Why Indonesian Small Businesses Find Bank Loans Hard to Get
Most small business owners in Indonesia started and funded their venture solely on their own, using money from their own pocket. But when time comes for their business to expand, they are often faced with funding dilemma. Sadly, for most of them, bank financing remains elusive.
There are some 58 million micro, small and medium-sized enterprises (MSMEs) in Indonesia, making up 99.9% of the total business entities in the country. These businesses are owned and run by farmers, fishermen, women in rural areas, vegetable sellers in traditional markets and the like. Most of them lack access to a bank loan. More than 50 millions MSMEs are considered unbankable and of the Rp 4,505 trillion disbursed in loans by Indonesian banks last year, less than 20 percent or about Rp 900 trillion went to SMEs, including the micro segment.
The numbers show that Indonesian small businesses are largely ignored by the banking sector. It begs the question as to why it is so hard for MSMEs to secure a bank loan. Here are a few of the main reasons:
1. Bank loan application procedure can be time-consuming and tedious, and requirements are not easy to meet
Many small business owners find that the process of getting a bank loan can really be a hassle. The procedure can take weeks or months to complete and it is not always easy to meet all the requirements for the loan. By and large, banks require paperwork or legal documentation that many informal businesses do not own.
2. No Collaterals
To lower credit risks, banks typically require collaterals for small business financing. Unfortunately, not many MSMEs have sufficient collateral to support the size of the business loan they wish to borrow.
3. Lack of informations
Not many banks have offices in rural areas, thus it is not easy for them to reach out to small businesses in those regions and raise awareness about their services. As a result, small business owners are left in the dark about the procedure or requirements of getting a bank loan.
4. No micro credit services
Many times a small business owner needs just a little bit of money to keep things going, and maybe their resources and cashflow are just enough to pay back a small loan for a given tenure. The problem is, most banks do not offer loans under Rp 25 million — for a home-scale business, this could feel like a huge amount of money.
Those factors have been discouraging MSMEs from getting a bank loan to grow their business. This surely poses a real problem for Indonesia’s nascent efforts in improving financial inclusion in the country. Thankfully, Indonesia has seen the births of peer-to-peer lending platforms in recent years, offering an innovative solution to MSMEs’ financing problem.
Mekar (PT Sampoerna Wirausaha) is running one of those peer-to-peer lending platforms and is one of only two fintech companies in Indonesia that put MSMEs at the heart of their business model. Mekar’s peer-to-peer lending platform lets investors invest in loans for small businesses managed and owned by Indonesian men and women, farmers, fishermen, crafters, weavers and the such.
To date, investors in Mekar have financed almost Rp 4 billion in small business loans. What differentiates Mekar from other peer-to-peer lending platforms is the fact that in Mekar, loans are not awarded to just any small business. Mekar forms a partnership with carefully selected financial institutions (Mekar’s lending partners) that have extensive experience in distributing and managing small business loans in many regions in Indonesia, which carefully vet the MSMEs so only those that have positive social and environmental impact can get a loan financed through Mekar. For investors in Mekar, this is the kind of good investment with good returns.