Sharper focus on SMEs

We are about to end the campaigning period for the April 5 legislative election without any violence or major disturbances to security, as many had feared. As the past three weeks of campaigning hurly-burly ran smoothly and peacefully, economic activities also ran normally.

The financial market, which is highly vulnerable to rumors or speculative information, has also remained relatively calm and stable because none of the campaigners for the largest political parties raised controversial policy issues, nor whipped up nationalistic sentiment, such as xenophobia, within the economic sector.

But neither was there a vigorous debate about the economy and economic policies during the electoral campaign. Some political leaders made promises to improve the lot of the poor and create jobs for the unemployed but these didn't make any sense as they stopped short of explaining how they would deliver on those promises.

However, not all has been calm within the economic sector just recently. We observed several developments last week that could go a long way to accelerating the development of small and medium-scale enterprises (SMEs).

True, the importance of SMEs has often enjoyed plenty of lip service, trumpeted as the backbone of the economy, but not many concrete measures have been targeted specially to invigorate this sector.

However, two separate deals last week are worthy of mention here because they could be really effective in bolstering the development of SMEs.

One of them was the signing of a cooperation agreement between state Bank BNI, the second-largest bank, and the association of secondary (rural) banks and PT Permodalan Nasional Madani, a state company established in 1999 to help provide financing for SMEs.

The other was a cooperation agreement between state Bank Rakyat Indonesia (BRI), the country's third-largest bank, and the Bogor Institute of Agriculture to help empower micro-, small and medium-scale businesses.

These moves will be greatly effective in bolstering SMEs because an acute lack of credit financing has been cited as one of the greatest barriers to their development.

Most city-based banks consider lending to SMEs as much costlier and riskier than to big borrowers as the big banks simply don't have enough experience or sufficient expertise to assess the commercial viability of SMEs. Moreover, most SMEs don't have fixed assets to secure their loans, or if they do own property it is not legally registered. Small businesspeople also feel uncomfortable and can find it difficult to meet the requirement to fill out loan application forms.

The tie-up between Bank BNI on one side and the association of secondary banks and PT Permodalan Nasional Madani on the other could be an effective shortcut for the state bank to expand its lending to SMEs because the other two parties have built up considerable experience and a broad database on the profiles and credit risks of SMEs. Most importantly, secondary (rural) banks have developed a system and mechanisms that enable them to serve SMEs borrowers through fast and convenient procedures.

Likewise, the cooperation between Bank BRI and the Bogor Institute of Technology will contribute not only to the further development of existing SMEs but also to the breeding of new small entrepreneurs. As the small business development programs in several European countries and the United States have demonstrated, higher learning institutes with their research centers can play a greatly effective role as the incubator of small entrepreneurs.

All agree that SMEs are not only a vital but also a significant part of the national economy. The Central Agency of Statistics announced the findings of its latest business survey last week, pointing out a significant increase in the number of SMEs, from 38.84 million in 2000 to 42.4 million last year. These businesses, the agency added, contributed almost 57 percent to the gross domestic product last year.

The deals made by the two largest banks are not aimed at promoting social welfare, nor do they contain subsidies. They are wholly viable on a commercial basis. Surveys have concluded that lending to SMEs is highly profitable, as the experience of rural credit financing firms and various private organizations running rural credit schemes has also shown.

As the central bank has steadily reduced the interest rate of its debt certificates (SBI) to as low as 7.42 percent currently from as high as 13 percent early last year, banks, which are now awash with excess liquidity, have to expand lending to increase or at least maintain their earnings.

As many large enterprises have yet to restructure their debts and consolidate their businesses and the rate of consumer credit expansion has reached a highly dangerous level, SMEs seem to be the most viable sector for new credit.