Revitalising Export Orientated SMEs of Sri Lanka with Trade Credit Insurance

Abstract

Financial losses due to unsettled receivables from commercial debtors, which expose them to enhanced credit risk, pose a serious challenge to the profitability and expansion of export-orientated small and medium enterprises (SMEs) the world over. Trade credit insurance is a specialised insurance product that aims to mitigate credit risk by protecting the account receivables of businesses involved in international trade. However, the adoption of trade credit insurance amongst export-orientated SMES remains strikingly low. The purpose of this paper was to examine the effectiveness of the use of trade credit insurance in raising the profitability levels of export-orientated SMEs, the reasons for its low adoption rate, and strategies to encourage enhanced utilisation of it among SMEs. The quantitative methodology was employed by way of a survey in conducting this study, which included a sample of 345 managers or owners of export-orientated SMEs in Sri Lanka. Descriptive analysis revealed that 20.9% of the respondents were unaware of the existence and benefits of trade credit insurance, and only 63.2% were utilising trade credit insurance. Ordinal logistic regression analysis revealed that SMEs that employed trade credit insurance in mitigating trade credit risk showed significantly higher growth in profitability in comparison to those who did not. Therefore, to revitalise the export-orientated SMEs and enhance their contribution towards the economic prosperity of the country, it is recommended to increase awareness of trade credit insurance among them and strengthen their risk management culture while improving the service quality of service providers.