Questioning the Fate of SMEs Amid Global Uncertainty

The micro, small, and medium enterprise (MSME) sector is always referred to as the backbone of the national economy. It contributes more than 60% of GDP, absorbs the majority of the workforce, and serves as the primary buffer during crises.

In every economic slowdown, MSMEs are once again called upon as saviours. However, the most honest question is rarely asked: why is the sector that is most frequently praised the one that finds it hardest to obtain financing?

Amid global uncertainties from geopolitical wars, supply chain disruptions, high interest rates, China’s economic slowdown, trade protectionism, energy volatility, and exchange rate pressures, the fate of MSMEs becomes the most tangible test for Indonesia’s development direction.

While large corporations still have liquidity buffers and broad access to capital, MSMEs live on the front lines of economic shocks. The issue is not merely about capital, but whether our financial system is truly designed to enable MSMEs to scale up.

When Risk Becomes Expensive

Central banks in advanced economies are maintaining high interest rates longer than expected. The Russia-Ukraine conflict and Middle East tensions are pressuring global logistics and energy costs. Export demand is weakening, household consumption is under strain, and liquidity is tightening.

In such situations, the banking sector naturally becomes more conservative. Prudential banking principles strengthen, risk appetite declines, and credit selection becomes stricter. When banks become more cautious, MSMEs are almost always the first victims.

Banks are more comfortable extending credit to large debtors with neat financial reports, strong collateral, and stable cash flows. In contrast, many MSMEs come with simple record-keeping, incomplete legality, limited collateral, and businesses that are highly dependent on daily market dynamics. From a business perspective, banks label them high risk. From a social perspective, the state calls them a priority sector. It is between these two logics that MSMEs are trapped.

Credit Does Not Always Flow

This phenomenon is explained by Joseph Stiglitz and Andrew Weiss’s theory of credit rationing (1981). When risk increases, banks do not always raise loan interest rates/margins, but instead limit credit/financing distribution. The reason is simple: interest/margins that are too high attract high-risk debtors and increase the potential for default.

As a result, even healthy MSMEs still find it difficult to obtain financing. Bernanke, Gertler, and Gilchrist’s financial accelerator theory adds that during crises, small businesses face double pressure: declining demand and simultaneously narrowing access to financing.

They are hit not once, but twice. This is what is happening today. The world is uncertain, and uncertainty is always more expensive for small businesses than for large companies.

A Repeating Paradox

Indonesia does not lack narratives about MSMEs. What is lacking is the courage to acknowledge their paradox. MSMEs are praised in speeches but often avoided in credit committees.

The Policy Brief on the Local Financial Access Index (IKAD) shows that the number of MSME loan accounts compared to total loan accounts is a primary indicator of the quality of local financial inclusion. This means MSME financing is not a sectoral issue, but a determinant of the quality of national development.

Interestingly, regency areas have higher MSME credit indicators than cities. This indicates that the need for productive financing is actually greater in areas far from formal growth centres. However, in the dimension of financial service availability, 71.2% of regency areas are still in the basic to developing category, while 89.8% of city areas are in the nearly excellent and excellent categories.

In the usage dimension, 82.6% of city areas are in the excellent category, whereas only 3.4% of regency areas reach a similar level. In eastern Indonesia, only 49 out of 185 regencies/cities are in the high category, while 78 areas are still in the basic and starting to develop categories. This means many MSMEs fail not because they are unproductive, but because they were born in the wrong postcode.

Credit Is Not Just Money

The biggest mistake is assuming that MSME problems are only about a lack of capital. In fact, financing is merely the tip of the iceberg. Beneath it lie far more complex issues: low financial literacy, weak business record-keeping, legal uncertainty, limited market access, low productivity, and the absence of sustained mentoring.

Banks do not always reject because they do not want to help, but because many MSMEs do not yet meet formal eligibility standards. Financial inclusion is not just about opening credit access, but building economic readiness so that society can use financial services in a healthy, productive, and sustainable manner.

Therefore, the more important question is not “how much MSME credit is distributed?”, but “how many MSMEs truly scale up because of that financing?”

Emergency State Presence

Urging banks to increase MSME financing often stops at moral appeals. Yet the financial system operates based on incentives and risk mitigation, not rhetoric.

IKAD recommends strengthening programmes such as People’s Business Credit (KUR), Ultra Micro Financing (UMi), interest/margin subsidies, simplified credit procedures, distribution incentives, and optimisation of credit information systems. But that is not enough.

If MSMEs are truly considered a national strategic agenda, the state must be present through credit guarantees, risk-sharing mechanisms, blended finance, digital/innovative credit scoring, cross-institutional business data integration, and prudential incentives that make MSME financing rational from a business perspective.

The state must not let banks bear the risks of development alone. Without that, MSME credit targets will only become numbers.