Launched, the latest ILO report on finance for small business in Indonesia

The ILO launched its latest report on finance for small business, aimed to broaden the knowledge base on finance for small enterprises in Indonesia.

News | Jakarta, Indonesia | 03 May 2019
The International Labour Organization (ILO) together with the Financial Services Authority (or in Indonesian: Otoritas Jasa Keuangan/OJK) and the Swiss State Secretariat for Economic Affairs (SECO) launched the “Financing Small Businesses in Indonesia: Opportunities and Challenges” report at a high-level event on 30 April in Jakarta. The launch was followed by a seminar to discuss key findings and policy recommendations outlined in the report.

The launch event was opened by Nurhaida, Vice Chairperson of the OJK Board of Commissioners (middle), the Ambassador of Switzerland to Indonesia, H.E Kurt Kunz (left) and the Country Director of ILO, Michiko Miyamoto (right)

One of the key constraints that small businesses face is access to financial and business development services. In partnership with SECO and OJK, the ILO is testing and developing new models to help banks to reach out to small businesses not only to support jobs but also to increase their market share."

Michiko Miyamoto, Country Director of ILO in Indonesia
The launch event was opened by Nurhaida, Vice Chairperson of the OJK Board of Commissioners, the Ambassador of Switzerland to Indonesia, H.E Kurt Kunz and the Country Director of ILO, Michiko Miyamoto. More than 50 participants attended the event including financial service providers, associations of banks, government representatives, think-tanks, and international development agencies.

The report follows research that was undertaken as part of an ongoing project titled “Promoting Micro and Small Businesses through Entrepreneurs Access to Finance (PROMISE IMPACT)”. The research was aimed to broaden the knowledge base on finance for small enterprises. The exercise included an extensive literature review, data analysis, and interviews with industry experts. The report touches upon various issues concerning the current policy framework, financial service providers, and demand for credit.

The real challenge for banks is to move away from the continued concentration of credit in trade and services. "

Owais Parray, Chief Technical Advisor of the ILO’s PROMISE IMPACT Projectuy Ryder, ILO Director-General
In her opening remarks, Michiko Miyamoto reiterated the instrumental role of finance and small businesses in job creation. More than 90 per cent of the workers in Indonesia are employed in small businesses, but productivity is low compared to large businesses.

“One of the key constraints that small businesses face is access to financial and business development services. In partnership with SECO and OJK, the ILO is testing and developing new models to help banks to reach out to small businesses not only to support jobs but also to increase their market share,” she said, adding that in a relatively short period of time the programme has reached more than 4,000 businesses.

Although several commercial banks have not met the 20 per cent credit allocation for small businesses yet, it is still a realistic target. According to Owais Parray, Chief Technical Advisor of the ILO’s PROMISE IMPACT Project, who presented the key findings of the report,

“The real challenge for banks is to move away from the continued concentration of credit in trade and services. A diversified loan portfolio will not only contribute to economic development and decent jobs, but it will also enable banks to tap into new markets and better manage their risks.”

Here are some key findings from the report:

  • There is still a lot of demand for small business credit. However, some of this demand may be latent, especially in the production sectors such as manufacturing.
  • Financial institutions can respond to this demand. But it will require improving market intelligence, policy environment that incentivizes banks, greater use of digital technologies, and staff development.
  • With technology, financial institutions and Fintech have opportunities for developing innovative loan products and other non-financial support services specifically for small enterprises.
  • It is important to note that credit alone is not the answer. Credit should be combined with technical assistance and a conducive regulatory environment for small growth-oriented businesses.