19. Indonesia
Based on data published by the Ministry of Cooperatives and SMEs of the Republic of Indonesia, there were 64 194 056 SMEs in 2019, which made up 99.99% of the total business population and employed 96.9% of the total workforce. In this report, SMEs consist of micro, small and medium-sized enterprises.
Outstanding loans to all businesses declined by 3.2% year on year (y-o-y) in 2020 (IDR 6,069.39 trillion), with 20.43% of this amount (IDR 1 240.23 trillion) allocated to SMEs. Despite the decrease in 2020, outstanding loans in the past ten years (2011-20) still experienced growth with an average yearly growth rate of 13.38%.
In the last three years (2018-20), non-performing loans (NPLs) have been increasing both for SMEs (from 3.35% to 3.95%) and for total businesses (from 2.40% to 3.03%). The COVID-19 pandemic is believed to have contributed to this increase. Nevertheless, NPLs are still well managed and remain under 5%.
The share of short-term loans for SMEs over total short-term loans fell by 16.43% in the 2011-2020 period, from 25.4% in 2011 to 8.96% in 2020. While in 2011 the amount of short-term outstanding loans for SMEs was IDR 120 trillion, in 2020 it stood at IDR 131.66 trillion; this represents an increase of 9% in the 2011-20 period. However, long-term loans in the same period experienced much stronger growth, rising from IDR 354.9 trillion in 2011 to IDR 1 084 trillion in 2020, which corresponds to a compound growth rate of 205.44% and an annual average growth rate of 14.54%. The increasing trend in long-term loans illustrates lenders’ higher trust in Indonesian SMEs.
In the period from 2011-2020, interest rates on loans declined for all business, by 3.8% for SMEs (from 14.53% to 10.69%) and 2.92% for large companies (from 12.28% to 9.36%). Although interest rates are declining in Indonesia, they are still very high compared to the average in other countries.
Venture capital financing shows a significant increase, reaching IDR13.40 trillion in 2020, a 208% increase compared to 2012. In the 2012-2020 period, the amount of financing grew positively, with an average growth rate of 16.73%.
Other non-bank finance indicators show a slight decline in 2020 compared to 2019. Leasing and hire purchases decreased by 13% in 2020. Factoring activities also exhibit a similar trend, decreasing by 24% in 2020.
Accessing finance is still challenging for most SMEs in Indonesia. Especially during the COVID-19 pandemic, many SMEs have been affected by financial problems. After successfully launching the People Business Credit Programme or Kredit Usaha Rakyat (KUR) in 2007, the Indonesian government launched the National Economy Recovery Program in 2020 to overcome the crisis caused by the COVID-19 pandemic, with total support for MSME and corporation financing amounting to IDR 173.17 trillion in 2020 and 186.81 trillion in 2021.
According to the data published by the Ministry of Cooperatives and SMEs of the Republic of Indonesia, there were 64 194 056 SMEs in 2019, which made up 99.99% of the total business population and employed 96.9% of the total workforce. They contribute 60.5% to national GDP and 15.6% to Indonesia's non-oil exports, demonstrating that MSMEs have an important and strategic role in the national economy.
To respond to the challenges faced by MSMEs, the Indonesian government issued Government Regulation (PP) Number 7 of 2021 concerning Ease, Protection, and Empowerment of Cooperatives and Micro, Small and Medium Enterprises. This is a derivative regulation of the Job Creation Law which was validated in 2020. This regulation is expected to provide wider opportunity for MSMEs to grow and develop.
Outstanding loans to all businesses declined 3.2% y-o-y at IDR 6 069.39 trillion in 2020, with 20.43% of that amount (IDR 1240.23 trillion) allocated to SMEs. Despite the decrease in 2020, total outstanding loans in the past ten years (2011-20) still experienced growth with an average yearly growth rate of 13.38%. Outstanding loans to SMEs also experienced a slight decrease of 1.7% y-o-y in 2020, from IDR 1 261.88 trillion in 2019 to 1 240.23 trillion in 2020. The SME share of total outstanding loans remained stable over the period, at 19.00-21.50%, with average around 19.95%.
In the last three years (2018-20), NPLs have been increasing both for SMEs (from 3.35% to 3.95%) and for total businesses (from 2.40% to 3.03%). The COVID-19 pandemic is believed to have contributed to the increase. Nevertheless, NPLs are still well managed and remain under 5%.
The share of short-term loans for SMEs over the total of short-term loans fell by 16.43 percentage points in the 2011-20 period, from 25.4% in 2011 to 8.96% in 2020. While in 2011 the amount of short term outstanding loans for SMEs was IDR 120 trillion, in 2020 the amount stood at IDR 131.66 trillion; this represents an increase of 9% in the 2011-20 period. However, long-term loans in the same period experienced stronger growth, with a 205.44 % increase, rising from IDR 354.9 trillion in 2011 to IDR 1 084 trillion in 2020, with a yearly average of around 14.54%. The increasing trend in long-term loans illustrates lenders’ higher trust in Indonesian SMEs.
Direct government SME loans show growth in the last three years (2018-20), from IDR 0.04 trillion in 2018 to IDR 2.06 trillion in 2020. The loans distributed by the Revolving Fund Management Institute for Cooperatives and SMEs (LPDB KUMKM) reached 52 830 SMEs of LPDB-KUMKM revolving fund through 167 LPDB-KUMKM Partners.
In the period of 2011-2020, interest rates on loans declined for all businesses. They saw a 3.84 percentage point reduction for SMEs, passing from 14.53% to 10.69%, and 2.92 percentage points for large companies, from 12.28% to 9.36% in the same period. Despite a stronger interest rate decrease for SMEs, they are still charged a higher interest rate. In 2020, the interest rate for SMEs stood at 10.69%, while for large firms it stood at 9.36%. In 2020, the interest rate spread stood at 1.32%. The 2015-2020 interest rate spread stands at around 1.59% on average. This is a good improvement because until 2015, the spreads had never dipped below 2%. Interest rates are declining in Indonesia but are still very high compared to the average in other countries.
Even though interest rates in Indonesia have been decreasing, they remain high, especially compared to other countries which take part in the Scoreboard exercise. To deal with this problem, the Indonesian government is still trying to work with the financial sector to reduce interest rates down to single-digit interest rates.
Non-bank sources of SME financing
Outstanding loans granted by non-bank financial institutions (NFBIs) to all business declined by 13% in 2020. Outstanding loans to SMEs also experienced a decrease of 7.9% in 2020, from IDR 148.83 trillion in 2019 to 137.07 trillion in 2020. Despite this decline, the improvement in SME access to credit is observable in these firms’ share of outstanding loans, which registered an increase from 25.44% in 2019 to 27.28% in 2020.
On the other hand, the share of short-term SME financing over total short-term loans from NBFIs shows remarkable growth. The share has grown from 7.30% in 2019 to 27.07% in 2020.
SMEs’ NPL rate for non-banking credit companies in 2020 is 4.01%, which is higher than the rate in 2019 (2.40 %). This rate is higher than the NPL rate for banks. The COVID-19 pandemic thought to have played a role in the rise. Non-performing loans (NPLs) are still adequately handled, with a rate of less than 5%.
Interest rates on loans from non-bank credit companies declined for all businesses, from 21.76% in 2019 to 20.27% in 2020 for SME and 14.71% to 13.65% in 2020 for large firms. In fact, interest rates charged by such companies to SMEs are higher than those charged by banks. The interest rate for SMEs is higher than 20% and the interest rate spread stands at around 6.62%.
Venture and growth capital grew by around 5.29% from IDR 12.72 trillion in 2019 to IDR 13.40 trillion in 2020 (see Table 20.4). Although VC increased in 2020, previous years registered higher growth rates (e.g. 50.4% in 2019 and 19% in 2018). Investing in venture capital is relatively uncommon among Indonesian SMEs. In contrast to VC, leasing activity fell by roughly 13% in 2020, after growing in 2017 and 2018. Factoring activities also exhibit a similar trend, decreasing by 24% in 2020.
The People’s business credit program (Kredit Usaha Rakyat – KUR) has been launched to alleviate poverty and unemployment through provision of financing for Micro, Small and Medium Enterprises (MSME) in Indonesia. The amount of KUR disbursement could contribute to increase economic activity and productivity that would raise earnings and reduce poverty. KUR program was started in 2007 by giving subsidies on guarantee fee for micro financing debtors. This kind of subsidy policy lasted for 7 (seven) years and was replaced with a measure that consisted in giving subsidies on the difference of the interest rate from market until now, so the debtors only pay 6% interest rate.
The KUR programme consists of several schemes that differ according to the amount of financing and its purposes: there are KUR Super Micro, KUR Micro, KUR Small, KUR Cluster and KUR for Migrant workers. KUR Super Micro is dedicated to housewives and workers that were laid off due to the COVID-19 pandemic. KUR Super Micro for MSMEs targets starting businesses less than 6 months old. Other forms of support are also provided for KUR debtors in the form of additional interest subsidies and credit restructuring. KUR Super Micro loan ceiling is up to IDR 10 million, KUR Micro is between IDR 10 million to IDR 50 million, KUR Small is between IDR 50 million to IDR 500 million, KUR Cluster is up to IDR 500 million and KUR for Migrant workers is up to IDR 25 million. The KUR programme is a specially designed loan programme to help MSME advance their skills and promote business scale step by step.
The Government of Indonesia, through the coordination meeting of the financing policy committee for MSMEs on 8 December 2021 and 29 December 2021, has decided several policies such as: (i) Changes in the Micro KUR loan ceiling (without additional collateral) which was previously above IDR 10 million up to IDR 50 million to above IDR 10 million up to IDR 100 million; (ii) Change of Special/Cluster KUR without limitation on accumulation of KUR ceiling for the production (non-trade) sector and interest subsidies according to the type of KUR; (iii) Changes in the KUR policy for the Placement of Indonesian Migrant Workers (PMI) including the adjustment of the ceiling for the KUR for the Placement of PMI from a maximum of IDR25 million to a maximum of IDR 100 million.
Source: Coordinating Ministry for Economic Affairs
The implementation of KUR in 2021 goes until 27 December 2021 and has reached IDR 278.71 trillion (Figure 20.1) (97.79% of the change in the 2021 target of IDR 285 trillion) with a growth of 40.4% (ytd) and providing IDR 7.35 million to borrowers (Figure 20.2). Outstanding KUR in 2021 as of 27 December 2021 amounted to IDR 373.35 trillion given to 32.07 million borrowers (accumulated since August 2015). The distribution of KUR during 2021 is based on the KUR programme, namely KUR Super Micro (3.59%), KUR Micro (63.81%), KUR Small (32.59%), and KUR for Migrant Workers (0.01%). KUR demand shows an increase from an average of IDR 11.7 trillion per month in 2019 (pre COVID-19) to IDR 16.5 trillion in 2020 and IDR 23.2 trillion in 2021.
Source: Coordinating Ministry for Economic Affairs
Source: Coordinating Ministry for Economic Affairs
Source: Ministry of Cooperatives and SMEs of The Republic of Indonesia.
Note: Data for 2015 is not available because KUR stops for 7 months for evaluation, starting again on August with a new scheme.
Source: Ministry of Economic Coordination of The Republic of Indonesia and Ministry of Cooperatives and SMEs of The Republic of Indonesia.
For the past two years (2020-21), the world has been dealing with an unprecedented situation that has had a substantial impact on different elements of life, including MSMEs. MSMEs have been hit hard by the COVID-19 pandemic in terms of production, sales, and financial issues. To overcome this, the government has implemented a number of policies designed to support MSMEs in surviving and growing during the pandemic.
To address the issue caused by the COVID-19 pandemic, the Indonesian government released the National Economy Recovery Program (PEN) in 2020, with total aids for MSME support and corporate finance amounting IDR 173.17 trillion in 2020 and 186.81 trillion in 2021. The policy consists of various of programs for MSMEs, including: KUR and non-KUR Interest subsidy, loss limit guarantee for MSMEs and Corporation, guarantee services (IJP) for MSMEs, Productive Assistance for Micro Enterprises (BPUM), etc.
MSMEs are also encouraged to digitize their activities in order to boost their businesses. Integrated MSMEs digitization is promoted, start from the utilization of e-producing, e-commerce, e-financing, and e-payment. As a Payment System regulator, the Bank of Indonesia provides support in digitizing MSMEs payments by encouraging MSME transactions (Supply Side), non-cash consumption (demand side), and accelerating structural reform of the Payment System through the 2021 Indonesian Payment System Blueprint (BSPI).
The Government together with the Association of State-Owned Banks (Himbara) launched a digital credit service for Micro, Small and Medium Enterprises (MSMEs) entitled digiKU1 (digital kredit UMKM) in July 2020. This serves as Government's commitment in encouraging MSMEs to enter the digital ecosystem, complementing the Indonesia Movement of Proud of Indonesian Product (GBBI). DigiKU aims to enable MSMEs to access credit more easily, with a fast and fully digital process and support the direction of the President of the Republic of Indonesia to achieve a 30% MSME loan ratio by 2024.
Efforts to increase MSME access to finance is promoted form both supply and demand side through MSMEs financial literacy. The low awareness of MSMEs financial records causes asymmetric information between banks and MSMEs, which affects the lending to MSMEs. One effort is by promoting MSMEs financial management capacity through utilization of digital applications for transaction recordings (e.g. SI APIK). The Bank Indonesia with financial institutions is increasing MSME access to finance through business matching events with banks and Fintech. Financial literacy in general is also promoted, education programs are conducted covering various areas such as digital payments, increasing awareness for non-cash transaction, and general financial education including financial knowledge, financial and investment planning, and consumer protection.
Based on the Government Regulation Number 7 of 2021 Concerning Ease, Protection, and Empowerment of Cooperatives and Micro, Small and Medium Enterprises, SMEs/MSMEs are defined as enterprises with a maximum turnover of IDR 50 billion or maximum assets (excluding building land asset) of IDR 10 billion. The detailed classification is:
Micro-enterprise: business with maximum turnover of IDR 2 billion or assets (excluding land and building assets) maximum of IDR 1 billion
Small enterprise: business with a turnover more than IDR 2 billion up to the most IDR 15 billion or assets (excluding land and building assets) more than IDR 1 billion up to the most IDR 5 billion.
Medium enterprise: business with a turnover more than IDR 15 billion up to the most IDR 50 billion or assets (excluding land and building assets) more than IDR 5 billion up to the most IDR 10 billion
Large enterprise: business with a turnover above IDR 50 billion or assets (excluding land and building assets) above IDR 10 billion
Data covering the 2007-2009 period are not comparable with the 2010-2019 period because the methodology used to define MSMEs changed. The data used in 2007-2009 uses ceiling loans.
Source: See table 19.5
Table 19.5. Source and definitions for Indonesia’s scoreboard
References
Bank Indonesia, Database from Bank Indonesia
LPDB KUMKM, Database from LPDB KUMKM (Revolving Fund Management Institution Cooperatives and MSMEs)
Ministry of Cooperatives and SMEs Republic of Indonesia, Database from Ministry of Cooperatives and SMEs of The Republic of Indonesia
OJK, Database from OJK (Indonesia Financial Services Authority)
Note
← 1. digiKU is a capital loan service for E-Commerce Seller MSME actors, in collaboration with Himbara with the E-Commerce platform.