Financing SMEs and Entrepreneurs 2020

20. Indonesia

Key facts on SME financing

Based on data published by Ministry of Cooperatives and SMEs of Republic of Indonesia, there were 64 194 057 SMEs in 2018, which made up 99.99% of the total business population and employed more than 116 million people. In this report, SMEs consist of micro, small and medium-sized enterprises.

Outstanding loans to all businesses stood at IDR 5 931.61 trillion in 2018, with 19.68% of that amount (IDR 1 167.45 trillion) allocated to SMEs. Outstanding loans continued to grow in double digits in the past eight years (2011-18), with an average yearly growth rate of 16.42%. Outstanding loans to SMEs also rose by 14.82% in this period.

Despite total outstanding loans increasing significantly, non-performing loans (NPLs) remained under 5%. In fact, in the last three years (2016-18), NPLs have been declining both for SMEs (from 4.05% to 3.35%) and for total business (from 2.96% to 2.40%).

The share of short-term loans fell by 16.29% in the 2011-18 period, from IDR 120.80 trillion in 2011 to IDR 101.11 trillion in 2018. Meanwhile long-term loans in the same period grew by 192.49% from IDR 235.9 trillion in 2011 to IDR 1 038.05 trillion in 2018, with a yearly average of around 17.58%. The increasing trend in long-term loans illustrates lenders’ higher trust in Indonesian SMEs.

In the period of 2011-2018, interest rates on loans declined for all business, from 14.53% to 12.69% for SMEs and 1.27 percentage points for large company from 12.28% to 11.01%. Interest rates are declining in Indonesia but are still very high compared to the average in other countries.

Financing distributed by the Venture Capital Company shows a significant increase, reaching out IDR 8.46 trillion in 2018, a 94.59% increase compared to 2012. Every year in the 2012-2018 period, the amount of financing grew constantly, with an average growth rate of 13.02%.

Other non-bank finance indicators also gained momentum. Leasing and hire purchases increased by 7.01% in 2018. This indicator shows around 207.54% growth in total during the 2007-2018 periods. Factoring activities exhibit similar trends. During 2007-2018, factoring experienced strong growth (603.80%). Factoring increased by around 16.28% in 2018.

Most SMEs in Indonesia are experiencing problems in accessing financing. Based on this observation, Indonesian Government launched a financing scheme called People Business Credit Programme or Kredit Usaha Rakyat (KUR) in 2007. KUR’s objective is to increase SMEs access to finance and works as a bridge for SMEs to obtain a financing scheme from a financial institution. A total of IDR 499.32 trillion have been allocated as part of this programme during 2007-18 and distributed to all provinces in Indonesia. KUR has managed to maintain high-quality credit, with a very low NPL rate. In 2018, the NPL rate for KUR stood at just 0.24%.

Table 20.1. Scoreboard for Indonesia

Indicator	Unit	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Debt
Outstanding business loans, SMEs	IDR trillion	110.1	127.0	127.4	389.0	476.8	551.5	637.3	733.0	792.1	952.2	1 059.2	1 167.5
Outstanding business loans, total	IDR trillion	1 001.9	1 307.7	1 307.8	1 777.8	2 217.5	2 726.8	3 321.2	3 707.7	4 093.9	4 908.4	5 320.1	5 931.6
Share of SME outstanding loans	% of total outstanding business loans	10.99	9.71	10.20	21.86	21.46	20.19	19.15	19.74	19.32	19.38	19.90	19.68
Outstanding short-term loans, SMEs	IDR trillion	..	..	..	102.6	120.8	141.7	195.0	215.4	100.1	115.0	94.3	101.11
Outstanding long-term loans, SMEs	IDR trillion	..	..	..	286.1	354.9	408.7	440.9	516.5	623.8	729.0	901.0	1 038.1
Share of short-term SME lending	% of total SME lending	..	..	..	26.40	25.39	25.74	30.67	29.43	13.83	13.63	9.47	8.88
Government guaranteed loans, SMEs	IDR trillion			17.2*			34.2	40.9	40.3	22.8	94.4	96.7	120.33
Direct government loans, SMEs	IDR trillion	..	0.04	0.41	1.07	1.15	1.25	1.43	1.15	1.56	1.25	0.41	0.04
Non-performing loans, total	% of all business loans	4.08	3.20	3.35	2.55	2.16	1.87	1.77	2.16	2.49	2.40	2.63	2.40
Non-performing loans, SMEs	% of all SME loans	4.80	3.87	4.22	3.97	3.43	3.23	3.19	4.00	4.20	3.35	3.89	3.35
Interest rate, SMEs	%	16.30	16.79	16.60	14.89	14.53	13.99	14.14	14.54	13.99	12.69	13.06	12.69
Interest rate, large firms	%	12	13	13	12.73	12.28	11.60	11.88	12.48	12.51	11.01	11.39	11.01
Interest rate spread	% points	4.14	3.30	3.79	2.16	2.25	2.39	2.26	2.06	1.48	1.68	1.67	1.68
Non-bank finance
Venture and growth capital	IDR trillion	..	..	..	..	..	4.3	6.0	6.9	7.2	8.5	7.1	8.46
Venture and growth capital (growth rate)	%, Year-on-year growth rate	..	..	..	..	..	..	38.70	14.68	4.38	17.69	-16.26	18.93
Leasing and hire purchases	IDR trillion	36.5	50.7	46.5	53.7	76.6	105.1	117.4	111.0	105.4	97.7	104.8	112.20
Factoring and invoice discounting	IDR trillion	2.2	2.2	2.0	2.3	3.9	5.1	7.7	9.4	10.7	11.5	13.3	15.48

Note: This table contains data from both bank and non-bank sources. Due to availability, post-2016 data includes non-bank data. Another table that includes only non-bank data is to be found in the “Non-bank sources of SME financing” part of the full profile. Data for venture and growth capital, leasing and hire purchases, factoring and invoice discounting are for all businesses, including large enterprises. *Data for 2007-2009.

Source: See Table 20.5.

SMEs in the national economy

Table 20.2. Business establishment by firm size in Indonesia, 2014-2018

Annual, in units

Enterprise	2014	2015	2016	2017	2018
A. MSMEs	57 895 721	59 262 772	61 651 176	62 922 617	64 194 057
Micro-enterprises	57 189393	58 521 987	60 863 578	62 106 900	63 350 222
Small enterprises	654 222	681 522	731 047	757 090	783 132
Medium-sized enterprises	52 106	59 263	56 551	58 627	60 702
B. Large enterprises	5 066	4 987	5 370	5 460	5 550
Total (A+B)	57 900 787	59 267 759	61 656 546	62 928 077	64 199 606

Note: Micro-enterprises have a yearly turnover under IDR 300 million, or total assets below IDR 50 million. Small enterprises have a yearly turnover between IDR 300 million and IDR 2.5 billion, or total assets between IDR 50 million and IDR 500 million. Medium enterprises have a yearly turnover between IDR 2.5 billion and IDR 50 billion, or total assets between IDR 500 million and IDR 10 billion. Micro-enterprises have a yearly turnover above IDR 50 billion, or total assets above IDR 10 million

Source: Ministry of Cooperatives and SMEs of the Republic of Indonesia, 2019.

Based on data published by Ministry of Cooperatives and SMEs of Republic of Indonesia, there were 64 194 057 SMEs in 2018, which make up 99.99% of the total business population and employ more than 116 million people. Compared to 2017, there is a small increase in the number SMEs in 2018, around 2%. The majority of SMEs in Indonesia are informal and not legally registered.

SME lending

Outstanding loans to all business stood at IDR 5 931.61 trillion in 2018, with 19.68% of this amount (IDR 1 167.45 trillion) allocated to SMEs. Total outstanding loans grew in double digits in the past eight years (2011-18), with an average yearly growth rate of 16.42%, while outstanding loans of SMEs also increase by 144.8%, from IDR 476.77 trillion in 2011 to IDR 1 167.44 trillion in 2018. The SME share of total outstanding loans remained stable over the period, at 19.32-21.50%, with average around 19.88%.

Despite total outstanding loans increasing significantly, non-performing loans (NPLs) were maintained under 5%. In fact, in the last three year (2016-18), the NPL rate has been on the decline both for SMEs (from 4.05% to 3.35%) and for total business (from 2.96% to 2.40%).

The share of short-term loans fell by 16.29% in the 2011-18 period, from IDR 120.80 trillion in 2011 to IDR 101.11 trillion in 2018. Long-term loans expanded strongly in the same period, with an average yearly growth rate of around 17.58% and total growth standing at 192.49%, from IDR 235.9 trillion in 2011 to IDR 1 038.05 trillion in 2018. The increase in the share of long-term loans illustrates lenders’ higher trust in Indonesian SMEs.

The share of direct government SME loans declined in 2017-18 because LPDB KUMKM (Revolving Fund Management Institute for Cooperatives and SMEs), which is the main institution for this task, is conducting an internal restructuring, thereby reducing the amount of loans granted.

Credit conditions

In the period between 2011 and 2018, interest rates on loans declined for all businesses. It saw a 1.8 percentage point reduction for SMEs, from 14.53% to 12.69%. Large companies experienced a similar decline (1.27 percentage points), from 12.28% to 11.01%. Despite a stronger decrease, SMEs are still charged with a higher interest rate. In 2018, the interest rate for SMEs is 12.92%, while it stands at 11.41% for large firms. The 2015-2018 interest rate spread stands at around 1.52% on average. This is an improvement because until 2015, the spreads had never dipped below 2%.

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

Table 20.3. Debt financing by non-bank financial institutions 2016-18

Non-bank financial institutions only

Indicator	Unit	2016	2017	2018
Outstanding business loans, SMEs	IDR Trillion	94.0	116.4	134.93
Outstanding business loans, total	IDR Trillion	493.7	537.7	573.81
Share of SME outstanding loans	% of total outstanding business loans	19.04	21.65	23.51
New business lending, total	IDR Trillion	273.8	303.1	269.44
New business lending, SMEs	IDR Trillion	58.0	66.9	63.93
Share of new SME lending	% of total new lending	21.20	22.08	23.73
Outstanding short-term loans, SMEs	IDR Trillion	7.7	9.8	11.26
Outstanding long-term loans, SMEs	IDR Trillion	66.7	86.5	95.25
Share of short-term SME lending	% of total SME lending	8.65	8.97	10.57
Non-performing loans, total	% of all business loans	3.26	2.96	2.71
Non-performing loans, SMEs	% of all SME loans	3.13	2.29	2.75
Interest rate, SMEs	%	22.06	20.69	21.54
Interest rate, large firms	%	14.66	14.22	14.58
Interest rate spread	% points	7.39	6.47	6.96

Note: Some data can only be provided from 2016 due to the availability of data.

Source: Data are from financing companies, Indonesia Export Financing Institution/LPEI/Eximbank and PNM. Data for venture and growth capital, leasing and hire purchases, factoring and invoice discounting are for all businesses, including large enterprises.

The data presented above are from NFBIs (non-bank financial institutions) of Indonesia, which include firms in the financial sector, Indonesia Export Financing Institution/LPEI/Eximbank, and the state micro-credit company Permodalan Nasional Madani-PNM.

Outstanding loans granted by NFBIs to all business grew by 6.7% in 2018. Meanwhile outstanding loans to SMEs grew from IDR 116.39 trillion to IDR 134.93 trillion, amounting to a 15.92% increase. The improvement in SME credit is also observable in these firms’ share of outstanding loans, which increased from 21.65% in 2017 to 23.51% in 2018.

In contrast with the total average in the Scoreboard (Table 20.3), the performance of short-term financing from NBFIs seems to be able to survive the downward trend. Moreover, the share has grown from 8.65% in 2016 to 10.57% in 2018.

SMEs’ NPL rate in 2018 for non-banking credit companies is 2.75%, which is higher than the 2017 figure (2.29%). Despite this increase, the figure for non-banking financial institutions is still lower than the NPL for banking firms. This shows that non-banking firms may be stricter and more reluctant to take risks when granting credit to SMEs. 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 5.33%.

Table 20.4. Debt financing by venture capital, leasing and hire purchases, factoring and invoice discounting 2007-18

Alternative Non-bank finance
Indicator	Unit	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Venture and growth capital	IDR trillion	..	..	..	..	..	4.3	6	6.9	7.2	8.5	7.1	8.46
Venture and growth capital (growth rate)	%, Year-on-year growth rate	..	..	..	..	..	..	38.7	14.68	4.38	17.69	-16.26	18.93
Leasing and hire purchases	IDR trillion	36.5	50.7	46.5	53.7	76.6	105.1	117.4	111	105.4	97.7	104.8	112.2
Factoring and invoice discounting	IDR trillion	2.2	2.2	2	2.3	3.9	5.1	7.7	9.4	10.7	11.5	13.3	15.48

Source: Data are from financing companies, Indonesia Export Financing Institution/LPEI/Eximbank and PNM. Data for venture and growth capital, leasing and hire purchases, factoring and invoice discounting are for all businesses, including large enterprises.

Venture and growth capital grew by around 16.64% from IDR 7.11 trillion in 2017 to IDR 8.16 trillion in 2018 (see Table 20.4). This follows a decrease in 2016-17, when investments contracted by around 16.26%. VC investment is still not considered popular for Indonesian SMEs. Leasing activities increased in 2017 and 2018, around 7% per year, contrasting with 2015-16, which saw a 7.28% decrease.

Government policy response

Since it was launched in 2007, KUR has become one of the main financing policies in Indonesia. Every year, the government allocates a budget of hundreds of IDR trillions to subsidise SME loans. Credit allocated via KUR has been increasing annually, with a 24.4% increase in 2018 compared to the previous year.

Even though the value of loans granted by KUR is very high and the amount continues to rise, NPLs have been maintained at safe levels. In 2018, the NPL rate reached its lowest level, at 0.24%. On the other hand, the allocation of credit via KUR is considered sub-optimal, as it is still not evenly distributed throughout Indonesia. The Western region of Indonesia receives far greater KUR credit than the Eastern region, whose population is relatively more economically disadvantaged, even though one of the goals of KUR is to help alleviate poverty.

Figure 20.1. Outstanding KUR loans, 2007-2018

Source: Ministry of Economic Coordination of The Republic of Indonesia and Ministry of Cooperatives and SMEs of The Republic of Indonesia.

Statlink

Figure 20.2. NPL rate for KUR, 2007-2018

As a percentage

Note: Data for 2015 is not available because KUR stopped for 7 months for an 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.

Statlink

As one of the institutions that promote SME access to finance, The Central Bank of Indonesia (Bank Indonesia) implemented the Peraturan Bank Indonesia regulation No. 17/12/PBI/2015, which obliges commercial banks to integrate a minimum ratio of SMEs in their credit portfolios. Bank Indonesia set the minimum share of SMEs credit at 5% in 2015 and the ratio has increased gradually every year.

In 2018, the credit ratio reached its final stage with a minimum mandatory share of 20% of total loans, from a 15% minimum in the previous year. Besides this, incentives and disincentives were also put in place, including written warnings for non-compliance. Moreover, if there is a Sharia commercial banks (BUS) that are unable to meet the minimum share of SME credit, Bank Indonesia will give them additional obligation to conduct training and socialisation for SMEs on financing.

Bank Indonesia has developed a new credit rating system for small and medium-sized enterprises. It also provides SMEs with information on financial statements. Bank Indonesia teaches micro and small enterprises (MSEs) basic accounting skills and use of applications to record financial transaction and generate financial statements. The training is carried out in collaboration with banks and related ministries or institutions.

Bank Indonesia's policy has had a positive impact on the development of SME loans. In 2018, the MSME credit ratio, including non-oil and gas export financing by foreign and branch banks, reached 20.4% (exclude non-banking institutions) with an NPL ratio for MSME loans standing at 3.4%. In June 2019, the MSME credit ratio reached 20.5% with the NPL ratio being maintained below the 5% threshold (Figure 20.3).

Figure 20.3. SMEs credit ratio and NPL rate

Source: Monthly Report from General Bank, Bank Indonesia (BI).

Statlink

Box 20.1. Definition of SMEs/MSMEs used in Indonesia and entrepreneurship finance scoreboard

Country Definition:

Based on the Law of Republic Indonesia 20/2008, 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 a turnover of up to IDR 300 million or assets (excluding land and building assets) up to IDR 50 million

• Small enterprise: business with a turnover between IDR 300 million and IDR 2.5 billion or assets (excluding land and building assets) between IDR 50 million and IDR 500 million

• Medium enterprise: business with a turnover between IDR 2.5 billion and IDR 50 billion or assets (excluding land and building assets) between IDR 500 million and 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 2010-2018 period because the methodology used to define MSMEs changed. The data used in 2007-2009 uses ceiling loans.

Figure 20.4. Trends in SMEs and entrepreneurship finance in Indonesia

Source: See Table 20.5.

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Table 20.5. Source and definitions for Indonesia’s scoreboard

Indicator	Definition	Source
Debt
Outstanding business loans, SMEs	Outstanding loan of SMEs which distributed by banking sector and Non-banking sector (export import finance institution and others). Data from non-banking sector included to table started in 2016.	OJK (Financial Service Authority of Indonesia (Bank and Non-Bank Lending)) and LPDB (Revolving Fund Management Institution)
Outstanding business loans, total	Outstanding loan of all business which distributed by banking sector and Non-banking sector (export import finance institution and others). Data from non-banking sector included to table started in 2016.	OJK (Financial Service Authority of Indonesia (Bank and Non-Bank Lending)) and LPDB (Revolving Fund Management Institution)
Share of SME outstanding loans	Percentage of Outstanding business loans from SMEs compare to total outstanding of all business loans, total (banking and non-banking). Data from non-banking sector included to table started in 2016.	OJK (Financial Service Authority of Indonesia (Bank and Non-Bank Lending)) and LPDB (Revolving Fund Management Institution)
New business lending, total	Outstanding of all new business loans from non-banking sector (export import finance institution and others).	OJK (Financial Service Authority of Indonesia (Non-Bank Lending))
New business lending, SMEs	Outstanding of SMEs new business loans from non-banking sector. (export import finance institution and others).	OJK (Financial Service Authority of Indonesia (Non-Bank Lending))
Share of new SME lending	Percentage of Outstanding SMEs new business loans compare to total outstanding of all new business loans (non-banking sector)	OJK (Financial Service Authority of Indonesia (Non-Bank Lending))
Outstanding short-term loans, SMEs	Outstanding loan to SMEs with term under 1 Years term which distributed by banking sector and Non-banking sector (export import finance institution and others). Data from non-banking sector included to table started in 2016.	OJK (Financial Service Authority of Indonesia (Bank and Non-Bank Lending))
Outstanding long-term loans, SMEs	Data Loan to SMEs with term more 1 years which distributed by banking sector and Non-banking sector (export import finance institution and others). Data from non-banking sector included to table started in 2016.	OJK (Financial Service Authority of Indonesia (Bank and Non-Bank Lending))
Share of short-term SME lending	Percentage of SMEs outstanding short-term loans which distributed by banking sector and Non-banking sector (export import finance institution and others). Data from non-banking sector included to table started in 2016.	OJK (Financial Service Authority of Indonesia (Bank and Non-Bank Lending))
Government guaranteed loans, SMEs	Outstanding of Government loans scheme called KUR that subsidized guarantee fee (2007-2014) or subsidized the difference of the interest rate from market (2015-2018)	Ministry of Coordination of Economy Republic of Indonesia and Ministry of Cooperatives and SMEs Republic of Indonesia
Direct government loans, SMEs	Outstanding of Direct Government loans, distributed by LPDB (Revolving Fund Management Institution) direct from state budget	LPDB (Revolving Fund Management Institution) and Ministry of Cooperatives and SMEs
Non-performing loans, total	Outstanding of all Non-Performing Loan Gross from banking sector and Non-banking sector (export import finance institution and others). Data from non-banking sector included to table started in 2016.	OJK (Financial Service Authority of Indonesia (Bank and Non-Bank Lending))
Non-performing loans, SMEs	Outstanding of Non-Performing Loan SMEs Gross from banking sector and Non-banking sector (export import finance institution and others). Data from non-banking sector included to table started in 2016.	OJK (Financial Service Authority of Indonesia (Bank and Non-Bank Lending))
Interest rate, SMEs	Average Interest Rate of Direct Loans to SMEs in IDR from banking sector and Non-banking sector (export import finance institution and others). Data from non-banking sector included to table started in 2016.	OJK (Financial Service Authority of Indonesia (Bank and Non-Bank Lending))
Interest rate, large firms	Average Interest Rate of Direct Loans to Large Firms in IDR from banking sector and Non-banking sector (export import finance institution and others). Data from non-banking sector included to table started in 2016.	OJK (Financial Service Authority of Indonesia (Bank and Non-Bank Lending))
Interest rate spread	Difference Interest rate for MSMEs to Interest rate for large firms from banking sector and Non-banking sector (export import finance institution and others). Data from non-banking sector included to table started in 2016.	OJK (Financial Service Authority of Indonesia (Bank and Non-Bank Lending))
Alternative bank finance
Venture and growth capital	Outstanding of all financing distributed by Venture Capital Company (all business include large enterprise)	OJK (Financial Service Authority of Indonesia (Non-Bank Lending))
Venture and growth capital (growth rate)	Percentage of financing growth distributed by Venture Capital Company in year on year (all business include large enterprise)	OJK (Financial Service Authority of Indonesia (Non-Bank Lending))
Leasing and hire purchases	Outstanding of financing receivables granted by the Financing Company for Lease activities (all business include large enterprise)	OJK (Financial Service Authority of Indonesia (Non-Bank Lending))
Factoring and invoice discounting	Outstanding financing receivables granted by the Financing Company for the activities of factoring (all business include large enterprise)	OJK (Financial Service Authority of Indonesia (Non-Bank Lending))

References

Bank Indonesia, Monthly Report from General Bank, (Central Bank of 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

Ministry of Economic Coordinator Republic of Indonesia, Database from Ministry of Cooperatives and SMEs of The Republic of Indonesia

OECD (2018), SME and Entrepreneurship Policy in Indonesia, OECD Publishing, Paris.

OJK, Database from OJK (Indonesia Financial Services Authority)