Indonesian SMEs – an economic shot in the arm?

SMEs play an important role in the national economy. But the pandemic has had a great impact on his survival. What is the government's strategy for them?

Indonesian SMEs – an economic shot in the arm? Photo: Unsplash

With Indonesia being one of the world's largest economies and possessing the potential for massive development in the coming years, the role of small and medium enterprises has only become more pivotal for the government. SMEs contribute substantially to Indonesia’s economic growth, as they play an essential role in social inclusion.

From creating jobs to having the capability of alleviating poverty, Indonesian SMEs account for nearly 56 percent of business investment and 97 percent of domestic employment. Recognizing the importance of SMEs, it is no surprise that the government has provided support in numerous ways, with financial strategies to strengthen the sector. However, major issues seem to still exist, as many Indonesian entrepreneurs still face difficulties in trying to establish and maintain their businesses.

Classic problems

A business's profitability and growth correlate with its size because larger enterprises have a higher probability of survival. Are SMEs a riskier option? Although the Indonesian banking systems may have improved since the previous monetary crises, these institutions are still very cautious and reluctant to lend, regardless of the fact that SMEs are the main contributor to Indonesia’s economy. However, if they do lend, they often charge SMEs with higher interest rates than from larger firms. Small and medium enterprises tend to struggle with finding adequate funding, as there are less financial institutions that are willing to support them.

Many of these SMEs don’t consistently update their financial statements, which comes off as a riskier investment for banks.

 

The main factor in poor credit risk management is the asymmetry of information between the lender and SME borrower. Many of these SMEs don’t consistently update their financial statements, which comes off as a riskier investment for banks, especially since they have have fewer assets and less credit history. However, larger ones follow certain auditing rules from external auditors, so there appears to be more authenticity and trust in their financial statements. To eliminate potential consequences, banks tend to require collaterals or higher interest rates.

Although the supply of financing for start-ups and enterprises is more developed in nations such as the United States, countries such as Indonesia still face insufficient funding methods for their SMEs. Even while being important in Indonesia, the lack of finance access remains a major problem for businesses. In 2018, Statistics Indonesia revealed that 93.5 percent of small enterprises had to fund their businesses using their own money, while only 6.7 percent of that number had access to bank loans. While there is no updated report, this has likely not changed for the better, especially given the Covid-19 pandemic.

Assessing SME policies

The registration of business firms highlighted the importance when assessing the Indonesian government's policies in supporting SMEs. With the establishment of SMEs requiring high registration costs and extensive time to process, the size of “unofficial” firms has increased remarkably. Consequently, the Indonesian government policymakers seem to be concerned about the amount of SMEs that are a part of the informal sector. Because these firms avoid tax payments and official registration, our government has difficulty figuring out how to provide support and increase their public goods and services.

Furthermore, with both the formal and informal sectors competing in the same industries, an inequality of marginal production costs (taxes and labor costs) arises. As the informal sector obtains cost advantages, the inability to legally export goods and achieve financial credit can disrupt Indonesia’s economic growth.

Lack of access and depth to information on SMEs is also an issue for the Indonesian government. For the government to focus on framing macro- and micro policies, there needs to be an emphasis on reliable, comprehensive, and present-day statistics on SMEs. With a little variation on forms of information, it has prevented government-sponsored programs from learning how to support SMEs. If this issue were eliminated, there would have been easier ways to improve their productivity and help them access markets. In addition, inadequate access to information about SMEs removes the ability of policymakers to design support systems and efficiently target issues within the SME sectors. It appears that if communication and coordination barriers between local and national offices need to be broken down and significantly improved, for the installation and implementation of government policies to be successful.

The Indonesian government has subsidized and eased loan interest payments for SMEs due to the global pandemic. As small and medium enterprises are a crucial stabilizing factor in the Indonesian economy, the government seems to be concerned about the country’s financial future with SMEs struggling through detrimental effects of Covid-19. In April, the Indonesian minister of finance, Sri Mulyani Indrawati, said that the government would cover 6 percent of the interest, and extend loan repayments to six more months for ultra-micro businesses. The government will also assist micro-businesses in paying loan interest for those borrowing up to Rp 500 million (around $34,000) or more.

Optimizing the role

The Indonesian government has many fulfillments for SMEs. The SME sector plays such an essential part of the Indonesian economy that supporting these businesses benefits the country. First, having access to capital must be improved. With a lack of access to financial institutions in rural and remote areas of Indonesia, SMEs often rely on individual earnings or other funds to support their businesses.

Second, credit risk management is a classic problem of SMEs that can also be mitigated. There seems to be a lower certainty-level between banks and SMEs because the investing simply appears to be riskier. If not for the added collateral requirements and higher interest rates, financial institutions tend to avoid lending to businesses with inadequate financial statements and records. The national government can enhance the status of SMEs by employing assistance programs that provide suitable mentoring which can help develop their businesses. If they can establish themselves in a more authorized manner, the relationship between the lender and borrower (SMEs) becomes more healthy and operative.

Conclusion

Even though many critical problems for SMEs and recommendations to address them have been stated in this essay, many important research questions remain. Suppose the government can broaden the accessibility of capital for entrepreneurs across the archipelago, create general strategies to minimize credit risk and make the formal SME sector more approachable? In that case, poverty alleviation and economic growth are bound to occur. SMEs will not only be rewarded as entrepreneurs, but also become an even larger contributor to the development of Indonesia’s economy.
 



Gia R Wirjawan is a student at the Jakarta Intercultural School and an intern at the School of Government and Public Policy Indonesia.

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    alexomari1

    SMEs are economic drivers for the nation and they actually employ the greatest percentage of citizens. They only need to be regulated for sustainability

    Jan 23, 2021 9:21 pm