Growing MSMEs
    Category: Column By : Andy Laver Sirait Read : 1386 Date : Wednesday, June 12, 2013 - 08:45:41

    In 2011 there were around 55 million micro, small, and midsized enterprises (MSMEs) that absorbed around 97% of the workforce in Indonesia, according to Ministry of Cooperatives and SME data. Despite MSMEs being a major contributor to job creation and growth in Indonesia, it is estimated that more than 60% of small businesses in Indonesia are still not served by the country's banking system.

    Where do these businesses get their financing? Most are getting funding from friends, families and less formal lending institutions. Though these sources' lending criteria may be less stringent compared to that of banks,’ these sources come with limitations such as higher interest rates.

    To encourage more participation from banks in serving the MSME segment, the Bank of Indonesia recently issued regulations requiring banks to allocate 20% of their loan portfolios to MSMEs. The regulation will be implemented in several phases. From now to 2014, banks will be given time to build their capacity, and MSME lending can be conducted on a best effort basis. From 2015 onward, each bank will have to have allocated at least 5% of their loans to MSMEs, increasing by 5% each following year until the 20% target is achieved in 2018.

    Data from the Bank of Indonesia shows that loans to MSMEs have actually been increasing in the past few years. Total lending to MSMEs was around 552 trillion by December 2012, up 40% from around Rp 394 trillion as of December 2010. On the other hand, the Non-Performing Loans (NPL) ratio of MSME loans has actually fallen, to around 3.4% in December 2012 from around 4.2% in December 2010. These trends are an indicator that NPLs for the MSME segment are still at manageable levels and that they can be seen as a good driver of loan growth in the banking system.

    The Bank of Indonesia actually allows banks to also provide loans to MSMEs through other eligible organizations such as cooperatives or microfinance institutions. By involving these partners, banks that currently do not have adequate infrastructure to serve MSMEs can reduce the costs and mitigate risks on NPLs in satisfying this new regulation from the Bank of Indonesia.