SMEs: What have we done with this sector?

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.