Optimizing Financial Access for Growth-Oriented MSMEs in Indonesia

Micro, small, and medium enterprises (MSMEs) are an important source of growth and employment in low- and middle-income countries, including Indonesia. However, many entrepreneurs face challenges in increasing their productivity and growth due to limitations in three main areas: 1) financial access, partially due to limited information on loan options, lack of collateral, or historical credit information; 2) managerial capacity, due to lack of business management skills and innovation; and 3) market access, due to limited digital literacy and business skills to navigate online marketplace and high logistics costs. 

This memo, the first in a series of three, draws on previous evaluations from developing countries to offer insights on how to identify growth-oriented MSMEs and expand financial access. Key policy recommendations include:

1. Using available data Information from loan officers or collecting additional psychometric data can assist in identifying firms with potential growth.
2. Modifying the traditional microcredit model, such as grace periods and flexible repayment options, can improve business outcomes.
3. Identifying key barriers faced by female-led firms and piloting interventions to reduce such barriers has the potential to increase female access to credit.
4. The recent rise of digital lending has the potential to optimize financial access. However, more evaluations are needed to assess how features of these products can benefit MSMEs.

For further insights into managerial capacity and market access, refer to the subsequent memos on enhancing MSMEs' capacity-building and market access.