commercial facilities
Near training centers
North
12
7
60
27
17
3
S Central
0
1
59
34
33
0
South
24
0
50
24
23
0
Current markets and expansion into specific markets: Businesses were asked what
markets they cater to at present and whether they plan to expand into new markets.
67
Where is your market?

local island(s)
Male' market
Resort(s)
Export market
Other
North
78
22
12
2
4
S Central
64
14
3
0
0
It is notable that many in the South Central Region plan

to expand their markets to include resorts. Five new
resorts are under construction in Thaa and Laamu
Atolls in which the survey of the South Central Region
was conducted.
Relationship with
Central Government
very helpful
helpful
neutral
unhelpful
very unhelpful
South
64
6
24
0
0
Market Expansion
local island(s)
Male' market
Resort(s)
Export market
Other
No Plans
North
52
22
20
5
5
10
S Central
64
14
33
1
0
16
South
64
6
20
2
2
5
Relationship with the Government:

Most of the respondents perceive their
relationship with the central
government as well as with the local
government as helpful or neutral. 12%
of the 190 respondents believe that the
Relationship with Local
central government is very helpful and
Government
North S Central South Total
very helpful
14
8
2
24
13%
13% of the 186 respondents believe
helpful
16
20
10
46
25%
that the local government is very
neutral
16
26
21
63
34%
helpful in relation to the development
unhelpful
4
9
9
22
12%
of their businesses. 26% of the
very unhelpful
11
7
13
31
17%
186
respondents to the question perceive
the central government to be unhelpful or very unhelpful and 29% of respondents believe that
the local government is unhelpful or very unhelpful in relation to the development of their
businesses.
C.6
North
12
10
34
7
11
S Central
8
21
22
10
0
South
2
10
23
7
13
Total
22
41
79
24
24
190
12%
22%
42%
13%
13%
Skills
Vocational training of business owners: When business owners were asked whether they
have had any vocational education 62 of the 224 who responded to the question stated they
have had some vocational education.
The highest number of positive responses to this question is from the Northern Region where
51% have had some training. The lowest is in South Central Region where only 22% have
attended some form of training.
With the exception of the Southern Region the largest number of owners has trained
themselves through self study while in the South the highest number has received training
through projects.
Where?
North
South Central
South
Total
School
6
3
4
13
Project
7
2
9
18
North
Do you need more training to improve your
business?
Yes
68
No
Self-study
12
11
6
29
Family
5
0
0
5
South Central
South
Yes
Yes
No
No
If so, what kind of training do you need?

Formulate a business plan
Informational management
Financial management
Production management
Marketing management
Technology management
North
44
40
South Central
52
18
South
44
17
42
32
43
32
41
28
16
19
17
17
15
25
47
22
48
29
39
31
42
28
44
26
42
23
16
27
15
29
17
33
10
17
7
7
9
6
The majority of interviewees felt that they needed more training to improve their businesses.
The highest number of business owners who felt they did not need further training to improve
their businesses were in the Northern Region where 40 of the 84 respondents said they did not
need further training.
In the all three regions the biggest need for training was felt in the areas of formulating business
plans, financial management and marketing management.
Level of training
North
South Central
South
Total
None
26
6
0
32
Vocational school graduate

39
47
45
131
High school graduate

10
4
11
25
College graduate
2
1
2
5
Don't know
5
3
0
8
Level needed to hire in order to develop businesses: Only 32 respondents stated that they
do not see a need for any level of education for their employees in order to develop their
businesses. In all three regions the highest number of respondents felt that they need to hire
employees with vocational training in order to develop their businesses. Eight of the
respondents did not know whether hiring more educated employees will help to improve their
businesses.
Areas of training for employees
Customer services
Accounting
Computer
Accounting and Record keeping
Production-related activities
Distribution-related activities
North
Yes
44
37
34
34
34
31
No
39
45
44
43
43
44
South Central
Yes
No
37
19
34
20
28
24
30
19
32
17
30
19
South
Yes
40
36
37
25
16
18
No
21
24
24
31
37
35
Type of training needed for employees: In the Northern and South Central Regions all areas
of training for employees were felt to be equally important. In the South respondents felt that
production and distribution related training was significantly less important than areas such as
customer services, computing and accounting.
Type of skilled labor that is most difficult to find: Respondents were asked to name the type
of skilled labor that is most difficult to find. The following table shows types of labor mentioned
and the number of times each type is mentioned in each of the regions. Carpenter is mentioned
12 times out of a total of 93. Other notable types include technical staff mentioned 6 times,
salesman mentioned 5 times and bakers and waiters each mentioned 4 times.
C.7
Business Finance
Utilization of loans and credit: According to responses on the question on number times
credit or loans that has been availed by the businesses interviewed, the 228 businesses
interviewed has availed themselves of loans or credit 297 times. However out of the 228
69
businesses interviewed 90 has never benefited from loans or credit, it is only 138 of the
businesses interviewed that has ever received a loan or credit from any source. In the Northern
Region 56 of the 91, 62% of those interviewed said they have received a loan or credit at least
once, in the South Central Region 39 of the 72 interviewed, 56%, has received a loan or credit
for their business and in the Southern Region it is 43 of the 65, which amounts to 66%.
Sources of credit and loans: 84% of total loans/credit has been from the Bank of Maldives; of
the 297 times loans or credit has been received by the businesses interviewed, 250 are from the
Bank of Maldives. The regional breakdown is also similar to the total;
Northern Region:
Total loans /credit received:
132
Bank of Maldives loans:
105
Bank of Maldives loans as % of total loans/credit availed: 79.5%
South Central Region:
75
61
Southern Region:
90
84
Frequency of loans and credit by sector: Most loans and credit has been availed by the
Services sector. This is expected as 62% of the total interviewed fall under this category. The
Services sector includes retailers and traders who are more confident of their businesses and
are more reputed in the islands as established businessmen. The next highest is
manufacturing followed by fisheries. This is directly related to the distribution of businesses
interviewed; 14% in fisheries and 13% in manufacturing.
Loan/ credit and gender: Overall the 37 women-owned businesses interviewed have received
loans or credit a total of 40 times, while the 190 businesses owned by men have received loans
or credit a total of 257 times. Thirteen percent of the businesses interviewed in the Northern
Region are owned by women and they have received 10% of the loans or credit of the total
received in the region by all interviewed. In the South Central, while 17% of the businesses
interviewed are women owned they have received 13% of the loans and credit and in the
southern region 19% of the loans or credit received by all was for the 20% of businesses that
are owned by women.
Details of last two loans received by respondents: Respondents were asked to provide
details of the last two loans they have received. The details include the size of the loans,
maturity period, interest rates and fees, other costs, cost period, repayment period and time
take to process the loans. The following table provides information on the number of responses
received for each of the details of the loans. All the loans for which details have been provided
were from Bank of Maldives. Therefore details such as maturity and interest rates have been
assumed to be common for all. However responded were pressed to provide details on other
costs, and time taken for processing.
Size of loans: Respondents in each of the regions were asked to provide details of their last
two loans. The amounts given by those who responded to provide an indication of the size of
loans they have received. In the Northern Region most of the highest number of loans is below
70
Rf. 15,001. The exact figure given by most in the category is Rf. 15,000. The responses in the
South Central Region and the Southern Region also give a similar result. In all three regions
most of the loans for which data is received falls below Rf. 500,000.
Asset value of businesses and the number and size of loans availed: As expected
businesses that have higher asset values have taken more and higher value of loans. In the
Northern Region businesses with an asset value of less than Rf 50,000 have taken a total of 15
first and second loans, businesses with asset values between Rf 100,000 to 1,000,000 have
taken 37 first and second loans. Almost the same difference in number of first and second loans
is seen in the Southern Region. Although the difference is smaller, the trend is still the same
even in the South Central Region.
The average value of loans also gives an indication of what businesses in each category needs
and what the bank is ready to offer these businesses. While the average value of first and
second loans for businesses with asset values less than Rf 50,000 range from Rf 43,000 to Rf
145,000, the average value of loans received by businesses in the 100,000 to 1,000,000
category ranges from Rf 244,000 to Rf. 569,000.
C.8 Business Development Services
Development of business idea: Respondents were asked how they developed the idea for
their businesses. The overwhelming majority of respondents said that they developed their idea
through market analysis. The next highest is through All regions
Yes
Market analysis
208
local fairs and with the support of government
With the support of a government program
35
programs. 14 said they continued their traditional
With the support of international donor program
10
family businesses. Although 35 said they got the
Through contacts with foreign/ business partners 18
idea for their businesses through the support of
During local trade fairs
40
During international trade fairs
11
government programs, when asked whether they
Family tradition
14
have received government help to develop their
Others in the island were doing it
9
businesses only two in the Northern Region and two
Others (list if yes)
0
in the Southern Region said they have received
government help to develop their businesses.
71
ANNEX D: CLASSIFICATION OF ENTERPRISES

Table D.1: Definition of Microenterprises and
Classification of Enterprises: Current

SMEs Used by Ministry of Atoll Development
information maintained by the Government and
Enterprise Size
the Maldives National Chamber of Commerce
Micro
Small
Medium
and Industry provides limited information on
ownership, employment, turnover, or capital
Number of
1-5
6-20
21-50
Employment
investment. There are about 2,500 registered
businesses at MEDT, and about one-fifth of these Total Assets
5,000
51,000
100,001
(MRf)
50,000
100,000
1 million
have reportedly submitted information on their
annual turnover. Until now, lack data has
Sales
50,000 or
50,001
200,001
(MRf/month)
less
200,000
500,000
prevented businesses from being classified, but
Source: Ministry of Atoll Development, Old, Existing and Potential
the 7NDP calls for the introduction of on-line
Income Generation Activities in the Maldives. Funded by UNDP
business registration procedures in 2007 that will
and UNESCAP, May 2004.
facilitat
Table D.2: Enterprise Classification in
e the procedure, broaden the coverage, and help
Selected Countries (number of employees)
classify businesses.
Enterprise Classification
Micro
Small
Medium
Bermuda
1-4
5-9
10-49
Puerto Rico
0-4
5-19
20-49
Albania
1-4
5-19
20-49
Australia
0-4
5-19
20-199
Botswana
0-4
5-49
50-99
Czech Republic
0-5
6-19
20-249
Egypt
1-4
5-14
15-49
El Salvador
0-4
5-49
50-99
Hong Kong
0-4
5-19
20-99
Jamaica
1-2
3-4
5-9
Jordan
1-4
5-19
20-99
Korea, Rep.
0-4
5-19
20-99
Norway
0-4
5-19
20-99
Singapore
0-4
5-19
20-99
Thailand
0-4
5-19
20-99
Virgin Islands
0-4
5-19
20-49
Source: Database maintained by Small and Medium

Enterprise Department of the International Finance
Association, World Bank, Micro, Small, and Medium
Enterprises: A Collection of Published Data.
Definitions of MSMEs: Most people invoke the

recent study by Ministry of Atolls Development on
income generating activities in the outer atolls for the
definition of microenterprises and SMEs in the
Maldives (Table D1). While the definition is generally
in line with that of other developing and transition
economies, it requires a narrower definition since the
present coverage has the potential for one type of
enterprise to overlap with another. 1 For example, a
firm may have less than 5 employees and be
classified as a microenterprise but, as indicated in the
MSME survey described in Annex C, it can generate
monthly sales of more than Rf 50,000 and therefore
be classified as a small-size enterprise.
Proposed Definition for Maldives: To overcome
these potentially conflicting definitions of MSMEs, and
because of the unreliable data on enterprise assets
and sales figures uncovered in the MSME survey, it is
suggested that only number of employees be used to
classify enterprises in the Maldives. Recent works on
MSMEs throughout the world that include some SIEs
provide a standard for classification. 2 Table D2 shows
For a survey of SME definitions currently used in transition economies, see United Nations Economic Commission
for Europe, Small and Medium Size Enterprises in Countries in Transition. Series: Entrepreneurship and SMEs,
2006.
2
For details, see Micro, Small, and Medium Enterprises: A Collection of Published Data, a database maintained by
the Small and Medium Enterprise Department of the International Finance Association, World Bank. The dataset is a
collection of publicly available data on MSMEs in over 100 countries that includes several indicators of a country's
business environment.
72
the definition used by two other SIEs for which data are available, as well as selected countries.
These countries generally define microenterprises as having up to four employees; small
enterprises as having five to 19 employees; and mediums size enterprises as having from 20 to
49 or 99 employees. In the case of the two SIEs, the maximum size of medium size enterprises
is 49. There are exceptions, of course. The Czech Republic defines microenterprises as having
up to five employees, and many larger economies define them as having up to nine employees.
For medium size enterprises, Bermuda classifies companies with up to nine employees as
being medium size; Botswana and El Salvador use an upper limit of 49 employees; and some
economies such as Mexico, Sri Lanka, New Zealand and the Philippines has an upper limit of
99 employees. For medium-size enterprises, the range varies from an upper range of 49
employees for the SIEs and some other countries to 99 for most other countries, with
considerably higher upper limits for Australia and the Czech Republic.
Proposed MSME Definition for the Maldives: It is appropriate to follow the definition of
MSMEs used by other countries, particularly SIEs. In general, countries rely on number of
employees, although a limited few use annual sales, annual gross income, turnover or assets.
Since these figures are not readily available in the Maldives and
Table D.3: Proposed MSME
enterprises themselves often do not have reliable estimates, it is
Definition for the Maldives
preferable to adopt the dominant classification scheme based on
Number of
number of employees in the Maldives. Using the classifications
Enterprise Size
Employees
adopted by other SIEs and the majority of countries reported in
Micro
0-4
Table D3, we propose a classification of 0-4 employees for
Small
5-19
Medium
20-49
microenterprises, 5-19 employees for small- size enterprises and
20 to 49 employees for medium-size enterprises.
73
ANNEX E: EXTERNAL ASSISTANCE

E.1
Overall and Sector-Specific Support to Private Sector Development
There have been a number of donor-supported projects on private sector development in

general and for sector-specific activities (Table E.1). Among the most important recent
contributions are the World Banks Investment Climate Assessment (ICA), which provides a
ranking of major constraints and challenges facing the private sector, and the sector-specific
strategies of the new tourism masterplan, the ADBs agricultural commercialization PPTA and
the FAO-funded masterplan for agriculture, and the ADB-funded domestic maritime transport
and employment skills training projects. The first section of this annex describes these and other
projects in terms of their overall PSD support, while the following section describes the
contribution of external assistance to income-generating and micro-credit activities in the atolls,
as well as specific support to the development of agriculture, fisheries, handicraft, construction,
transport, shipbuilding. The final section covers external assistance for employment and skills
development, specifically as it relates to closing the skills gap and developing an integrated
human development approach to employment generation.
Table E.1: Summary of External Assistance to Private Sector Development
Sector
Multi-Sector
Agriculture
Construction
Fisheries
Handicraft
Power
Activity Report
World Bank, "The Maldives: Sustaining Growth and Improving the Investment Climate".
Finance and Private Sector Development Unit, South Asia Region, June 2006.
ADB, Country Operational Strategy Study: The Republic of Maldives. STS MLD 95017.
October 2005.
ADB, Loan No. 681-MLD (SF): Multiproject, for $2.38 million. Approved 29 March 1984.
ADB, "Technical Assistance to the Republic of Maldives for Capacity Building for Regional
Development". TAR MLD 36079, March 2003.
Ministry of Atoll Development, Old, Existing and Potential Income Generation Activities in
the Maldives. Funded by UNDP and UNESCAP, May 2004.
Ministry of Planning and National Development, National Recovery and Reconstruction
Plan: Programmes and Projects. Male', March 2005.
Asian Development Bank, Commercialization of Agriculture in the Maldives. TA No. 4337MLD, June 2005.
World Bank, Potential for Agricultural Products. In The Maldives: Sustaining Growth and
Improving the Investment Climate. Annex 2. Washington, DC: Finance and Private
Sector Development Unit, South Asia Region, The World Bank. April 2006.
Ministry of Fisheries, Agriculture and Marine Resources, the Republic of Maldives and
Food and Agriculture Organization of the United Nations, The Agricultural Development
Master Plan of Maldives. Draft Report. Tcp/Mdv/3001: Master Plan for Sustainable Food
Security, Agriculture and Regional Development, January 2006
World Bank, Case Study on Construction Industry. In The Maldives: Sustaining Growth
and Improving the Investment Climate. Annex 3. Washington, DC: Finance and Private
World Bank, The Maldives: Sustaining Growth and Improving the Investment Climate.
Annex 2. Washington, DC: Finance and Private Sector Development Unit, South Asia
Region, The World Bank. April 2006.
World Bank, Case Study on Handicraft Industry in Maldives. In The Maldives: Sustaining
Growth and Improving the Investment Climate. Annex 4. Washington, DC: Finance and
Private Sector Development Unit, South Asia Region, The World Bank. April 2006.
ADB, Loan No. 1121-MLD (SF): Second Power System Development, for $9.2 million.
Approved 19 November 1991.
74
Tourism
Transport
Skills Gap
Closure
ADB, Loan No. 848-MLD (SF): Power System Development, for $6.1 million. Approved
28 October 1987.
Ministry of Tourism, Mid Term Evaluation and Recommendations: Maldives Tourism
Master Plan, 1996 2005. Undated.
ADB, Domestic Maritime Transport Project. Draft Final Report. TA 4395-MLD, August
2005.
ADB, Interislands Transport Operations Review. TA No. 679-MLD. 25 April 1985.
ADB, Loan No. 1226-MLD (SF): Second Male Port, for $8.8 million. Approved 1 April
1993.
ADB, Loan No. 513-MLD (SF): Inter-Island Transport for $1.0 million. Approved 18 June
1981.
ADB, Loan No. 911-MLD (SF): Male Port Development, for $6.4 million. Approved 20
October 1988.
ADB, Report and Recommendations of the President to the Board of Directors on a
Proposed Loan to the Republic of the Maldives for the Employment Skills Training
Project. Loan 2028-MLD, approved on 2 December 2003
ADB, Report and Recommendations of the President to the Board of Directors on a
Proposed Loan to the Republic of the Maldives for the Postsecondary Education
Project. September 1998.
ADB, "Report and Recommendation of the President on a Proposed Loan to Maldives for
the Employment Skills Training Project". Manila (Loan 2028-MLD, approved on 2
December 2003).
World Bank, Maldives: Integrated Human Development Project. IDA/R2004-0168/1, June
16, 2004, and World Bank, Maldives: Integrated Human Development Project
Additional Financing. March 14, 2006.
Investment Climate Assessment: The recently released ICA by the World Bank is an
important guide to areas requiring attention for the promotion of private sector development in
the Maldives. 3 Unfortunately most of the enterprises covered were in Mal Atoll. Nevertheless,
the ICA points to constraints to doing business in the Maldives that are likely to apply to
businesses operating in other atolls. The top five obstacles identified by the businesses
surveyed were (i) lack of access to finance; (ii) high cost of finance; (iii) lack of access to land;
(iv) lack of skilled labor; and (v) corruption. There is, however, a high degree of diversity across
sectors with respect to the relative significance and severity of other constraints affecting
enterprise performance. Access to and cost of finance nevertheless emerged as the major
obstacle to businesses in all major sectors, including the construction, handicraft, and
agriculture sectors.
Tourism Masterplan: Two ten-year masterplans have been formulated for the tourism sector
since 1980, the second one having been completed in 2005. 4 The most recent Master Plan
contained the following polices and strategic objectives are recommended: (a) tourism should
be private sector led, where the roles of the public sector are regulating and providing
supportive environments, while the private sector under takes commercial operations; (b)
tourism activities should produce not only short term financial returns but adequate long term
financial and economic benefits to firms and the population at large; (c) beneficiaries of tourism
should be all Maldivians disregard of their location, as such, they should be in the center of all
planning processes; (d) tourism should be developed with dignity. Religion, culture and
traditions should not be compromised for economic benefits; (e) Maldivian culture, traditions and
3
World Bank, The Maldives: Sustaining Growth and Improving the Investment Climate. Annex 2. Washington, DC:
Finance and Private Sector Development Unit, South Asia Region, The World Bank. April 2006.
4
Ministry of Tourism, Mid Term Evaluation and Recommendations: Maldives Tourism Master Plan, 1996 2005.
Undated.
75
way of life, is an asset, not an impediment for tourism, therefore, revival, rejuvenation and
sustenance of the authenticity of folklore, cultural dances, art and crafts and traditional
ceremonies should be made a priority in all tourism projects; (f) environmental resources should
be used in a sustainable manner; (g) capacity should be planned and expansions controlled, so
as to maximize economic, environmental, and social benefits; (h) efforts should be made to
ensure that the islands are used for the purpose for which they are most appropriate, and
activities undertaken in one should not jeopardize the productive capacities of others. To attain
the strategic objectives, implementation guidelines focus on two major areas consisting of
product development management and growth management. Product development addresses
the issue of diversification of the product, source, and target market and enhancing the tourism
inputs, while growth management primarily focuses on spatial and temporal expansion plans.
Product development management aims at sustaining the industry, by devising mechanism that
ensures continued development of tourism. To do so, it is recommended to adopt a whole of
destination framework, attract innovation and creativity to the industry, undertake pilot
demonstration projects and create an enabling environment for the private sector led
development.
Tourism Expansion Plans: In 2006 a new leasing process was initiated that represents a
significant departure from earlier policies and has caused concern among resort owners and
travel agents. Under the new initiative, the Government introduced 35 new islands for leasing.
This number compares with 87 resorts that were introduced to tourism over 30 years. The likely
impact of this rapid expansion is that access capacity will be strained and the basic tourism
model will undergo unknown modifications since little research information is available on the
impact of accelerating growth. As part of this process, a new public enterprise has been
proposed to manage at least 50 percent of the new resorts and it is unclear how the entity will
achieve its stated objective of encouraging wider Maldivian participation in resort ownership.
Maldives has long relied on a public sector role limited to creating the environment for sound
investment in tourism and managing the leasing process-with private sector firms bidding on
individual islands.
Fisheries: Fisheries have traditionally been the backbone of the countrys economy, providing
around 80% of export revenue. Although its contribution to GDP has since been overtaken by
tourism, fisheries remain the most important sector in terms of employment and income in
Maldives. The World Banks ICA describes recent developments in the sector and its evolution
from a traditional subsistence-based pole and line tuna fishery to numerous largely artisanbased commercial fisheries. About 30-35 percent of the population lives on income received
directly or indirectly from fishing. Fisheries are vital in that it provides most, if not the sole,
employment and income earning opportunities for atoll women. In terms of output, the fisheries
sector has grown steadily in recent years. Increased catch was recorded for both pelagic and
reef fish fishery. Revenue generated from the export of marine products has also increased
during the past years increased.
Agricultural Commercialization: In 2005 the ADB completed a comprehensive study on the
potential commercialization activity in the Maldives. 5 The strategy for agricultural
commercialization seeks to promote a market-driven process that in the short to medium-term
will target specific types of activities to these three markets. It relies on the following key
components: (a) develop distinctive crop types and agribusiness activities for the domestic,
resort and foreign markets; (b) adopt a phased approach to project interventions, but provide
5
Asian Development Bank, Commercialization of Agriculture in the Maldives. TA No. 4337-MLD, June 2005.
76
priority programs to commercialization activities aimed for the domestic and resort markets
since development of those activities will provide parallel support to subsistence farming in the
inhabited islands damaged by the tsunami; (c) provide for value-added processing industries by
facilitating high value-added agribusiness activities and developing a limited but significant
number of agriculture-based industries in different parts of the country; (d) adopt a clusters
approach to the integration of production, marketing and distribution activities for targeted
geographic areas; (e) enhance the catalytic role of public sector for kick-starting commercial
activities and strengthening private sector commercial activities through national, regional and
local projects and programs supported by the ADB and other development partners; (f) provide
for an institutional mechanism that will allow rapid decision-making processes to take place; and
(g) target the poorest and most tsunami-affected areas of the country in terms of activities that
will combine subsistence and commercial production activities, encourage an increased role of
women in agribusiness activities at the local level, and ensure an equitable distribution of
benefits from commercial activities throughout the country.
Agricultural Masterplan: The FAO-funded Agricultural Masterplan for the Maldives sets out
three core objectives for the sector: (a) achieve sustainable and optimal utilization of potential
agricultural resources to maximize the sectors contribution to national economic development
without jeopardizing the environmental beauties and values; (b) increase the productivity of
agricultural commodities and livestock products to make available safe and nutritious local food
and meat supply and to reduce reliance on food imports; and (c) establish a diversified and
vibrant national economy through private sector oriented and sustainable agribusiness system
development with a reliable competitive edge. 6 The overall strategic policies set out consist of
(a) optimization of the cultivable land and water resources utilization for sustainable and
environmentally viable agricultural and agro-forestry development; (b) intensification and
diversification of subsistence food crops and commercial cash crops and production of these
crops for domestic, resorts and export markets through ecologically sound improvement in
productivity; and (c) development of agribusiness system by creating conducive and enabling
business environment and a regulatory framework through harmonized public and private
partnership. The strategic components in the private sector growth promotion include: (i)
improvement of environment for competitive private sector growth, inequitable and distorted tax
structure, and laws, regulations and practices that inhabit private sector development or distort
market mechanisms; (ii) facilitation of access to capital through a more efficient financial sector;
(iii) simplification of access to land by introducing uniform and simplified land tenure system with
commercial development needs; (iv) facilitation of domestic and foreign investment by the
private sector by rationalizing the promotional, regulatory, licensing and policy formulation
functions of the financial and monetary authorities; and (v) development of agribusiness by
redefining the role and functions of the ministries concern, especially MOFAMR.
Transport Masterplan: The ADB-funded Domestic Maritime Transport Project identifying ways
to improve maritime transport and to develop a project for possible ADB financing. 7 Aspects that
have been addressed include the facilities required for maritime transport and the technical,
institutional and policy solutions needed in order to improve safety, efficiency and accessibility
of the existing system. In addition, the TA identified a delivery mechanism for maintenance of
the proposed facilities, comprehensive improvements targeting efficiency, and financial
6
Ministry of Fisheries, Agriculture and Marine Resources, the Republic of Maldives and Food and Agriculture
Organization of the United Nations, The Agricultural Development Master Plan of Maldives. Draft Report.
Tcp/Mdv/3001: Master Plan for Sustainable Food Security, Agriculture and Regional Development, January 2006.
7
77
mechanisms geared to achieve effective and consistent operation and maintenance of the
facilities and vessels. The project has its origin in the Transport Master Plan which is still at the
final draft stage. The masterplan will provide a holistic approach to the development of the
transport sector, which seeks to integrate the access to and provision of air, sea, and surface
transport services. Its key elements consist of (a) the development of a transport grid involving
air, sea and land transport; (b) the development of international airport(s) to integrate and
sustain activities in the larger national arena;(c) the development of Mal Commercial Harbor
and the regional ports to cater to the developmental needs of the country;(d) the development of
inter-island transport networks (both by air and sea) with special emphasis on realizing
synergies;(e) the development of sustainable and efficient intra-island transport networks, taking
into consideration the increasing demand for motor vehicles, congestion and pollution; (f) the
development of sustainable and efficient inter-island transport networks, taking into
consideration the increasing demand and number of sea-based vessels and pollution; and (g)
the harmonization of the transport system with the growth of the tourism sector. There are four
policy guidelines, the second of which provides for the development of a nation-wide transport
grid that recognition of the role of the private sector. The policy favors the domestic private
sector by requiring foreign firms to pay a royalty that is not levied on domestic firms.
Education and Vocational Training: The ADB-funded Employment Skills Training Project is
assisting the Maldives make better use of its human resources potential by increasing the
number of Maldivians actively participating in the labor force. 8 The project will provide
employment-oriented skills training in various occupations to make the prospective Maldivian
employee more attractive to the employer. In the process, in-country capacity to deliver
competency-based skills training will be strengthened. Together with the provision of
employment-oriented skills training, career guidance in schools and social marketing will
contribute to making training and employment more attractive to the prospective Maldivian
employee. The overall objective of the project is to increase the number of Maldivians, men and
women, actively participating in the labor force and employed. The project will (i) provide youths
with employment-oriented skills training; (ii) increase capacity to design, develop, and deliver
employment-oriented skills training; (iii) improve public perception of training and employment in
locally available skills-oriented occupations; and (iv) strengthen labor administration and labor
market analysis. The project aims to train about 6,000 youths, at least 40% of whom will be
female. The project implementing agency will be Employment and Labor (MEL). A project
steering committee will be established to facilitate policy dialogue, advise the project manager of
concerns and issues related to all aspects of project implementation, and facilitate coordination
between ministries and agencies. A project implementation unit will be established. Working
groups will be organized to coordinate and guide the implementation of project components and
activities. The main project benefits are: (i) more youths provided with employment-oriented
skills training; (ii) more skilled Maldivians in the labor force sharing in the benefits of economic
development; (iii) increased capacity in country to design, develop, and deliver demand-oriented
skills training; (iv) strengthened labor administration and labor market analysis at MEL. The
direct beneficiaries of the project will be: (i) unemployed youths, including women; (ii) island
communities; (iii) various ministries and agencies addressing the issues of the youths, human
resources development, and training delivery; and (iv) public and private training providers.
Benefits to the country will accrue through human development that is necessary for economic
growth. The provision of skilled labor will also contribute to meeting the macroeconomic goals of
8
ADB, "Report and Recommendation of the President on a Proposed Loan to Maldives for the Employment Skills
Training Project". Loan 2028-MLD, approved on 2 December 2003.
78
the country, notably addressing the balance of payments and retention of foreign exchange. The
project will have three components: (i) increasing access to good quality employment-oriented
skills training; (ii) social marketing, and improving career guidance and awareness of
employment opportunities; and (iii) capacity strengthening of the Ministry of MEL. Training in the
project will be delivered in three geographic regions, namely, Mal island and adjacent atolls,
the Northern Development Region, and the Southern Development Region. The project will
focus on delivering training in four sectors: tourism, fisheries and agriculture, transport, and the
social sectors.
E.2 Support to Atolls-Level Income-Generating and Financing Activities
Potential for Income Generating Activity in the Atolls: One of the most important recent
studies on cross-sectoral income generating activities in the Maldives has been produced by the
Ministry of Atoll Development with the support of UNDP and UNESCAP. 9 The study points to a
number of important findings that are important to the present project on SME development in
the Maldives, especially in terms of occupational information, skills gaps, and specific income
generating activities and business profiles. In general the study found a large difference
between business activities and opportunities across islands, a situation that is likely to grow if
left untreated. The poor in most islands face large constraints to accessing income earning
opportunities (IGAs) because of their lack of skills and access to capital. Most of businesses
that do exist are started and owned by men with their own savings and are operated largely with
family labor. Women play important roles in terms of providing labor but seldom provide
managerial or financial support. Yet while formal group income generating activities are
relatively uncommon, where they do exist they are most commonly done by women under the
auspices of Island Womens Development Committees (IWDCs). There are nonetheless many
more exclusively male occupations than exclusively women occupations, which aggravates the
existing situation in which the female labor force participation rate is only 37 percent compared
with a 71 percent rate for male labor
Potential for Agriculture Products: In 2005 the ADB completed a comprehensive study on the
potential commercialization activity in the Maldives. 10 It identified six fruits and seven vegetables
having high commercial value in the country. They are dry and green coconuts, bananas,
papayas, watermelons, mangoes, medicinal plants, chilies, pumpkins, eggplant, cucumbers,
tomatoes, and cut flowers. The selection criteria for those were based on the perennial nature of
the plants, technology, transport, storage and production costs, market potential for domestic,
resort, and international markets, and value-adding capacity. The World Bank subsequently
reported the results of the study as part of its ICA. 11
Potential for Handicraft Industry: In the Maldives, some crafts are highly concentrated in
specialist islands (such as lacquer ware and fine mats) while others are undertaken throughout
the nation (tailoring, boat building). 12 The World Banks 2006 ICA includes a special study on
Ministry of Atoll Development, Old, Existing and Potential Income Generation Activities in the Maldives. Funded by
UNDP and UNESCAP, May 2004.
10
Asian Development Bank, Commercialization of Agriculture in the Maldives. TA No. 4337-MLD, June 2005.
11
World Bank, Potential for Agricultural Products. In The Maldives: Sustaining Growth and Improving the
Investment Climate. Annex 2. Washington, DC: Finance and Private Sector Development Unit, South Asia Region,
The World Bank. April 2006.
12
Enterprise Development Unit, National Handicraft Centre. Mal. Ministry of Economic Development and Trade,
2006.
79

the handicraft industry in the Maldives. 13 The absence of a linkage between the tourist industry
and the rest of the economy is nowhere more apparent than in this industry. Traditional
handicraft products are not generally valued in the Maldives and they have lost their place to
substitutes that can easily be imported from other countries at cheaper prices. Handicraft and
gift shops for tourists in Mal contain mostly imported products from Indonesia, Thailand, India,
and Sri Lanka, often with signs indicating that they are products of the Maldives. The relatively
high cost of handicrafts is unlikely to drive away customers since in the past the Maldives
successfully created a brand name for its tourist industry and caters to up-market clients. The
major problem currently facing the industry is the migration that has occurred since the tsunami
and the loss of equipment and stocks to the Tsunami tidal waves that struck islands where
handicrafts were produced. Since then, many of these people have been relocated to temporary
shelters provided by the Government of Maldives and lack financial assistance for much-need
start-up capital. In addition to financing, there is an urgent need to introduce a certification
system for authentic products from Maldives. Other promotion activities that are simple to
implement are the establishment of a handicraft display center at the airport, support of these
products by the Tourist Promotion Board, and improved collaboration with resort owners to
promote more Maldivian handicrafts as an act of corporate social responsibility.
Potential for Construction Industry: The World Banks 2006 ICA includes a special study on
the construction industry in the Maldives. 14 Based on interviews with a representative sample of
the construction firms owned by the Maldivians, the study examined SMEs as well as the
construction industry as a whole, as represented by the Maldives Association of Construction
Industry (MACI). It identified lack of skills and education of available workers as an important
problem needing attention for the industry to become competitive with foreign competition, as
well as improved access to finance, lower utility costs, resolution of land policy constraints,
governance, streamlining bureaucratic processes, improved labor laws, better commercial laws,
improved infrastructure, training and capacity building, better standards, and further
improvements in public-private sector dialogue and partnership. Until then, the industry feels
that it needs protection against foreign competition, a view often expressed by businesses from
all sectors in the Maldives.
Potential for Transport: The ADBs Domestic Maritime Transport PPTA was completed in
2005 and addresses harbor investments in the outer islands and in Mal, and a program
proposal for the improvement of safety and operational conditions of boats involved in domestic
maritime services. 15 The PPTA addresses the lack of reliable services and inadequate
infrastructure that are major obstacles to safe and efficient domestic maritime transport. Interisland shipping services are operated entirely by the private sector, while the Government
provides essential infrastructure such as harbors, and regulatory functions like maritime safety.
An integrated, efficient transport network that linking Mal, the regional centers currently under
development, and the surrounding atolls would facilitate an equitable distribution of economic
growth and opportunities through the Maldives. The PPTA therefore proposes assistance to
improve the domestic maritime transport system to provide safer, more efficient and more
13
World Bank, Case Study on Handicraft Industry in Maldives. In The Maldives: Sustaining Growth and Improving
the Investment Climate. Annex 4. Washington, DC: Finance and Private Sector Development Unit, South Asia
Region, The World Bank. April 2006.
14
World Bank, Case Study on Construction Industry. In The Maldives: Sustaining Growth and Improving the
Investment Climate. Annex 3. Washington, DC: Finance and Private Sector Development Unit, South Asia Region,
The World Bank. April 2006.
15
80
accessible services. For the outer islands, four new harbors are proposed for (a) Ihavandhoo,
costed at $1.152 million; (b) Nolhivaramu, costed at $0.922; (c) Thulhaadhoo, costed at $0.559;
and (d) Kulhudhuffushi, costed at US$1.054. There is also a pilot regular shipping service based
on inter-atoll government-sponsored regular shipping services for the main islands of Faafu Atoll
(Nilandhoo, Magoodhoo, Biledhdhoo and Fieeali). The key Ministries responsible for the sector
are the Ministry of Transport and Communication (MTC), the Ministry of Construction and Public
Infrastructure (MCPI), and the Ministry of Atolls Development (MOAD). A road map for sector
policy reforms is being prepared under the ongoing project preparatory TA, and will be
implemented under the project. This will include (i) creation and enforcement of appropriate
safety standards for ships operating in domestic maritime services, and (ii) policy and regulatory
framework for public service obligations on regular domestic maritime transport services.
Potential for Shipbuilding: Under the aforementioned Domestic Maritime Transport PPTA of
the ADB, there is a proposal for a loan-based program for the improvement of safety and
operational conditions of boats involved in domestic maritime services. Under this scheme, the
ADB would provide loan finance to be on-lent to finance boat construction and improvement, as
a means of improving the quality of the domestic maritime transport fleet and providing an
incentive for boat owners to place their boats on regular scheduled services by providing easier
access to finance for actual and potential boat owners. Specific proposals include (a) that the
Bank of Maldives (BML) be appointed the intermediary responsible for on-lending part of the
proceeds of the proposed ADB loan to suitable borrowers for the purposes of investment in
boats approved by MTC; (b) that the interest rate be agreed with the Government and
preferably be below the standard rate of BML; (c) that the proposed repayment period be a
maximum of 15 years; and (d) that one of the on-loan conditions be the employment of the boat
concerned on a regular scheduled service. An economic appraisal of a hypothetical boat
constructed under this scheme and employed on a regular service yielded an economic internal
rate of return (IRR) of 12 percent.
E.3 Support for Employment and Skills Development
Closing the Skills Gaps: The ADBs Employment Skills Training Project (ESTP) was
implemented in 2004 for a five-year period to increase the number of Maldivian men and women
actively participating in the labor force and employed. 16 It extends the work undertaken before
2004 by the ADBs Postsecondary Education Project. 17 The ESTP will (i) provide youths with
employment-oriented skills training; (ii) increase capacity to design, develop, and deliver
employment-oriented skills training; (iii) improve public perception of training and employment in
locally available skills-oriented occupations; and (iv) strengthen labor administration and labor
market analysis. The total cost of the project is estimated at $7.5 million equivalent. It will be
delivered in three geographic regions: the island of Mal and adjacent atolls, and the North and
South Regions. 18 The project will support: (i) training for potential new entrants in occupations of
priority need; (ii) training for occupations currently occupied by expatriates; (iii) training of
16
ADB, Report and Recommendations of the President to the Board of Directors on a Proposed Loan to the
Republic of the Maldives for the Postsecondary Education Project. September 1998.
17
ADB, Report and Recommendations of the President to the Board of Directors on a Proposed Loan to the
Republic of the Maldives for the Employment Skills Training Project. Loan 2028-MLD,. approved on 02 December
2003
18
This consists of North Thiladhunmathee Atoll (Haa Alifu), South Thiladhunmathee Atoll (Haa Dhaalu),
NorthMiladhunmadulu Atoll (Shaviyani), Mal Atolls, North Huvadhoo Atoll (Gaafu Alifu), South Huvadhoo Atoll,
(Gaafu Dhaalu), Foamullah Atoll (Gnaviyani), and Addu Atoll (Seenu).
81
individuals engaged in the informal sector to enhance income generation opportunities; and
(iv) training for occupations of future need as identified by national economic priorities. The
Ministry of Finance and Treasury (MOFT) is the Executing Agency (EA) and the implementing
agency is the Ministry of Human Resources, Employment and Labor (MHREL). One of the key
features of the ESTP is the participation of the private sector. Extensive consultations were held
with the private sector during the PPTA. The project design is based on the active participation
of employers to ensure market orientation, relevance, and quality of skills training programs.
This process will ensure (i) increased access to quality employment-oriented skills training in
selected regions, (ii) social marketing and improving career guidance and awareness of
employment opportunities, and (iii) capacity strengthening of MHREL. Training will focus on
delivering training in four key sectors: tourism, fisheries and agriculture, transport, and the social
sectors.
Integrated Human Development Project: The World Banks Integrated Human Development
Project has a component covering employment and skills development in the Maldives. 19
Component 3 of the project aims to enhance employment prospects of individuals, particularly
those residing in remote atolls by (a) supporting cost effective job information and job
counseling services through (i) a national jobs information network, (ii) job centers on focus
islands, (iii) career and employment counseling through job centers and (iv) business centers to
facilitate business development; and (b) expanding existing micro-finance programs to the focus
islands. The counselors in the job centers will help link individuals, as needed, to a national
skills development program run by the Ministry of Labor and financed by the ADB, and an
externally-funded micro-finance program operated by the Atoll Development Committees.
Linkage to these services will allow individuals to access income opportunities in remote atolls.
By connecting individuals to market-based employment generating initiatives, this part of the
project will help improve economic growth on focus islands, and thereby increase the likelihood
of migration from other islands. The resulting higher population density will enable the
realization of economies of scale, and hence the establishment of new economic activities or
sectors on focal islands.
Atoll Development Project for Sustainable Development: Under the UNDP-supported Atoll
Development Project for Sustainable Development (ADSL), micro-credit is being offered for
community development and social mobilization interventions in six atolls through communityowned revolving credit funds (ADFs). UNDP for development of The Development of Credit
Schemes in the Atolls technical assistance in 2006 was renamed Assistance for SMEs
Development in the Atolls to be piggybacked to the proposed loan under the same project title.
The project has suffered from inadequate human resource capacity and funds have tended to
be used for participatory local governance and development planning process, rather than
social mobilization of the poorest population segments. The result has been that individual loans
have been offered to segment of the population that could access credit from commercial banks
and benefit from cheap credit at the expense of the poorest population segments. As a result,
UNDP is phasing out the program. 20
19
World Bank, Maldives: Integrated Human Development Project. IDA/R2004-0168/1, June 16, 2004, and World
Bank, Maldives: Integrated Human Development Project Additional Financing. March 14, 2006.
20
UNDP, Strategy and Implementation Plan for Re-alignment of Current UNDP Maldives-supported Programmes
involved in credit provision. Final Report, 31 May 2006.
82
ANNEX F: CREDIT GUARANTEE FACILITY

Objective: The CGF seeks to generate more loans for more SMEs by shifting the lenders socalled risk-reward frontier, that is, by reducing both actual and perceived risk. The CGF is
expected to enable financial institutions to offer loans that have a reduced conventional
collateral requirement. The capital-backed structure of the guarantee fund will ensure prompt
guarantee payment to financial institutions, thus reducing the impact of defaults on capital at risk
and cash flow. The business presented in this annex demonstrates that, if managed correctly,
the CGF will be financially viable and sustainable.
F.1
CGF Organization
Overview: The CGF will be administered by Allied Insurance Company of the Maldives Pvt. Ltd,
Male, which is the only insurance company in the Maldives. The management has expressed its
interest in administering the new facility, and the board has approved the new product. Allied
Insurance can provide office infrastructure and equipment to the CGF, thus ensuring that the
fund capital can be fully utilized for guarantee risk coverage and associated operating costs.
Advantages: In contrast to creating a new CGF institution, its placement as a division of Allied
Insurance offers the following advantages: (i) according to Allied Insurance management, they
would not require a special license or permit from the Maldives Monetary Authority (MMA) to
enter into issuing credit guarantees since they are already a licensed insurance company; (ii)
the CGF can use existing facilities (Allied Insurance head office and agents in outer atoll
islands), and possibly draw on existing staff and institutional capacities such as recruitment,
secretarial support, accounting, and product advertisement; (iii) placing the CGF in the existing
organization enhances career development, and thereby enhances the CGF attraction to wellqualified staff; and (iv) there are mutual synergies between the CGF and Allied Insurances
traditional business, such as extending the range of collateral towards non-traditional business
assets to create demand for insuring these assets.
Regulatory Framework: The Maldives Monetary Authority (MMA) has stated that any
institution that enriches the Maldivian financial market is welcome and will enjoy full support by
MMA. According to Allied Insurance management, as a licensed insurance company they do not
need a special license or permit from MMA to enter into the business of issuing credit
guarantees. It is nevertheless suggested that MMA review and eventually amends its current
regulation to ensure prudent and effective application of the CGF. Among the possible
amendments are (i) MMA releasing the CGF from the 25 percent compulsory deposit
requirement, thus allowing it to gain higher deposit interest on the unused fund capital (in
another foreign assisted scheme, MMA has reduced the compulsory deposit rate to 15 percent);
(ii) MMA issuing regulation that ensures adequate CGF liquidity and maintenance of the fund
capital, including prescribing maximum risk levels for interest-bearing fund deposits, limiting the
leverage and defining a minimum CGF liquidity ratio in relation to the guarantees issued; (iii)
regulation and guidelines determining the institutions and types of activities, such as credits and
leasing, that can be covered by the credit guarantee and the asset / risk quality of financing
instruments that can be insured; (iv) defining reporting requirements and supervision
mechanisms for the CGF; and (v) amending supervision and reporting standards for financial
institutions, for example, with respect to considering credit guarantees when calculating the
capital adequacy ratio.
Management: The Board of Allied Insurance will appoint a CGF Manager (head of division),
who will be responsible for the management of the credit guarantee facility, including: (i)
83
management of the fund in such a way that it maximizes income under the prevailing
investment regulations so that it allows withdrawing from the funds for promptly settling claims,
other liabilities and current expenditures; (ii) negotiating with the participating financial
institutions the terms under which the facility will guarantee loans, including applied loan
appraisal standards, collateral requirements, monitoring and supervision, reporting, access to
files and documents, conditions under which claims are accepted and refused, loan recovery
procedures, fees and charges; (iii) monitoring and ongoing review of the performance of the risk
portfolio. The CGF manager will be responsible for the result of the credit guarantee facility.
Domicile: Even though the loans to be covered by the CGF are those from clients in the outer
atolls, the facility should be domiciled in the head office of Allied Insurance in Male.
Geographically, Male is situated in the centre of the country, while the focal regions cover both
the north and south of the country. Moreover, the aforementioned advantages of establishing
the CGF as a division of Allied Insurance can best be realized if the facility operations are
located within Allied Insurances head office.
Phase of the Program: There are two phases to the program. The first phase of the program
will focus on institutional organization and staffing, capacity building, and the implementation of
a pilot facility in the amount of US$0.5 million that will aim to provide five (5) credit guarantees
during the course of 2008. The second phase will establish regular operations of the facility with
a capital contribution of US$2.5 million. During the first three years of the project, the number of
credit guarantees will be targeted as follows: 10 loans in 2009, 40 loans in 2010, and 90 loans in
2011.
Implementation Phases: CGF implementation should progress through the following phases:
1. Preparation (prior to loan signature)
Drafting governing and related regulation for credit guarantees (MMA);
Final decision on CGF legal form and institutional set-up (i.e. independent entity, or division
of Allied Insurance) by the Government of the Maldives;
Legal preparation for CGF establishment (Allied Insurance board decision, CGF
administration contract between Allied Insurance and Government.)
2. Institution Building (approx. 3 months)
Recruitment and selection of management and staff
Training of management and staff
Providing premises
Setting up work plan
Initial staff capacity building
3. Business Preparation (3 months)
Preparation of operations manual, forms, formulation of contracts
Preparation of annual and medium-term business plan, and simulation of default scenarios
under various cost and income assumptions
Quarterly and annual budgets
Socialization of procedures and fees to participating FI
Development and sanctioning of fund management policies
Development of a reporting format including indicators or ratios reflecting the loan portfolio
quality
Development of a monitoring and evaluation system for, among others: Loans, debtors, and
creditors, pricing policy; and CGF budget (income versus expenses and claims).
84
4. Pilot operation (6 months)

Based on US$ 0.5 million fund, issuing and administering guarantees to five targeted SMEs
at a standardized risk coverage and fee structure, with restricted geographical and sector
focus.
Maintaining CGF exposure and fund deposits at a level sufficient to cover 50 percent of the
value of outstanding guarantees at any one point of time.
Evaluating pilot experiences, and reviewing and adjusting CGF policies, operations and fees,
as well as governing regulation, accordingly.
5. Regular operation (ongoing)
Based on a US$ 2.5 million fund, extend regional coverage and range of partner institutions;
Gradually developing a more differentiated range of guarantee products (for example,

different guarantee ratios).
Technical Assistance: Successful implementation of the CGF will be contingent on the

availability of adequate and sufficient technical assistance (TA). The TA needs to cover, among
others: (i) assistance to MMA in creating and amending, respectively, adequate regulation on
CGF operation, supervision and reporting, as well as on the consideration of credit guarantees
in the overall regulatory framework for financial institutions; (ii) assistance and advice to CGF
management in Allied Insurance on the establishment, operation and development of the
facility; and (iii) capacity building for CGF staff, including initial loan officer training, on-the-job
support during pilot operation, and providing opportunities for experience exchange with other
CGF in Asia by means of study tours, and conference participation.
F.2
Guarantee Product and Procedures
Principles: International experience demonstrates that a credit guarantee facility can be

effective and sustainable if the following conditions are met: (a) lenders can receive good
repayment through prudent screening, monitoring and collection procedures, and intelligently
structuring collateral requirements; (b) risk is adequately shared between the borrower, lender
and guarantor; with sufficient risk remaining with the lender to ensure diligent loan appraisal and
effective recovery of defaulted loans; (c) guarantee fees are high enough to cover risk and low
enough not to put off borrowers; (d) fees and investment income for the guarantor are high
enough to cover expenses and default; (e) fund procedures are adequately designed for clear
selection and evaluation standards; and (f) the guarantor is credible, pays out quickly and in well
defined mutually agreed and verifiable circumstances.
Risk Mitigation: The CGF is geared towards improving SME access to finance, by partly
substituting physical collateral and decreasing the collateral ratio of loans. Consequently,
guarantees will not require the availability of sufficient bankable collateral in the form of
buildings or vessels. The CGF will, nevertheless, develop adequate mechanisms for reducing
and mitigating default risks. Developing such mechanisms and standards will take place during
the negotiation of individual guarantee contracts.
Selection Process: The present scheme adopts a selective approach, whereby guarantees are
extends on a case-by-case basis to SMEs. The potential borrower and guarantor will reviews
the project and, once agreed upon, the guarantor will issue an advance guarantee approval to
the borrower who, in turn, can use it to negotiate a loan contract with a commercial bank. Under
this mechanism, a direct relationship between the guarantor and the borrower exists since the
former investigates designated loan application and selects the ones to be guaranteed. This
reduces the probability of moral hazard on the part of the commercial bank during the screening
process and ensures that guaranteed borrowers are indeed in the targeted category intended by
85
the CGF. The recommended institutional structure and CGF process flow follows international
best practices and lessons learned from other countries.
Claims Handling: The guarantee can be claimed if a debtors arrears amount to more than
three monthly installments and appropriately warnings have been issued. Prior to issuing a
claim, however, the efforts should be made to restructure and possibly reschedule the loan. The
role of the CGF in claim recovery will need to be defined during the inception phase. The CGF
can either rely on the lenders debt recovery efforts or ask for the collateral being handed over
by the lender for liquidation by the CGF in exchange for paying out the guarantee.
F.3
Business Plan
Business Development: The CGF will require some 6 months preparation for staff recruitment
and training, preparing manuals and procedures, during which time the facility will manage a
pilot fund of US$ 0.5 million. During regular operations, ten guarantees are projected for the first
year and thereafter the number of guarantees is assumed to increase by twenty each year. By
the third year of regular operations there will be roughly 25 new guaranteed loans in each of the
two focal regions. It is further assumed that lenders will primarily look for coverage of mediumto long-term loans, with an average term of 5 years.
Table F.1: Number of Guaranteed Contracts
New guaranteed contracts
Risks/accounts in portfolio (end of year)
Pilot
2008
5
5
Regular Operations
2009 2010 2011
10
30
50
15
45
95
Guarantee Portfolio: An average loan amount of MRf 500,000 (US$ 40,000) is assumed over
the project period. It is furthermore assumed that the loans to be guaranteed will be annuity
loans with 12 percent interest a year. This rate corresponds to the current market rate of 10.5
percent, plus 1.5 percent guarantee charge, and is comparable to the 11.75 percent a year
interest that BoM is charging for its so-called Target Group Loans (TGL)21. Under these
assumptions, loan repayment gradually increases from 15.6 percent of the principal in the first
year to 25 percent of the principal in the fifth and last year.
Defaults: Normal default rates for SME credit guarantee facilities are between 2 and 3 percent,
the present calculation are based on a conservative rate of 6 percent. To simplify calculations, it
is furthermore assumed that all defaults will occur one year after the loan has been disbursed.
By then, 16 percent of the principal will have been repaid, resulting in a net default rate of 5.4
percent on the loan principal. In practice it is likely that default occurrences will be relatively
evenly distributed over all loan age classes, suggesting that actual defaults will tend to occur at
a later point in time, at a lower outstanding loan balance, and after the CGF has collected more
guarantee commissions than currently projected.
Contract Balance: The CGFs balance of loans under contract is projected to increase from
MRf 2.4 million at the end of 2008 to MRf 12.7 million by the end of 2011. The projection has
been made on a quarterly base, whereby loan repayment has been calculated annuity-based,
on those loan amounts that have not yet started to default. Loans in arrears have been left in
the contract balance for two more quarters (i.e. one quarter for getting 90 days in arrears, and
another quarter for the lender to call in the loan and initiate legal proceedings), and then they
have been written off and removed from the contract balance.
21
TGLs are collateral-free, but limited to Rf 15,000 (D1,170), which is insufficient for most small and medium
enterprises.
86
Table F.2: Projected Credit Guarantee Loan Activity

Pilot
Regular Operations
2008
2009
2010
2011
No. 5
10
30
50
MRf 2,500,000
5,000,000
15,000,000
25,000,000
MRf
70,477
281,909
2,251,954
5,828,769
MRf
121,476
235,905
621,919
MRf
2,429,523
4,718,091
12,748,046
MRf 2,429,523
7,026,138
17,230,233
31,297,358
US$ 189,806
370,098
1,375,385
2,849,891
New guarantee contracts

New contract value @ MRf 500,000 / loan
Loan repayment during the period
Defaulted and written off loans during the period
Balance of loans under contract Start-of Year
Balance of loans under contract End-of Year
Operating Income: On the guarantee portfolio, the CGF will gain the following income: (i) 1.5
percent contract fee on new contracts; (ii) 0.375 percent quarterly commission on the
outstanding loan balance; and (iii) 0.375 percent quarterly commission on 90 days foregone
interest, i.e., on 3 percent of the outstanding loan balance. Against this income are claims that
need to be honored, which amount to 80 percent of the outstanding amount of defaulted loans,
plus 80 percent of 90 days foregone interest on these loans, i.e., 80 percent of 3 percent of the
outstanding amount of defaulted loans.
Claim Recovery: The CGF will be able to recover some of the claims from foreclosing on the
collateral. Even though the collateral will be below current industry standards, it will still be
substantial. In the case of investment loans, the CGF should secure the fixed assets; for
working capital loans, 100 percent bankable collateral is assumed. When defaults occur, about
15 percent of the loan principal will already been repaid, so the collateral should allow
substantial recovery. An average 25 percent recovery from claims has been assumed, with an
average claim recovery period of one year.
Table F.3: Projected Operating Income of CGF
Pilot
2008
Contract Fee
Quarterly Commissions
Total Fee and Commission Income
Claims on defaulted loans (80% coverage)
Claims on 90 days foregone interest (80% coverage)
Total Guarantee Claims Paid
Claim Recovery (25% of previous years claims)
Operating Result (Gross)
MRf
MRf
MRf
MRf
MRf
MRf
MRf
MRf,
US$
37,500
13,375
50,875
50,875
3,975
Regular Operations
2009
2010
2011
75,000
225,000
375,000
26,750
199,074
465,817
101,750
424,074
840,817
9,718
18,872
497,535
292
566
14,926
10,010
19,439
512,461
30,369
58,976
91,740
435,004
387,332
7,167
33,985
30,260
Operation Costs: The following costs have been included in the management and operation of
the facility: (i) staff costs, (ii) travel costs to the target regions, (iii) office rent and operation, (iv)
telecommunications and Internet, (v) other office expenses. Various expenses cover the cost of
office equipment maintenance and renewal. Since the facility will be implemented as a division
of Allied Insurance, administration costs should remain modest. Initially the facility will require a
fund manager and one account officer, supported by one administrative staff (accounting and
office assistance), who can initially work on a part-time basis.
Table F.4: Staffing of Financial Guarantee Agency
(MRf/
Month)
20,000
10,000
5,000
4,000
Manager
Account Officer
Support staff
Total Staff
Domestic Travel (Trips/Year) 5,000
Pilot
2008
0.5
0.5
0
0.25
1.25
10
87
Regular Operations
2009
2010
2011
1
1
1
1
2
2
1
1
1
1
1
1
4
5
5
20
30
35
Administration Costs: The following additional details have been considered budgeted: (i)
Staff costs: Monthly staff costs have been estimated based on actual salaries that are being
paid in the Maldives to qualified staff. In addition, extra costs such as allowances, incentives for
achieving pre-determined targets, and costs for business uniforms have been considered; (ii)
Travel: Travel costs have been calculated based on an estimate of required domestic trips; (iii)
Rent and telecommunication: Estimates have been based on current costs paid by similar
operations; (iv) other office expenses: These expenses include office material, equipment
maintenance and replacement, and other administration costs such as newspapers and
receptions; (v) cost increases: Annual costs have been adjusted for inflation over the project
period. The table below presents and sums up the projected development of CGF
administration costs.
Table F.5: Operating Costs of Financial Guarantee Agency
Manager
Account Officer
Support staff
Travel (Costs per Domestic Trip)
Rent, electricity, water (500 sq ft)
Telephone , internet
Sundry office expenses, others
Total MRf
In US$
(MRf/
Month)
20,000
10,000
5,000
4,000
5,000
15,000
6,000
4,000
Annual
Increase
4.5%
4.5%
4.5%
4.5%
4.5%
4.5%
6.0%
6.0%
Pilot
2008
120,000
60,000
0
12,000
50,000
67,500
24,000
24,000
357,500
27,930
Regular Operations
2009
2010
240,000 250,800
120,000 125,400
60,000
62,700
48,000
50,160
100,000 150,000
135,000 141,075
48,000
50,880
48,000
50,880
799,000 881,895
62,422
68,898
2011
262,086
131,043
65,522
52,417
175,000
147,423
53,933
53,933
941,357
73,543
Interest Income: As capital-backed credit insurance, the CGF will earn interest from depositing
its fund capital and accumulated reserves at credible financial institutions. The scenario
assumes that 4.5 percent interest a year will be earned, since the fund will be deposited with
different maturities, and can thus benefit from higher interest rates on long-term deposits. It is
anticipated that MMA will not impose a compulsory deposit on this fund (which would, among
others, constrain fund liquidity and the ability to pay out guarantees), or, at least, that MMA will
reduce the compulsory deposit from 25 percent to 15 percent.
88
ANNEX G: BUSINESS DEVELOPMENT AND COST SHARING FACILITY

G.1 BDS Centers in Target Regions
Strategy and Organization: Field research conducted under this project shows that the
economic activities of MSMEs in the atolls are limited. Two of the major obstacles facing
MSMEs are (i) the limited access to all types of business development services (BDS) like
information, marketing services, communication and training; and (ii) the inability to access
finance at reasonable costs. On the supply side, there is a complete lack of private sector based
providers of BDS in the atolls and only a few public sector based services for business
development. On the demand side, MSMEs are unaware of the concept of professional support
for enterprise development, despite their urgent need of it. The current market volume of BDS is
non-existent, as all services from public providers are delivered free of cost.
In the absence of private sector providers of BDS in the regions, as well as of business
membership organizations like chambers or business associations, there will be established
Business Development Service Centers (BDSCs) as new institutions in each of the focal regions
for the delivery of business development services to MSMEs and as facilitators of Local
Economic Development (LED).
Functions: The Business Development Service Centers will be the principal vehicle for delivery
of BDS products to MSMEs and will facilitate cluster development in the atolls. Each focal
region will have a BDSC offering a wide range of services to MSMEs and cooperative initiatives
at cost-based prices. As neither start-ups nor established MSMEs have been exposed to the
concept of professional, demand-oriented delivery of BDS at market prices so far, and are
therefore unprepared to pay the cost-based price for such services, a Cost Sharing Facility
(CSF) will be established as the principal funding mechanism for the development of a
commercial BDS market. The CSF will enable the BDSCs to initially offer services at a low,
subsidized price. It will also support the BDSCs in developing service products and provide
substantial income to the Centers during the three-year funding of the CSF. The Centers will
have a business plan indicating core activities, required investment and planned revenue
streams. They will develop a clear strategy comprising a vision, mission, goals and line of
activities, as well as an annual operational plan.
Objectives: The BDSCs will have the following three objectives: (i) provide BDS products to
start-ups and established MSMEs; (ii) facilitate Local Economic Development (LED) and cluster
development in their respective regions; and (iii) link start-ups and other types of MSMEs to
financing opportunities. To meet its objectives the BDSCs will offer a wide range of services
classified into four categories: (i) consulting services for business planning and business
counseling, identification and provision of information, and coaching; (ii) training services on
costing and pricing, marketing and sales, accounting and entrepreneurship; (iii) facilitation
services for market access facilitation, accessing finance and facilitating the formation of
cooperatives; and (iv) government-related services covering support for business registration
and licensing, linking to government databases, and linking to government extension services.
To sustain its operation following the termination of the three-year Cost Sharing Facility, the
BDSC will become an independent and market oriented service provider with a development
and commercial objectives. Within the context of a suitable legal form of operation, the BDSC
will need to consider the following activities: (i) participation of business membership
organizations like MNCCI and MATI; (ii) ability of the organization to receive funds; (iii)
possibility of the organization for staff participation through incentive and other forms of
motivation; and (iv) ensuring the development goals of MEDT.
89
Staffing: BDSC staffing will consist of three permanent professional staff: one (1) manager and
business consultant; one (1) trainer for entrepreneurship; and one (1) cluster development
facilitator, along with two (2) support staff to be located at each Center. A major challenge will
be the identification of suitable professional staff as the required set of qualifications is difficult to
find in Maldives. Also the willingness of qualified professional staff to work and live outside of
Male is limited. Therefore the SMED project will offer an intensive HRD program to the selected
BDSC staff and a competitive salary package exceeding usual government salary range for
similar positions. An incentive scheme will be developed that links the BDSC staff directly to
their achievements in employment and income generation in the respective region.
Starting the BDSC: Establishing a region-wide recognition of BDSCs will be critical to the
success of the project as a whole. Three phases are proposed for their establishment. The first
phase will focus on recognition gains in the local community. It will rely on a media campaign
initiated by MEDT, as well as an awareness campaign of the BDSC staff presenting their
services. Business training on starting a business for government-sponsored programs like the
entrepreneurship training for youth and women will further support the BDSC in gaining
recognition. In the second phase, the BDSCs will provide training to MSMEs in the atolls cofinanced by the CSF. The third phase of the BDSC will gradually adjust prices their market level
and subsidies will gradually be eliminated. During this period the BDSC will generate its revenue
solely from the provision of commercially viable products to the MSMEs, as well as facilitating
the implement of government and donor sponsored development-based activities for SMEs.
Monitoring and Evaluation - Performance Measurement: The BDSCs will establish a
performance measurement framework as a systematic tool for measuring operational results
related to the Centers activities, including CSF-based financial support to entrepreneurs.
Among the information gathered by the Centers and published on a quarterly basis will be the
following: (i) number of businesses consulted; (ii) number of business plans prepared; (iii)
number of financial applications processed for each of the financing mechanisms supported by
the BDSC; (iv) breakdown of clientele by sector and size of enterprise; (v) number of courses
provided and participants in each course; (vi) participant evaluations of each training course;
(vii) revenue from conditional support for successful applications to various financing
mechanisms; (viii) other revenue sources; and (ix) Cost Sharing Fund management, allocation,
and monitoring analysis. Each BDSC will be responsible for establishing a results-based
management and accountability framework.
G.2
Costing
Investment and Operation Costs: The total volume of finance allocated to the establishment
and three-year operation of two BDSCs in the northern and southern development regions is
nearly US$ 1.5 million. Of that, almost US$ 0.6 million will be directed to the construction and
equipment of the two Centers and the purchase of the required inter-island transport vessel for
each Center. The operating costs for two Centers and three-years of operation are estimated at
US$ 0.9 million, of which US$ 0.4 million will go into staff-related expenses and another US$ 0.4
will be allocated for the purchase of consultancy services and the conduct of training courses.
The overhead costs for marketing, utilities and travel costs are projected at US$ 0.14 million for
both Centers over the three years.
Income: As the BDSC will require some time to gain regional recognition, the projected income
for the BDSC for the first year of operation is estimated at 10 percent of its operating costs. As
the BDSC improves its service provisions and proves its potential for value-adding to
businesses, the request for its services from MSMEs, cooperatives and government line
agencies will gradually increase. During the course of the second year, the income of the
90
BDSCs will cover already 33 percent of the operational costs and will gradually cover 100
percent of operational costs in the third year. The overall coverage of operational costs over the
three years of starting and operating the BDSC is calculated at 70 percent, and the income from
BDS co-financed from CSF will be approximately 60 percent of the total income generated by
the Center. The income from the SME share from matching grants and the income share from
other BDSC activities are both estimated at approximately 20 percent of total income each.
Sustainability: As the BDSCs will be newly created, sustainability issues need to be addressed
at the onset of the establishment of the Centers. The Centers will need to focus on long-term
sustainability issues during their initial period of operation and while being funded by the CSF
and other SMED project financing. The following conditions need to be created at the onset: (i)
the BDSCs should be established with sufficient start-up capital, including investment in its own
office building with training hall and its own means of transport; (ii) the legal basis for the BDSCs
should ensure that they are market-oriented and able to operate as commercially viable entities
at the end of the SMED project; (iii) the services provided by the BDSCs should be the focal
point of the SME media campaign initiated by the MEDT at the start of the SMED project; (iv)
staff incentive scheme should be directly related to the income generated by the Centers; (v)
during the first three years of operation the revenue generated from BDS co-financing from the
CSF, as well as the income generated from MSMEs share from matching grants and the
income share from other BDSC activities shall be flowing into a special BDS fund to be
established by the Centers and deposited in a Bank of Maldives account; (vi) services offered
by the BDSC to MSMEs will continue to be subsidized by contributions from the special BDS
fund after termination of the matching grant scheme of the CSF;(vi) BDSCs activities should be
linked to government programs and donor activities geared towards the promotion of MSMEs,
Local Economic Development (LED) or the promotion of specific industry clusters; and (vii)
following the completion of the SMED project after three years, the BDSC staff will be
downsized and some of the staff reassigned to newly established BDSCs in other regions of the
country. This sustainability strategy should ensure that the pilot Centers for MSME development
in the atolls will provide a long-term contribution to the development of the private sector in the
atolls.
G.3
Cost Sharing Facility
Coverage: The proposed size of the CSF is US$ 1.0 million (MRf 12,700,000) and will be
distributed to about 300 MSMEs and 25 cooperative initiatives for Local Economic Development
(LED) in the targeted pilot clusters in the Northern and Southern Development Regions. This
coverage has been calculated from population figures in the vicinity (over 30,000 inhabitants)
and the estimated number of microenterprises in the proposed target atolls (over 1,000
microenterprises).
Matching Grants: The facility will limit requests for support by applying a minimum matchinggrant volume of US$ 400 (MRf 5,000) and a maximum matching-grant volume of US$ 4,000
(MRf 50,000) for MSME support; for the targeted clusters, the minimum matching-grant will be
US$ 2,000 and the maximum will be US$ 4,000.
Matching-Grants for Clusters: Twenty-five cluster related matching-grants are projected over
the three-year period. As the identification and preparation of these projects is complex and time
consuming it is expected that only four projects will be introduced in the two target regions
during the first year of BDSC operation, followed by nine projects in the second year and 12
projects in the third year.
91
Fund Management: The cost projection for fund management is US$ 103,000, based on a
streamlined management structure comprising a CSF Coordinator and an Administrative
Assistant located in the EDU office in Male. The workplace will be equipped by the Project
Fund. About 10 applications for matching grant will be process each month for submission to
the Committee. The CSF Coordinator will travel up to five times a year to each BDSC to
coordinate and monitor, as well as visit the cluster development projects.
MSME Contribution to BDS-Related Matching-Grants: Cost coverage by the BDSC through
income generating activities can only be estimated at this point. Considering that no income is
expected during the preparatory phase, the estimated income per center for 2.5 years is as
follows:
Income from BDS and co-financed from CSF
Income from MSME as their share (20 percent) for matching grants
Total income
$ 420,000
$116,000
$536,000
Implementation and timeframe: The program last three years and it could be sustained if it
were to have a positive impact assessment at enterprise level.
Table G.1: Main activities and timeframe for the CSF establishment
Activities
Pre-preparation (phase 0)
Role of MEDT/EDU and EDU/BDSC regarding CSF is confirmed
Preparation of rules and regulations (EDU)
Announcement ToR for the position of Cost Sharing Facility
Coordinator and Administrator
Preparatory (phase 1)
Appointment of Sharing Facility Coordinator and Administrator
Training of professional staff
MIS
Annual CSF action plan approved by MEDT
Marketing strategy developed ( with EDU and BDSCs)
Promotional materials developed (with EDU and BDSC)
Pre-launch marketing campaign (with EDU and BDSC)
Marketing campaign
Implementation (phase 2)
Program launch
Feed-Back meetings with stakeholders
Monitoring, impact and completion evaluations
Annual action plans
Timeframe
Month
-5
-4 to 3
-2 to -1
Month
1
on-going
2 to 4
3 to 4
3 to 4
4 to 5
6
on-going
Month
7
Twice yearly after launch
18 and 36
Yearly
Monitoring and supervision: Each BDSC will submit an annual progress report to the CSF
Coordinator on the supported enterprises. Cost coverage of the monitoring and evaluation field
visits are covered by fees charged by the BDSCs and supported by the CSF. For the CSF
supported investment activities, each BDSC will submit a progress report six months after the
release of funds. An overall evaluation of the CSF will take place in the middle and end of the
project.
92
ANNEX H: IMPLEMENTATION ARRANGEMENTS

H.1
Purpose and Outputs
Objective: The major objective of the The Maldives Micro, Small and Medium Enterprises
Development Project Loan is to support the Governments efforts to (i) develop the
entrepreneurial climate and support services that will facilitate growth, (ii) provide the necessary
conditions for converting existing entrepreneurial potential into innovative and successful
business activities, (iii) attract entrepreneurial leadership from other regions of the country, and
(iv) establish broader regional centers for SME activities that are driven by growth nodes or
networked clusters for supporting activities. To achieve the aforementioned objective, the
project loan focuses on the following: (a) bolster human resource development by creating
business development service centers that provide training programs in entrepreneurship,
management, and technical skills for MSMEs and develop appropriate materials for such
training, as well as help to identify commercial opportunities in specific sectors; (b) improve
access to finance by developing innovative financing schemes using alternative financial
instruments such as equity financing, while encouraging the development of cooperatives and
associations; (c) promote a market-driven process through the public and private sector that in
the short to medium-term will target specific types of activities in selected regions of the country;
and (d) enhance the catalytic role of public sector for facilitating commercial activities in the
atolls and strengthening MSME activities by improving the policy and regulatory environment.
Focus: The MSME Development Project Loan and associated technical assistance (TA) will
focus on four major outputs (i) a policy coordination framework on SME development; (ii)
improved business regulatory environment; (iii) enhanced MSMEs' access to non-financial
business development services (BDS) and (iv) enhanced MSMEs' access to market-based
finance. These components aim to help the Government of the Maldives to increase private
sector activities in the high value-added, labor-intensive MSMEs segments of the economy
leading to the creation of jobs for the country for the increasing number of new entrants into the
labor market. Support will be given for specific activities designed to (i) establish and sustain
programs in the BDS centers, (ii) provide capacity building to the Enterprise Development Unit
of the Ministry of Economic Development and Trade (MEDT) and business member
organizations (BMOs), and (iii) ensure sustainable access to MSME financing.
H.2
Methodology and Key Activities
TA Components: The TA component of the MSME Development Project Loan will fund
consultants with expertise in the MSME sector and related areas who will conduct in-depth
consultations with the Government and private sector stakeholders. A consultative approach is
a critical part of the process to produce targeted outputs, and will be followed by a number of
roundtable discussions and workshops for knowledge transfer needed to implement the policy
conditions under the Program. The Asian Development Bank (ADB) will monitor the process
closely to ensure the quality of outputs, including training.
H.3
Cost Estimates
Loan Amount: The proposal consists of a loan of US$6.9 million for the development of MSME
Development Project Loan, preceded by US$1.7 million for activities related to capacity building.
The ADB will provide US$1,000,000 in 2008 to build the capacity for MSME development in the
atolls. Under the loan and in 2009-2011 the Government will finance US$1.2 million of capacity
building activities related to MSME development in the atolls. The loan takes into account the
strategic importance of developing the private sector in the atolls and the cost of investments
93
and adjustment costs associated with the adoption of the elements in the policy matrix. In
addition to the loan, counterpart funding will be used for costs associated with regulatory
reforms. Table H.1 summarizes the project costs. The investment costs include technical
assistance that represents 17 percent of the loan amount.
Table H.1: Project Cost Estimates and Financing Plan ($1000)
Phase I:
ADB
Cap.Dev.
A. BDS Component
1,034.6
1. BDS Centers
58.8
Operating Costs
58.8
Capital Investments
2. Enterprise Development Unit (EDU): BDS Development
94.9
Operating Costs
94.9
Capital Investments
3. Cost Sharing Facility (CSF)
19.8
Fund Management
19.8
861.1
BDS Centers
353.6
419.1
MNCCI
88.4
B. Financial Services Component
665.4
1. Credit Guarantee Facility
526.5
Fund Capital
500.0
Operating Costs
26.5
2. Technical Assistance
138.9
22.1
116.8
C. TOTAL COST
1,700.0
1,000.0
2. SME Development Project
700.0
D. FINANCING
1,700.0
1. Capacity Development Assistance
1,700.0
2. Project Loan
-
SME Development Project (Phase II)

2009
2,559.3
757.2
297.2
460.0
251.2
226.2
25.0
1,049.5
49.5
1,000.0
501.4
341.4
137.9
22.1
2,590.2
2,562.4
2,500.0
62.4
27.8
5.5
22.3
5,149.5
529.2
4,620.3
5,149.5
5,149.5
2010
809.9
310.5
310.5
105.0
105.0
51.7
51.7
342.6
254.1
77.5
11.1
93.8
68.9
68.9
24.9
2.8
22.1
903.6
367.5
536.2
903.6
903.6
2011
760.9
313.7
313.7
98.4
98.4
54.1
54.1
294.7
244.1
45.1
5.5
86.0
73.5
73.5
12.4
1.4
11.1
846.9
307.1
539.7
846.9
846.9
Total
4,130.0
1,381.5
921.5
460.0
454.6
429.6
25.0
1,155.3
155.3
1,000.0
1,138.7
839.5
260.5
38.7
2,770.0
2,704.9
2,500.0
204.9
65.1
9.7
55.5
6,900.0
1,203.8
5,696.2
6,900.0
6,900.0
TA Phases: The technical assistance will be provided in two phases. Phase I will start in 2008
and concentrate on the provision of capacity building assistance aimed at assisting the
Government to build institutional capacity to effectively manage the development process,
address existing capacity deficiencies, while helping to meet the demands that are likely to be
generated by the envisioned creation of new institutions under the Governments Roadmap for
Reform Agenda. 22 Phase II envisions an integrated project assistance in MSMEs, as well as
other sectors like transport and the regulatory framework. In the case of the MSME
development project, technical assistance will support the implementation of various measures
to support MSME development, as specified in the program, as well as to provide key
institutional capacity building support to the implementing agencies.
22
Asian Development Bank, Memorandum of Understanding, CPS Formulation Mission, South Asia Department, 1323 May 2007, Male, Maldives.
94
Table H.2: Technical Assistance for Capacity Building

Phase I
2008
BDSC
International BDS Expert
Number of experts
Phase II
2009
2010
2011
Sub-Total
1000 US$
354
341
254
244
839
1000 US$
265.2
165.0
109.9
109.9
384.8
0.8
0.5
0.3
0.3
1.2
1000 US$
216.0
135.0
89.1
89.1
313.2
Per diem
1000 US$
43.2
27.0
17.8
17.8
62.6
Travel
1000 US$
6.0
3.0
3.0
3.0
9.0
1000 US$
44.2
58.8
44.2
44.2
147.2
Fees
Training in Business Planning

Consulting SMEs
EDU
person-years
1000 US$
44.2
117.6
99.9
89.9
307.5
1000 US$
419.1
137.9
77.5
45.1
260.5
33.2
Strategic Planning
1000 US$
88.4
22.1
11.1
Facilitators Training
1000 US$
44.2
9.3
Training of Trainers
1000 US$
88.4
29.5
14.7
7.4
9.3
51.6
Overseas Training for Staff
1000 US$
66.0
33.0
29.7
26.7
89.4
1000 US$
132.1
44.0
22.0
11.0
77.1
38.7
MNCCI
Strategic Planning
BoM/AI
1000 US$
88.4
22.1
11.1
5.5
1000 US$
88.4
22.1
11.1
5.5
38.7
1000 US$
138.9
27.8
24.9
12.4
65.1
1000 US$
22.1
5.5
2.8
1.4
9.7
Training on Credit Guarantee Facility

TOTAL
1000 US$
116.8
1,000.0
22.3
529.2
22.1
367.5
11.1
307.1
55.5
1,203.8
1000 US$
TA Amounts: Table H.2 summarizes the main technical assistance activities, which include
(i) technical support to the EDU in its efforts to create a more effective and efficient institutional
setup for MSME support, (ii) technical support for the establishment of the BDS Centers,
(iii) technical support to MNCCI as the most appropriate private sector representative to
promote MMSEs in the outer atoll areas, and (iv) technical support to the banking sector and
financial guarantee agency. Consultants will be recruited in accordance with ADBs Guidelines
on the Use of Consultants and other arrangements satisfactory to ADB. Procurement under the
TA will be in accordance with ADBs Guidelines for Procurement.
D.
Implementation Arrangements
Implementing Agency: Ministry of Economic Development and Trade (MEDT) will be the main
implementing agency and other ministries will implement pilot projects. Ministry of Finance and
Treasury (MOFT) will be the executing agency for the responsible for managing and overseeing
the flow of funds for the credit line and grant facilities. The newly created Enterprise
Development Unit of MEDT will be responsible for ensuring the participation of all relevant
government agencies and business member organization in regulations and policies governing
MSMEs, as well as formulation of project activities related to business development services
and finance under the project. The period for implementation of the project will be 36 months.
Consultants: The consultants will prepare a detailed work plan before the start of services,
which will include a timetable for deliverables defined under each TA component. All reports will
conform to ADB format and will be reviewed by MEDT and ADB. Draft final reports will be
submitted within the deadline specified in the work plans after incorporation of feedback from
MEDT and ADB. The final report, incorporating comments of MEDT and ADB should be
submitted upon completion of services. The TA activities are scheduled to commence in 2008
and to be completed by December 2011.
95
E.
Terms of Reference for Consultants
The work plan and consultant selection are subject to refinement by ADB, based on the needs
of ADB and government agencies.
1.
International Consultants
a.
International MSME Policy Specialist (54 person-months)
The MSME Policy Specialist (MSMED Project Coordinator) will have a university degree in
economics or political science or related fields and extensive working knowledge of (i) small
enterprise development and related policy framework, and applicable international experiences
especially in small island economies; (ii) demonstrate good understanding of the history and
development of the Maldives economy and the development stage of the countrys regulatory
environment and private sector development, under which MSMEs. Tasks and responsibilities
include consultancy, training and preparing the reports on the following activities:
(i)
Based on in-depth consultation with the MEDT and other relevant agencies, help
implement the MSME Development Project Loan by drafting and regularly
reviewing a detailed work program for Enterprise Development Unit (EDU) and
MEDT in coordination with the BDS advisor (see below).
(ii)
Draft a plan for collection of information on the MSME sector.
(iii)
Assist EDU in commissioning of sector studies and MSME sector analysis as

qualified inputs to the formulation of MSME White Papers and coherent inputs to
the formulation of MSME policies and program interventions of MEDT and the
inter-ministerial technical committee.
(iv)
Assist EDU to monitor and evaluate existing MSME support programs and
regulations governing the sector, as well as propose future support measures. In
this context assist EDU to organise round tables with the private sector on MSME
support programs and help to enter stakeholder feedbacks and the results of
systematic sector analysis into policy discussions and the formulation of MSME
support programs.
(v)
Based on consultation with relevant stakeholders assist EDU to further simplify

and accelerate business formalization in the context of doing business in the
Maldives.
(vi)
Assist and support ADB missions with related activities, as well as conduct
discussions and workshops with the relevant stakeholders for effective program
implementation.
(vii)
Hold workshops and other dissemination events to inform stakeholders and raise
public awareness of the MSME development framework and reform of business
laws and regulations.
b.
International BDS Product Development Specialist (14 person-months
intermittent)
96
The specialist will have a university degree in economics or related fields and extensive
working knowledge in the field of business development services (BDS); and should
demonstrate good understanding of the history and development of the Maldives MSME
sector and the development stage of the countrys BDS sector. The tasks and
responsibilities include consultancy, training and preparing reports concerning following
activities:
(i)
Assist the SMED Project Coordinator (MSME Policy Specialist) in the elaboration
and review of work plans for the implementation of the ADB MSME Development
Project Loan under MEDT.
(ii)
Assist MEDT/Enterprise Development Unit (EDU) in the implementation and

evaluation of a comprehensive BDS supply and demand study and the
dissemination of the results.
(iii)
Based on the study results and further round tables with MSMEs examine the
possibility and eventually develop standard BDS to be marketed under the cost
sharing facility in close cooperation with the MEDT/EDU.
(iv)
Enhance the capacity of EDU/MEDT staff to carry out cluster and value chain
analysis and design cluster and value chain projects.
(v)
Enhance the capacity of the appraisal panel of the CSF in classifying and approve
or reject project applications.
(vi)
Based on consultation with EDU staff and representatives of atoll MSMEs (i)
design and plan local cluster support projects, (ii) assist EDU staff in acquiring
financial resources for their implementation and (iii) finally assist also in actual
implementation of pilot cluster initiatives.
(vii)
Advise EDU staff how to encourage stakeholders to support local economic

development (LED) beyond a cluster context by applying modern up-to-date
participatory LED methods.
Based on consultation with EDU staff and representatives of atoll MSMEs (i) conduct
value chain analyses, (ii) assist EDU and MEDT staff to identify weak or missing links as
well as solutions to overcome these weaknesses, (iii) assist to acquire financial resources
for value chain projects and (iii) assist in their actual implementation.
2.
Domestic Consultants
a.
Domestic Coordinator (54 person-months)
The domestic coordinator will have a university degree and understand private sector
development issues; have experience working with international consultants and ADB; and
provide inputs related to the program framework, especially for issues related to implementation
of the MSME development policy, including the shift of the role of GOM to its facilitating role.
The domestic coordinator will undertake the following tasks:
97
(i)
Under the guidance of the international policy specialist and the BDS product
development specialist, collect and analyze required information and data, and
make these available in an organized, readable form.
(ii)
Assist in implementation and gradually start to implement training programs

designed by the international policy specialist and international BDS product
development specialist.
(iii)
Arrange, organize and gradually start to implement round tables and stakeholder
workshops, and assist the international MSME policy specialist in preparing
materials.
b.
Domestic Cost-Sharing Specialist (75 person-months)
The specialist will have a university degree in economics or related fields and extensive working
knowledge with (i) the establishment; (ii) marketing and (iii) evaluation of cost sharing or
matching grant schemes. The domestic specialist should also demonstrate good understanding
of the history and development of the MSME sector and should know the strengths and
weaknesses of business sector organisations and private BDS providers. Tasks and
responsibilities include the following:
(i)
Implement the proper institutional set-up of the cost sharing facility based on
consultation with MEDT/EDU.
(ii)
Assist in the recruitment of the CSF staff.
(iii)
Implement CSF policies and standard operating procedures including strict

monitoring and evaluation.
(iv)
Select BDS providers eligible for providing services under the scheme.
(v)
Conduct staff training including the training of EDU staff and the staff of preselected BDS providers to be able to market the CSF to the targeted regions of the
Maldives.
(vii) Enhance capacity of EDU staff and staff of pre-selected BDS providers to draft
high quality CSF applications.
c.
Domestic Credit Guarantee Specialist (59 person-months)
The domestic Credit Guarantee Specialist should have the following key qualifications: (i) at
least 5 years of demonstrated experience in cash-flow based lending; (ii) experience in micro
and small loan/lease appraisal, supervision and monitoring technology; and (iii) good knowledge
of the banking system in small island economies. The consultants main objectives and
responsibilities will be as follows:
(i)
Streamline or strengthen credit approval procedures and management practices
needed to develop a well performing MSME portfolio;
98
(ii)
Train Credit Guarantee Facility staff with respect to best practice in micro and
small loan/lease appraisal, supervision and administration skills;
(iii)
Develop demand driven products in credit guarantees;
(iv)
Improve management and MIS specifically geared towards MSME portfolio;
(v)
Strengthen marketing of micro and small loans guarantees.
99
ANNEX I: REFERENCES
Abdullah, H. and Z. Ismail (2002), An Overview of Micro credit and MSME financing activities
in the Maldives. Country Paper for SAARC Finance Seminar on Micro Credit
Operations, Dhaka, Bangladesh, 21 Dec 2002.
Asian Development Bank (ADB, 1981), Loan No. 513-MLD(SF): Inter-Island Transport for $1.0
million. Approved 18 June 1981.
Asian Development Bank (ADB, 1984), Loan No. 681-MLD(SF): Multiproject, for $2.38 million.
Approved 29 March 1984.
Asian Development Bank (ADB, 1985), Interislands Transport Operations Review. TA No.
679-MLD. 25 April 1985.
Asian Development Bank (ADB, 1987), Loan No. 848-MLD(SF): Power System Development,
for $6.1 million. Approved 28 October 1987;
Asian Development Bank (ADB, 1988a), Loan No. 911-MLD(SF): Male Port Development, for
$6.4 million. Approved 20 October 1988.
Asian Development Bank (ADB, 1988b), Loan No. 911-MLD(SF): Male Port Development, for
$6.4 million. Approved 20 October 1988;
Asian Development Bank (ADB, 1991), Loan No. 1121-MLD(SF): Second Power System
Development, for $9.2 million. Approved 19 November 1991.
Asian Development Bank (ADB, 1993), Loan No. 1226-MLD(SF): Second Male Port, for $8.8
million. Approved 1 April 1993.
Asian Development Bank (ADB, 1998), Report and Recommendations of the President to the
Board of Directors on a Proposed Loan tto the Republic of the Maldives for the
Postsecondary Education Project. September 1998.
Asian Development Bank (ADB, 2003a), Report and Recommendations of the President to the
Board of Directors on a Proposed Loan to the Republic of the Maldives for the
Employment Skills Training Project. Loan 2028-MLD,. approved on 02 December 2003
Asian Development Bank (ADB, 2003b), Report and Recommendation of the President on a
Proposed Loan to Maldives for the Employment Skills Training Project. Loan 2028-MLD,
approved on 2 December 2003. Manila
Asian Development Bank (ADB, 2003c), "Report and Recommendation of the President on a
Proposed Loan to Maldives for the Employment Skills Training Project". Loan 2028MLD, approved on 2 December 2003.
Asian Development Bank (ADB, 2005a), Country Operational Strategy Study: The Republic of
Maldives. STS MLD 95017. October 2005.
Asian Development Bank (ADB, 2005b), Domestic Maritime Transport Project. Draft Final
Report. TA 4395-MLD, August 2005.
Asian Development Bank (ADB, 2005c), Commercialization of Agriculture in the Maldives. TA
No. 4337-MLD, June 2005.
100
Enterprise Development Unit (2006), National Handicraft Centre. Mal. Ministry of Economic
Development and Trade, 2006.
Food and Agriculture Organization of the United Nations (FAO, 1994), MDV/92/TO1 Report
to the Government of the Republic of Maldives on the Agricultural (Horticultural) Crop
Sector, February 1994.
Integrated Framework (2005), Integrated Framework Diagnostic Trade Integration Study for the
International Finance Corporation (2007), Doing Business: Maldives. Available:
www.doingbusiness.org.
International Fund for Agricultural Development (IFAD, undated), Atolls Credit and
Development Banking Project Republic of Maldives: Atolls Credit and Development
Banking Project: Completion Evaluation Executive Summary.
Ministry of Atoll Development (2004), Old, Existing and Potential Income Generation Activities in
the Maldives. Funded by UNDP and UNESCAP, May 2004.
Ministry of Economic Development and Trade (MEDT, undated), Enterprise Development Unit
(EDU). Male, Maldives.
Ministry of Fisheries, Agriculture and Marine Resources, the Republic of Maldives and Food and
Agriculture Organization of the United Nations (2006), The Agricultural Development
Master Plan of Maldives. Draft Report. Tcp/Mdv/3001: Master Plan for Sustainable Food
Security, Agriculture and Regional Development, January 2006.
Ministry of Planning and National Development (2006), Maldives: Population and Housing
Census 2006. Preliminary Results. Maldives: Republic of Maldives.
Ministry of Planning and National Development (2005a), Strategic Economic Plan. Maldives:
Republic of Maldives.
Ministry of Planning and National Development (2005b), Statistical Yearbook. Male, Republic
of Maldives.
Ministry of Planning and National Development (2004), Household Income and Expenditure
Survey, 2002-2003. Maldives: Republic of Maldives.
Ministry of Tourism (undated), Mid Term Evaluation and Recommendations: Maldives Tourism
Master Plan, 1996 2005. Male, Maldives
Naseer, A. and B.G. Hatcher (2004), Inventory of the Maldives coral reefs using
morphometrics generated from Landsat ETM+ imagery. Coral Reefs 23: 161-168.
Presidents Office letter 73 of October 7, 2004 approved the establishment of the small business
unit. For details, see Ministry of Economic Development and Trade (MEDT, Undated),
Enterprise Development Unit (EDU).
RAM Consultancy Services Sdn Bhd (2005), SME Access to Financing: Addressing the Supply
Side of MSME Financing. ASEAN Secretariat, REPSF Project No. 04/003, July 2005.
Republic of Maldives (2005), Tsunami Impact and Recovery, Joint Needs Assessment. Annex
2, 2005.
UNDP (2006), Strategy and Implementation Plan for Re-alignment of Current UNDP Maldivessupported Programmes involved in credit provision. Final Report, 31 May 2006.
101
United Nations (2002), Development Assistance Framework for Republic of Maldives 20032007. Mal. 26 July 2002.
United States Department of Commerce (2005), Doing Business in Maldives: A Country
Commercial Guide for U.S. Companies. U.S. Department of State, 2005.
Winters, L. Alan (2003), Beautiful but Costly: Business Costs in Small Economies. Centre for
Economic Policy Research, London and Centre for Economic Performance, London
School of Economics. First Draft.
World Bank (2006a), The Maldives: Sustaining Growth and Improving the Investment Climate.
Annex 2. Washington, DC: Finance and Private Sector Development Unit, South Asia
Region, World Bank. April 2006.
World Bank (2006b), Case Study on Handicraft Industry in Maldives. In The Maldives:
Sustaining Growth and Improving the Investment Climate. Annex 4. Washington, DC:
Finance and Private Sector Development Unit, South Asia Region, World Bank. April
2006.
World Bank (2006c), Potential for Agricultural Products. In The Maldives: Sustaining Growth
and Improving the Investment Climate. Annex 2. Washington, DC: Finance and Private
World Bank (2006c), Maldives: Integrated Human Development Project. IDA/R2004-0168/1,
June 16, 2004, and World Bank, Maldives: Integrated Human Development Project
Additional Financing. March 14, 2006.
World Bank (2007), Doing Business in South Asia 2007. Washington, DC.
102

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MALDIVES

Preparing the Small and Medium

TA 4745-MLD: SME Development Project Draft Final Report

TA 4745-MLD: SME Development Project Draft Final Report

DESIGN AND MONITORING FRAMEWORK

TA 4745-MLD: SME Development Project Draft Final Report

Sixth National Development Plan

TA 4745-MLD: SME Development Project Draft Final Report

Ministry of Fisheries Agriculture and Marine Resources

TA 4745-MLD: SME Development Project Draft Final Report

LOAN AND PROGRAM SUMMARY

Targeting classification: General intervention

Category C: Involuntary resettlement

Category C: Impact on indigenous people

In an effort to ameliorate regional inequalities and reverse migration to the capital,

The objective of the MSME Development Project Loan is to support the

TA 4745-MLD: SME Development Project Draft Final Report

driven by growth nodes or networked clusters for supporting activities. To achieve

bolster human resource development by creating business development

The project framework is attached in Annex A.

Ministry of Economic Development and Trade (MEDT)

Risks include lack of Government capacity to implement program, and

TA 4745-MLD: SME Development Project Draft Final Report

I. THE SECTOR: PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

For administrative purposes, these atolls are grouped in 20 atolls.

TA 4745-MLD: SME Development Project Draft Final Report

Table 2: Maldives Sectoral Contributions to GDP (percent), 2000 - 2005

TA 4745-MLD: SME Development Project Draft Final Report

TA 4745-MLD: SME Development Project Draft Final Report

Business Regulatory Environment

TA 4745-MLD: SME Development Project Draft Final Report

TA 4745-MLD: SME Development Project Draft Final Report

manufacturing respondents, around 45 percent of respondents in the tourism industry and

Geographical location near tourist resorts

Improvement of logistics through inter and intra-island

Artisan tradition and culture

Communication system enhancements through mobile

Regional development planning

Possibilities to use existing facilities for BDS activities

Low cost skilled workers

Political commitment to private sector development

Schools system for creating knowledgebase society

Development of entrepreneurial infrastructure for MSME

Cultural, recreational and tourism capacities

Existence of experienced entrepreneurs

Tradition of large enterprises

Lack of entrepreneurial mindset

Narrow economic structure

Few people oriented to modern working environment

Lack of entrepreneurial and managerial

Dependence on government for action

Lack of support for entrepreneurs

Delays in privatization and restructuring of SOEs

Lack of finance for MSMEs

Impact of government involvement on business decisions

Fragmentation of the agricultural land; little

Corruption and lack of good governance

TA 4745-MLD: SME Development Project Draft Final Report

Key Challenges and Opportunities

TA 4745-MLD: SME Development Project Draft Final Report

Table 8: Constraints on Competitiveness of Enterprises

TA 4745-MLD: SME Development Project Draft Final Report

TA 4745-MLD: SME Development Project Draft Final Report

TA 4745-MLD: SME Development Project Draft Final Report