Financing small business

Minister of Finance Mar'ie Muhammad received significant political support for his campaign to promote new sources of financing for small-scale firms in the provinces when President Soeharto bought 10 shares worth Rp 10 million (US$4,580) in a newly-established venture capital company in Yogyakarta on Saturday.

Since early this year, Mar'ie has campaigned aggressively to promote the establishment of venture capital companies in the provinces in a bid to accelerate the development of small businesses.

He apparently fully realizes that the requirement for banks to set aside a minimum of 20 percent of their total lending portfolios to small firms is far from adequate to support so large a number of small-scale enterprises operating in numerous sectors of the economy all across the country. Moreover, most banks see lending to small enterprises as much riskier and much costlier than loaning to medium-scale or large companies because small firms usually have no fixed assets to secure bank credits. Besides that, administering a number of small loans is obviously more expensive than managing one large loan.

Because small-scale firms play an important role in generating jobs and in broadening the base and strengthening the foundation of the private sector, alternative sources of funding have to be developed. In this context, venture capital financing is a very attractive and viable proposition.

Thus far, five venture capital firms have been set up in Bandung, Semarang, Yogyakarta, Surabaya (all in Java) and Medan (North Sumatra). The more encouraging is this development because all the venture capital companies have big businessmen, either from the provinces or Jakarta, as shareholders. The one in Yogyakarta is lucky to have President Soeharto, in his personal capacity, as a shareholder.

Setting up a venture capital firm in the provinces is indeed strategic in nature as most small businesses are located outside of Jakarta. Local venture capital firms are naturally in a better position than those in Jakarta to identify the small firms qualified to obtain equity financing. Mar'ie, therefore, would like to see not only every province but each of the regencies with at least one venture capital company specializing in financing small businesses through equity participation.

The participation of big businessmen as shareholders in the venture capital firms is equally important because they usually own many enterprises. Under this scheme, the venture capital companies can eventually act as intermediaries in arranging various forms of tie-ups between the small firms, in which the venture capital companies invest equity funds, and the enterprises of the big businessman shareholders.

Hopefully, the preparations now underway for the establishment of venture capital companies in other provinces will receive the full support of big businessmen. As the experiences of other countries have shown, venture capital firms can serve as a very effective mechanism to support small firms and start-up enterprises with high growth prospects. Because the local stock exchanges have been expanding, venture capital firms will not find it difficult to obtain reasonable gains from their equity investments.