Small and Medium Enterprises (SMEs) playa pivotal role in the socio economic development and poverty reduction process of any economy in terms of employment generation, growth of G D P, innovation, equitable income distribution, resource utilization and regional development. As a result of the twenty six years long civil war, Sri Lanka was unable to realize her full potential in the SME sector despite the endowment in human capital and natural resources. The main objective of this paper is to examine the current role of SMEs in different industries, as well as understanding their contribution to the economy and identify the possibilities for promoting SMEs in the whole country including war affected areas. The paper goes further to review the existing literature, empirical studies as well as the prevailing data bases in order to indentify the challenges and opportunities for the development of SMEs in the post conflict era. The study found that there is a vast opportunity for Sri Lanka to harness the opportunity by developing this vital sector. The paper further, attempts to identify the policy changes necessary for enhancing the role of SMEs in economic development.