SMEs: What have we done with this sector?

C.G. Moghe, Jakarta

There have been several small tremors already felt by the Indonesian economy this year. The rupiah weakened from less than 10,000 to a dollar, almost entered the free-fall regime and was strengthened only by hiking interest rates. The resultant loss of purchasing power, coupled with increasing costs of fuel and the consequent spiraling costs of other services and commodities and uncertainty about issues like availability of power; the imminent increase in the minimum wage and further increase in interest rates are undermining the economic viability of small and medium enterprises (SMEs).

Several are responding by cutting jobs or even closing down. There is no safety net to halt this process and save the SMEs and the jobs they generate and to prevent the economy from plunging further into a tail spin. It looks like we have learned nothing from the economic crisis and have been caught napping once again.

The SMEs generally fold up as a result of lack of sustaining power and the lost jobs bring many onto the streets as vendors and vagabonds, in general affecting all segments of the economy in terms of lost business. Is there a safety net, to minimize the impact? Can some short and medium term measures be taken to strengthen the SMEs to minimize the job losses?

SMEs need assistance both for detecting and removing road blocks and for capacity building in any form such as better management skills to improve their competitiveness.

The stakeholders in the success of SMEs are banks (since the failure of the SMEs means the lending banks have to write off the loans), other larger corporate players (whose market is assured by the jobs generated by the SMEs) and the government (which needs to ensure that SMEs keep growing and generating new jobs).

Banks perceive SMEs as a risky proposition and do not consider the future growth potential of this market segment. Most banks in Indonesia therefore have an adversarial relationship with SMEs, focusing only on the security, usually land or buildings, against which the credit facility has been granted, instead of the inherent operational aspects of the SMEs.

Banks by the very nature of their relationship with the SMEs can have access to a lot of aspects of the working of the SMEs, which can be converted into the health indicators of the businesses of the SMEs with some practical input from experts in the various industries.

Banks operating collectively under their association -- PERBANAS -- together with other stakeholders interested in the wellbeing of SMEs may be able to establish SME assistance centers for skill/resource/management development for SMEs, where the unorganized SMEs, can be assisted to periodically upgrade their skills to meet the current competitive/quality needs, in areas of management development, export promotion, better quality control, development of standard MIS packages and other measures to assist SMEs to improve their performance.

These efforts may strengthen the SMEs, reducing their failure rates and therefore protecting the funds banks have advanced to the SMEs, apart from improving the ability of the SMEs to generate and sustain jobs. Some efforts that have already commenced in this direction, aided by the World Bank, ADB, PNM and similar institutions may form a nucleus of such collective assistance centers.

On the other hand, agencies like the Indonesian Chamber of Commerce and Industry (Kadin), in association with the relevant government officials, such as the Ministry of Industry can assist SMEs by identifying the existing and potential road blocks to the progress of SMEs and assist in initiating appropriate steps, such as regulatory changes based on cost-benefit studies. Changes in the structure and application of VAT forced many of the silverware makers of Yogyakarta to shut down, since they could not face the resulting hike in the cost of raw materials.

The furniture makers and exporters have lost their export market and consequently many of the related jobs, as a result of non-availability of "legal" timber within Indonesia at reasonable prices. On the other hand, plenty of illegal Indonesian timber is available in China at prices, lower than in Indonesia, which makes it easier for China to make and export furniture made out Indonesian wood. In such instances, the cost-benefit studies may indicate the optimum tax levels the government may charge so that the businesses can still survive and continue providing jobs.

Muslimin Nasution of the Indonesian Association of Muslim Intellectuals in a recent news item mentioned 5 C's, as the banks' guiding principles, namely: Character, capacity, capital, condition and collateral which the borrower must demonstrate. He should have added a few more C's for the banks to acquire, namely: Commercial common sense, conventional wisdom, close contact with the borrowers, conviction and courage, if the SMEs/small borrowers are to survive and thrive in their function as the providers of jobs and therefore maintain social stability.

Indonesia does not have to feel these measures are an act of charity by giving benefits to SMEs. Even more advanced countries like Singapore provide "health checks" for small and medium businesses and consultancy for branding and automation at affordable costs as a measure to build their long term capabilities. India has long assisted small industries in the procurement of raw materials on a collective basis, where the small buyers can benefit from pooling of materials and orders, thereby lowering the overall costs.

Recently Dr. Vivian Balakrishnan, the Second Minister for Trade and Industry, in Singapore, said that Singapore "... should nurture a strong base of local manufacturers who are ready to ride the wave of globalization to face international competition". Unless some special efforts are made to provide anchors against the wave of globalization, Indonesian SMEs may be simply washed away and the streets of Jakarta will be perpetually flooded, not with the usual excess rainfall but with those who were once employed by the SMEs.

The writer has been working more than 33 years in banking, financial services and projects. He can be reached at cmoghe@indosat.net.id.