MSMEs and Access to Financing in a Developing Economy: The Indonesian Experience

MSMEs and Access to Financing in a Developing Economy: The Indonesian Experience

Tulus T. H. Tambunan (University of Trisakti, Indonesia)
Copyright: © 2018 |Pages: 25
DOI: 10.4018/978-1-5225-2700-8.ch008
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Abstract

Historically, micro, small, and medium enterprises (MSMEs) have played an important role in economic development in Indonesia. MSMEs are very numerous, amounting to, on average, almost 99% of total enterprises and also more than 90% of total employment across sectors in the country. Although the lack of finance is not the only problem facing many MSMEs, this chapter discusses the Indonesian experience with MSME financing with the focus on a government-initiated credit guarantee scheme, namely KUR (people business credit), aiming to give the enterprises more access to finance and the development of microfinance institutions. It also provides a brief description of MSMEs' development, their main constraints, and their main finance sources. The chapter shows that, in spite of government efforts, the majority of MSMEs, especially micro and small enterprises (MSEs), still depend on informal sources for their capital.
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Introduction

Historically, micro, small, and medium enterprises (MSMEs) have played an important role in Indonesia’s economic development. MSMEs are very numerous, amounting to, on average, almost 99% of total enterprises across sectors in the country. They have always been the main drivers of domestic economic activities, contributing to more than 50% to the country’s gross domestic product (GDP). The enterprises have also been the primary source of employment creation, which means that they have made a significant contribution to government efforts in the region to reduce unemployment, especially among youths, relatively low-educated workers, and women.

Within developing economies, Indonesia is more advanced in MSME policies, especially with respect to MSME financing and microfinance institutions. Indonesia began supporting MSMEs with government-initiated subsidized credit in 1971, and since then, various types of subsidized credit schemes for MSMEs have been initiated and implemented. In 2007, the government launched for the first time a guarantee credit scheme, known as Kredit Usaha Rakyat, or KUR, particularly for micro and small enterprises (MSEs), as they have limited access to commercial banks for financing their activities because they have no valuable assets as collaterals (so they are considered as nonbankable by commercial banks).

This chapter discusses MSME financing in Indonesia with the focus on the country's experience in the implementation of the KUR.

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