82027 ASSESSING PRIVATE SECTOR CONTRIBUTIONS TO JOB CREATION: IFC OPEN SOURCE STUDY THEME: ACCESS TO FINANCE CBC: Micro-Case Study of Job Creation Effects IFC has supported Sri Lanka’s largest private bank, the Commercial Bank of Ceylon (CBC), since 2003. IFC has provided equity, advisory services, and support for loans to small and medium-size enterprises. Interviews with a sample of 100 micro, small, and me dium-size enterprises (MSMEs) that obtained loans from CBC in 2009 found that the firms created 2,650 permanent jobs between 2009 and 2012, with annual job growth of 12 percent- more than twice the country’s job growth. Job creation was equal for men and women and the companies also increased labor productivity. The rapid job growth coincides with companies starting and expanding operations using financial resources from CBC and taking advantage of a better investment climate. Extrapolating the sample results to CBC’s portfolio of MSMEs that received loans in 2009, we estimate that they may have created between 140,000 and 330,000 jobs over three years, which represents about 1.8–4.3 percent of employment in Sri Lanka in 2011. But, these jobs cannot be exclusively attributed to the financing and there are some other caveats. This is the first case study covering financial markets for the IFC Job Study, which estimates the employment effects on MSMEs of access to finance provided by CBC, IFC’s financial intermediary client. The study is based on interviews with a representative sample of 100 MSMEs that received loans from CBC in 2009. Methodology investment clients in Sri Lanka. IFC’s equity investment in To choose the firms, the portfolio was split in three groups CBC started in 2003 and currently holds nearly 8 percent of according to the size of the loan, based on the assumption its shares. that loan size is a proxy for firm size.1 Then, samples of at least Between 2006 and 2009, as part of its advisory services, IFC 30 firms were chosen for each loan size to have large enough helped CBC develop an integrated SME, retail, and corporate samples to do an extrapolation to the portfolio.2 Firms were strategy—creating a new loan product for SMEs. CBC has asked about employment in 2009 and 2012. The period of since increased its focus on SMEs and enlarged its SME port- about three years was chosen to measure the employment ef- folio, increasing the number of MSME loans (with sizes from fects on firms of having capital to start and expand operations $1,000 to $1,000,000) more than three times from 2009 to but limit the effect of external factors on turnover and job 2011. IFC has also been involved in the development of in- growth that could result over a longer period of time. ternal systems and the improvement of risk management and The sectors covered, for their relevance to Sri Lanka’s econo- credit scoring models. CBC is expected to continue supporting my, were tourism, agribusiness, infrastructure, and manufac- Sri Lanka’s growth and development, especially in infrastruc- turing. Of the 100 selected MSMEs, 92 were in the western, ture, tourism, and agriculture, in addition to retail financing in southern, and central parts of the country. The other eight the northern and eastern regions. In 2012, IFC supported CBC were from northern and eastern (post conflict) areas (box 1). providing $65–70 million to expand its SME portfolio and its Based on the sample, a conservative extrapolation was done credit support to 20,000 firms. on the total portfolio of loans provided by CBC in 2009.3 The Direct Employment in CBC estimates consider loans provided by CBC to companies in 2009, adjusting for nonperforming loans in the portfolio, but CBC’s solid financial performance is reflected in its growth in not correcting for the fact that some companies could have business volumes and increased profits before taxation. Profits received more than one loan in 2009. grew 18 percent in 2010 and 10 percent in 2011.5 Employ- ment in CBC also increased between 2009 and 2011, with IFC and CBC full-time employment up nearly 6 percent a year and out- CBC is the country’s largest private bank, accounting for about sourced workers6 by about 3 percent per year.7 Between 2009 12 percent of the Sri Lankan market.4 For banks that make and 2011 almost 470 positions were created and the gender loans to SMEs, CBC estimates that it currently holds about mix of employees remained stable, with three-quarters ac- 20 percent of this market. It is among IFC’s longest-standing counted for by men. Male and female participation is similar among outsourced workers. 1 IFC uses loan size as a firm size proxy. Firms are defined as micro ($1,000–10,000), small ($10,001–100,000), or medium-size ($100,001–1,000,000), depend- ing on the loan size received in 2009. In 2009 Sri Lanka did not have a uniform nationally accepted definition of SMEs but part of classifications based on employment, asset value, or investment criterion depending on the institution (i.e. Sri Lanka Standards Institution, Industrial Development Board, Department of Census and Statistics, and the Ministry of Small and Rural Industries). 2 For more details on the methodology please go to www.ifc.org/jobcreation. 3 The approach used the 25th percentile and the median to extrapolate the results, instead of using the average, in order to eliminate the effects of outliers. The 25th percentile is the value below which 25 percent observations in each loan group can be found and the median is the value below 50 percent of the observations can be found. 4 Commercial Bank of Ceylon. 2011. Miles Ahead. Annual Report 2011. 43rd issue 5 Commercial Bank of Ceylon. 2011. Miles Ahead. Annual Report 2011. 43rd issue 6 Defined as employees hired by agencies to perform certain activities for the bank but are not directly employed by CBC 7 Commercial Bank of Ceylon. 2011. Miles Ahead. Annual Report 2011. 43rd issue 1 CBC provides competitive compensation based on market FIGURE 1: UNEMPLOYMENT RATE IN SRI LANKA HAS BEEN surveys and collective agreements. It promotes equal pay at DECREASING SINCE 2007 the same employee levels regardless of gender–in 2010 and 2011 the male to female wage ratios at each level were close 6.5% to one. Employees receive significant training and education, 6.0% with an average of 23.8 training hours per worker a year from Unemployment rate 5.5% 2009 to 2011. CBC increased spending on training by 28 5.0% percent between 2011 and 2012, with 446 training programs. 4.5% CBC’s Strategy for Small and Medium-Size 4.0% Enterprises 3.5% 3.0% CBC plays an important role in developing SMEs, as one of 2007 2008 2009 2010 2011 the two main private banks serving them in Sri Lanka. Actu- Sri Lanka Global ally, about two-thirds of the SME sample to which CBC pro- vided loans in 2009 obtained them solely from CBC. Why is Source: Department of Census and Statistics in Sri Lanka and ILO 2012. this? The most common reasons cited for getting loans from CBC were its efficient services, convenient locations, and es- workers. In addition, wages for machine operators tended to tablished relationships. CBC also has competitive rates and be high compared to the minimum wage in Sri Lanka. These has provided valuable advice on loans and other financial firms usually had the lowest share of female employees, and products, according to firms interviewed. when women participated they held administrative positions. Micro, Small, and Medium-Size Enterprises Sri Lankan Fast Employment Growth Need Access to Finance after Conflict A significant proportion (40 percent) of firms interviewed The Sri Lankan economy is going through a positive phase, as mentioned that insufficient access to finance had been a main employment figures show. This is surprising given the global obstacle either when starting or expanding their business. economic climate. While the global unemployment rate has Lack of access to finance represented the top constraint for been increasing since 2007, for Sri Lanka it has decreased to three reasons: firms did not have enough resources to start at levels below 4 percent in the third quarter of 2011 (figure a bigger scale or expand rapidly, interest rates were too high 1).8,9 Annual employment growth for Sri Lanka was 4.8 per- to obtain loans, and business slowdown increased financial cent up to the third quarter of 2011, showing an accelerat- needs or made it difficult to repay. For example, one-quarter ing trend.10 The services sector employed 43 percent of the of the companies mentioned difficulties repaying loans as a workforce in the third quarter of 2011, showing the fastest result of the Euro crisis, higher loan costs, competition, de- compounded annual growth since 2009 of about 3.5 percent. layed client payments, or macroeconomic conditions. This Regarding GDP, the Sri Lankan economy grew by 8 percent confirms the notion that during crises, MSMEs are more in 2010 and 2011 and the country’s development continued vulnerable to shocks and suffer more from access to finance in 2012 with similar GDP growth in the first quarter.11 constraints than larger firms. Fast Annual Employment Growth of MSMEs BOX 1. EXPANDING FINANCIAL SERVICES IN POST Served by CBC between 2009 and 2012 CONFLICT AREAS The sample of CBC client MSMEs showed annual job CBC decided to open more branches in post conflict areas growth of 12 percent between 2009 and 2012, with equal of Sri Lanka—eastern and northern areas—from 9 to 21 job creation for women and men—more than twice the most new branches opened between 2009 and 2011. In fact, recent annual growth for which Sri Lanka has data. The firms it was the first bank to open a branch in Kilinochchi, the surveyed created 2,650 positions, with half going to women. But by 2012, female participation rate was lagging behind most affected area of the country in the north. male participation rate in the sample, accounting for about To stimulate livelihoods for people in the north, mainly 40 percent of employment overall. In addition 15 companies in agriculture and fishery, CBC committed more than interviewed did not have any female employees. 1,500 unsecured loans. The study estimated that 10 – 31 jobs were created for ev- In the east—not as economically paralyzed as the north— ery $100,000 of loans provided to MSMEs.12 However, more people look to develop businesses and mainly need work- than 80 percent of the firms surveyed also got other loans ing capital. Here, CBC opened branches for convenience before or after 2009, which could have also contributed to and to create opportunities. their expansion and the impact on job creation during the period. This could, in turn, overestimate the number of jobs created per $100,000 of loans. Other factors could also have Firms operating in the infrastructure sector mainly face finan- affected job growth, and the variation in the estimate varies cial constraints because they often have liquidity and working significantly.13 capital needs due to delayed payments from customers and high project costs. These firms said that another main con- The sales turnover in the sample increased 19 percent a year straint for their operations was the unavailability of skilled because of the significant expansion of activities, a faster rate 8 Excluding the north. http://www.statistics.gov.lk. 9 International Labour Organization. 2012. Global Employment Trends 2012. Geneva. 10 The most recent annual employment (2010 – 2011). Excluding the north. http://www.statistics.gov.lk. 11 http://www.statistics.gov.lk. 12 Based on an exchange rate of 114 Sri Lankan rupees to $1. The range of the multiplier is based on all industries considered and was calculated using the 25th percentile and the median. 13 Even excluding outliers - the 10 percent smallest and largest job creation figures per $100,000 - the range is 2-145. 2 than job growth.14 Firms in tourism and agribusiness had the jobs between 2009 and 2012. In the north and east the aver- highest sales turnover increases, while infrastructure did not age 15 jobs created per firm were enlarged by an infrastruc- perform as well. Two factors affecting firm sales turnover per- ture firm that almost doubled its turnover. The west (includ- formance in infrastructure were higher competition and more ing southwest) had the slowest annual job growth rate in the expensive imports, in part due to Sri Lankan rupee depre- sample, at 8.8 percent. ciation. Average annual labor productivity (sales relative to employees) growth in the sample was 10 percent from 2009 Women Accounted for a Third of Employees to 2012, showing a positive association of job growth and of Female-Owned Small and Medium-Size productivity. That could be, to some extent, due to invest- Enterprises17 ments in technology: about 20 percent of firms interviewed There was significant participation of females in SMEs own- mentioned that they used loans to acquire more productive ership. Forty percent of the firms surveyed had at least one machinery or additional technology. The result of job growth woman participating in their ownership. The most common ,accompanied with increases in labor productivity, is in line form was in partnerships with their husbands. In Sri Lanka, with the IFC Job Study’s finding: there is a positive associa- women and men have equal property ownership and inheri- tion between labor productivity and job growth for firms in tance rights. This gives women in Sri Lanka better access to developing countries.15 land and property than in other countries in South Asia.18 Their property can be used with their husbands’ to obtain bet- Manufacturing Firms Created More Than ter loan conditions and/or higher loan amounts. Hence, the 40 Percent of Jobs high proportion of husband and wife business partnerships In Sri Lanka, manufacturing firms created the most jobs, ac- can be indicative of people taking advantage of this option. counting for 44 percent of jobs, with an average of 51 po- Higher female employment is associated with the sectors that sitions per firm (figure 2). Agribusiness created about 36 firms operate in rather than with female ownership. Women- percent of jobs, and accounted for 33 percent of firms. Man- owned companies employed 34 percent of women, less than ufacturing and agribusiness firms had the highest annual job the average female employment ratio of 40 percent in the growth between 2009 and 2012 (16 percent). Infrastructure sample, but similar to the national employment share distri- firms had the lowest annual job growth, at 3 percent, and also bution (35 percent).19 For the sample, the participation of had the lowest share of jobs created (7 percent). According women in ownership did not seem to increase female em- to the surveyed firms, low job growth in infrastructure is the ployment. On the other hand, when focusing analysis on the result of higher competition and slowdown of construction sector, firms operating in the agribusiness sector tend to have business. In addition, direct employment for infrastructure the highest shares of employment of women, followed by tex- firms is low compared to the other sectors. Even in case of tile and manufacturing companies. Among agribusinesses, 40 tourism, which is a labor intensive sector, employment effects percent of firms employ more women than men. In tourism were low, which might be a consequence of the higher inci- and infrastructure there is very low participation of women, dence of temporary workers and the stagnating business trend and they usually hold administrative positions. In tourism, due to the Euro crisis. This makes sense as European tourists one in five companies did not have female employees. Female accounted for half of the share of tourism arrivals to Sri Lanka participation is the lowest among infrastructure firms, with in 2011.16 one in three employing no women. FIGURE 2. MANUFACTURING FIRMS CREATED THE Jobs Created in CBC’s Portfolio of Micro, LARGEST SHARE OF JOBS Small, and Medium-Size Enterprises The sample showed significant job creation effects supported 50% Share of firms in the sample 45% Share of jobs created by business expansion and technology investment—more 40% than 80 percent of firms used loans obtained in 2009 for these 35% purposes. CBC’s development credit department provided 30% more than 30,000 loans to MSMEs in 2009 worth $1,000–1 25% million.20 An extrapolation of sample results to the CBC’s 20% whole MSME loan portfolio in 2009 showed that the com- 15% panies created about 140,000 to 330,000 jobs between 2009 10% 5% and 2012. The range might represent about 1.8–4.3 percent 0% of total employment figures in the third quarter of 2011.21 AGRBUSINESS TOURISM INFRASTRUCTURE MANUFACTURING Employment data showed a positive relationship between firm size and number of jobs created (figure 3). Medium-size Firms in Central Sri Lanka Created the Most firms created the most jobs per firm, but small firms had the Jobs per Firm fastest annual job growth rate. Medium-size firms had average Firms in the center of Sri Lanka created the most jobs (averag- job growth of 39 positions per firm, small firms created 30, ing 44 positions), and rapid annual job growth of 17 percent. and micro firms had 11. But those results are magnified by outliers that created many 14 Turnover data was available for 98 percent of the sample 15 IFC Forthcoming (www.ifc.org/jobcreation). For the analysis, World Bank Group Enterprise Surveys were used and data from IFC clients. 16 Sri Lanka Tourism Development Authority. 2011. Annual Statistical Report. 17 Women-owned definition is based on the fact that at least one of the owners is female. 18 International Center for Research on Women. 2006. Property Ownership & Inheritance Rights of Women for Social Protection – The South Asia Experience (Synthesis report of three studies). 19 http://www.statistics.gov.lk. 20 Comes from MIS data 21 The employment figure for Sri Lanka does not include the north as the information is not available. The percentage is a rough estimate, and there are some caveats on the calculation. Hence it should not be considered as an accurate estimation of employment impact in the country. 3 to finance to MSMEs. Banks can benefit when making and FIGURE 3. LARGER FIRMS CREATED THE MOST JOBS informing strategic decisions: 1) on products, regions, and sectors that are associated with high growth, 2) identifying Average Median 25th Percentile MSMEs with high job creation results that can be potential 45 clients for other financial services, 3) understanding their 40 reach and impact on firms and in the market in terms of em- 35 ployment, and 4) as an additional tool linked to responsible Number of jobs 30 25 finance and corporate social responsibility, given the impact 20 of job creation on development and poverty reduction. 15 10 The study helps understand the impact of access to finance to 5 MSMEs and the channels through which this can create jobs. 0 1,000-10,000 1,001-100,000 100,001-1,000,000 From a sectoral perspective, the study collects information to MICRO SMALL MEDIUM-SIZE build job creation multipliers that can be used to estimate the impact of providing financing to MSMEs in specific ways. These multipliers can be used to establish benchmarks and Some Caveats compare the effects across sectors, but evidence from addi- The sample showed considerable job growth from 2009 to tional studies is needed to further confirm these findings. 2012. However, job losses that competitors could have ex- perienced due to MSMEs expansion are not measured in the Conclusions and Lessons study. The sample of firms interviewed did not include firms Sri Lanka, in contrast to global trends, has been experiencing with nonperforming loans, which could have experienced job fast economic growth and unemployment reduction in recent losses in the period. Even when the portfolio was adjusted for years. This study shows that firms have been expanding opera- nonperforming loans and the extrapolation was done using a tions and increasing their workforce. CBC, the bank around conservative approach of the 25th percentile and the median, which this discussion has revolved, had employment growth the job growth can be an overestimation. of 6 percent in the past two years while MSMEs surveyed reg- CBC supported MSMEs by providing loans efficiently and istered an annual 12 percent employment growth since 2009. advising them on financial opportunities to help firms with The jobs created by productive MSMEs in Sri Lanka show their operations and expansion plans. But, banks pick win- that access to finance can have significant effects. Other fac- ners, in the sense that they select high performing MSMEs tors, such as macroeconomic stability, have also contributed to provide loans to, which are expected to grow faster than to business expansion and employment effects. Firms have other MSMEs not eligible for loans. Therefore, the high job reported that limited access to finance is a major constraint growth results can be related to CBC choosing highly profit- to business creation and expansion. In addition, crises can able MSMEs that are willing to risk collateral to fund their exacerbate the impact of financial constraints on MSMEs. business plans. Nearly all (99 percent) of the firms surveyed Employment growth in MSMEs has been complemented by that got loans in 2009 used land and property as collateral higher labor productivity, likely supported by technology in- for loans. Only one firm got a loan without providing col- vestments. There was significant share of women owned en- lateral—but used guarantees instead. terprises in the sample. However, it is interesting that female Access to finance likely played an important role in business owned firms were not associated with higher female employ- growth, but it is difficult to attribute job creation effects just ment. Higher levels of female employment, in fact, were as- to the loans provided by CBC in 2009. Several firms obtained sociated with the sector in which firms operated. loans from CBC and other banks before and after 2009, and other relevant events occurred in the period considered in Sri THE STUDY PROVIDES SEVERAL LESSONS: Lanka; both could have supported job creation. In 2009 the • Providing loans to MSMEs has a significant po- conflict in Sri Lanka ended and the economy benefited from tential to create jobs—but there are other relevant macroeconomic and political stability. Firms that started op- elements such as improving skills of workers and erations or expanded in 2009 relied on the better business the investment climate in the country that can environment. In contrast, most firms that participated in the contribute to it. study said that current macroeconomic conditions made it harder to expand their operations, mainly due to high interest • By supporting local banks, IFC can help firms create rates in the country (over 14 percent). jobs and raise labor productivity. Job Creation Analysis: Opportunities for • The study estimated that 10 - 31 jobs were created Financial Institutions per $100,000 of credit provided, but there was a This study is the first of IFC Job Study’s micro-case studies lot of variation, and the job creation cannot be conducted in partnership with a financial institution to un- exclusively attributed to the financing. Hence, derstand and estimate job creation effects of providing access more studies are needed to confirm these findings. Author: Luz Leyva Urenda. Development Impact Department. lleyva@ifc.org Contact: Study leader: Roland Michelitsch, Chief Results Measurement Specialist, ifcjobstudy@ifc.org Development Impact Department, rmichelitsch@ifc.org www.ifc.org/jobcreation The author gratefully acknowledges guidance from: Kishan Abeygunawardana, Victor Antonypillai, Rathnija Arandara, Ehsanul Azim, Anastasiya Denisova, Pratigya Kalra, Mahima Khanna, Ruchira Kumar, Adam Sack, and Garima Sahai.