How to increase enterprise credit for production and growth

Abstraksi

1. Background Private firms are engines of growth and job creation in an economy. Among firms, small and medium enterprises (SMEs) play a vital role. In Indonesia, micro and small businesses account for 99 percent of over 62 million enterprises. Small businesses contribute 57 per cent of the Growth Domestic Product (GDP), and over 97 per cent of jobs. Access to finance is one of main constraints affecting the development of small businesses. In Indonesia, less than 30 per cent of small businesses use bank credit for working capital. Importantly, enterprise credit from banks is mainly allocated to trade and services while enterprises engaged in local production such as manufacturing receive limited financing from banks . From a public policy point of view, greater lending for production is more desirable. The growth of production can have greater multiplier effect in the form of jobs. Historically, with few exceptions, expansion of manufacturing with concurrent productivity gains in agriculture usually provided the platform for industrialization. 2. Research Question Considering the importance of financing local production and SMEs, the question this research poses is: “can development objectives be reconciled with market forces to ensure that finance plays an instrumental role in enterprise growth and job creation?” The current discourse and analysis on financial inclusion in Indonesia has focused mainly on access for households and enterprises rather than the broader developmental features of financing. The present study is trying to broaden the discourse and influence policy direction. In analyzing the state of financing for small businesses, it also takes a slightly different approach. The underlying issues are being studied from the perspective of the banks. Specifically, the research tries to answer what it would take banks to increase lending for SMEs in the production sectors. To do this, a survey of over 50 banks was undertaken to understand internal policies, procedures, and capacities of banks. The hypothesis that the research is testing is that banks perceive manufacturing and agriculture to be highly risky and as such limit their exposure to these sectors. The alternative hypothesis is that while risks play a role, it is often lack of capacity, and limited adaptability of internal procedures that in the end determines credit allocations. The survey findings and policy recommendations discussed in this paper will be an important input in the implementation of the national strategy for financial inclusion or Strategi Nasional Keuangan Inklusif (SNKI). The strategy is one of the main interventions of the current administration to address income poverty. Below are some preliminary findings from the research. 3. Preliminary Findings It appears that risk perception associated with credit for small businesses and production sectors is overly exaggerated. While it is true that risks in these two sectors are higher, the lack of capacity is a major constraint for banks. While credit officers and loan analysts have a good understanding of their functions and carry out their tasks diligently, they may not have the necessary knowledge about the heterogeneous nature of enterprises working in different sectors. The survey shows that loan officers who are responsible for new loans often rely on “traditional” methods of marketing. Recommendations from existing clients and word of mouth still is the main source (66 per cent) for finding new clients. It appears that there is limited knowledge and expertise among loan officers and credit analysts to assess sectors such as manufacturing and agriculture. There is a general understanding, but only a small number (11-17 per cent) have a good grasp of business cycles in these sectors. Around 22 per cent of loan officers and credit analysts interviewed had never received any training. Many banks do provide training, but it tends to focus more on the functional responsibilities of loan officers and credit analysts. The frequency of training is also low. Close to 86 per cent of the respondents interviewed were male. Only 15 and 23 per cent of the loan officers and credit analysts were female. Although on its own it may not guarantee, but having more female staff responsible for marketing and appraisal of loans can potentially help banks to reach one of the most underserved segments of the population viz. businesses owned by women. The survey revealed that a large number of respondents consider trade and consumption loans convenient to process. While respondents associate enterprise loans for agriculture and manufacturing with higher risk, the convenience and familiarity of trade sector and fixed wage borrowers discourages innovation. 4. Possible Recommendations 1. First of all, there is need for raising awareness in the financial industry about untapped market that can be reached through a strategic approach and innovative models of lending. 2. Public institutions responsible for formulation of policies and regulations need to further incentivize financial institutions to diversify and channel credit to sectors that are strategic for national economic development and jobs. 3. A number of training modules for lending in specific sectors were developed in the past. However, these resources have not been fully utilized. In future, these could be used in conjunction with new training tools to help financial institutions to train their staff. 4. On the demand-side, there is still room for improving the enabling environment and productive capability of enterprises. It is recommended that through a combination of online portals and business networks, advisory support can be provided to growth-oriented enterprises.