Business Loan Financing Dips, Do SMEs Still Prefer Informal Lenders?

Micro and small enterprises (MSMEs) in Indonesia face a critical and widening financing gap. Formal financing shows a downward trend as businesses tend to choose informal loans, known as ‘bank emok’.

‘Bank emok’ is a familiar concept in the daily lives of Indonesians. These lenders remain popular because they offer quick, easy, and low-requirement access to financing, especially for micro-enterprises that struggle to meet the standards of formal banks, such as collateral, financial documents, and credit history.

The social closeness between lenders and borrowers also creates trust, making the process simpler and less intimidating. Amid urgent capital needs and limited access to formal financial institutions, ‘bank emok’ becomes a practical solution, although it carries the risk of higher interest rates.

In the dissemination of the third Barometer Report: Striving to Thrive: The State of Indonesian Micro and Small Enterprises 2025, the Mastercard Center for Inclusive Growth and Mercy Corps Indonesia noted that the rate of formal credit uptake has continued to decline over the past three years.

Formal credit financing decreased from 33 percent in 2023 to 27 percent in 2024 and then sharply to only 20 percent in 2025. This decline reflects the significant obstacles that MSMEs still face in accessing financing from formal financial institutions.

Several factors are the main causes, ranging from high interest rates and strict collateral requirements to cultural barriers that make business owners reluctant to deal with the formal financial system. As a result, many MSMEs choose alternative routes, including utilizing informal loans that are easier to access, although they carry greater risks.

This condition is clearly visible among female entrepreneurs. The report initiated by Mastercard reported that only 16 percent access formal credit, which is lower. Meanwhile, male-led businesses account for 20 percent, and businesses led jointly account for 26 percent.

Senior Vice President of Social Impact at the Mastercard Center for Inclusive Growth, Subhashini Chandran, warned of a new gap that could widen inequality. She also highlighted that digitalization has not been fully matched by the readiness of business actors.