Banking Sector: Steps toward SMEs

Yesterday PT Bank Danamon Indonesia, Tbk (Danamon) and PT Asuransi Jiwa Manulife Indonesia (Manulife Indonesia) launched a partnership that provides insurance solutions to small and medium enterprises (SME). This is yet another effort by the commercial banks in Indonesia to provide better / more services to SMEs.

MSMEs are very important to Indonesian Economy

BPS estimates that in 2006 they constituted 99 percent of all businesses in the country, employed 97 percent of the work force, and accounted for 54 percent of that year’s GDP. 

The great majority of all Indonesian firms are micro enterprises—about 82 percent. Small and medium firms account for a significant but much smaller share of all firms, 15.8 and 0.6 percent, respectively.

Though SMEs are extremely important and is also recognized by the commercial banks still there exists a big gap due to which SMEs are still facing constraints in terms of financing. Very detailed report on this subject by IFC is a good read. Some of the highlights are as follows:

The key factors small-medium businesses gave for developing their businesses are financial: 

the need for more capital (59 percent) and, closely related, gaining access to loans (19 percent). The main constraints they face were again dominated by financial considerations: insufficient finance (26 percent) and, closely connected, financial management (9 percent). 

Loan Experience

Only 30 percent of small-medium firms have ever tried to obtain a loan from a licensed lender; of these 77 percent were successful. 

For the specific loan transactions, commercial banks are the most frequent credit source for small-medium firms, accounting for 76 percent of the loans issued. Cooperatives are in second position (11 percent) followed by Sharia banks (3.1 percent). Informal lenders were not asked about in this question. 

Factors determining the choice of lender are convenience of location, ease of the application process, and a relationship with the financial institution or a particular bank officer. 

Loan amounts are modest, averaging IDR 354 million for loans issued. About a quarter (24 percent) are under IDR 15 million; only 21 percent are over IDR 200 million. Loan terms are short, with over 39 percent being for a single year and 50 percent being for 2-3 years. 

Three-fourths of loans issued had flat interest contracts – a particularly striking finding.

Internet Banking

Only about 17 percent of firms currently use computers and the internet (59 percent of medium versus only 10 percent of small firms). Only 3.5 percent engage in internet banking, suggesting that this should be a service ripe for expansion. 

When respondents who now use computers and the internet were asked if they would be interested in purchasing an internet-based tool for purchasing and payment management, a surprisingly large share (23 percent) said they already do (18 percent of small, 29 percent of medium firms). Another 4 percent said they were “very interested” and 25 percent expressed some interest in acquiring such a tool. Some said they would even pay small amounts to do so.

What do these firms want in financial services providers? Of ten characteristics listed in the survey, four got a positive response from 55 percent or more of the owners/managers interviewed: 

•  low fees,

•  speed in making loan decisions,

•  flexible lending policies,

•  limited documentation requirements.

Definition of SME 

There is no commonly agreed definition across institutions and countries of what is a small firm

Ministry of SMEs and Co-operatives and Bank Indonesia. Micro firms are defined as enterprises with net assets less than IDR 50 million (land and buildings excluded) or enterprises which have less than IDR 300 million total annual sales. Small firms are enterprises with net assets from IDR 50 million to IDR 500 million (land and buildings excluded) or with total annual sales from IDR 300 million to IDR 2.5 billion. Medium-sized firms are those with net assets from IDR 500 million to IDR 10 billion (land and buildings excluded) or with total annual sales from IDR 2.5 to 50 billion.
As per World Bank Enterprise Survey. Size is defined by the number of employees: from 5-19 the firm is small, and from 20-99 it is a medium-sized firm. The survey covers only the formal sector and firms with more than 5 employees

Employment Numbers:

Estimated employment numbers (following numbers do not have any source) 

Micro - 89 million 

Small and Medium - 15 million

Large - 4 million