Strategic reforms key to Indonesian MSMEs’ greater contribution to the economy

Micro-, small- and medium-sized enterprises (MSMEs) in Indonesia employ a staggering 97.2 per cent of the country’s total workforce but are contributing only close to 60 per cent of the US$1.2 trillion economy. As one of the major drivers of the Indonesian economy, they appear to be punching below their weight in terms of economic output. 

In order for MSMEs to reach greater heights and to contribute more to the economy, they should pursue reforms in three strategic areas: digitalisation, access to credit and collaboration with larger corporations within and outside Indonesia.

Strategic reforms for MSMEs needed

Our UOB ASEAN Transformation Study showed that 60 per cent of MSMEs in Southeast Asia see digitalisation as a key enabler for their business transformation. However, the road ahead will be full of challenges, especially for Indonesia. The rate of digitalisation for the country’s MSMEs was only 13 per cent in 2019, with internet connectivity remaining an issue. According to the Association of Indonesian Internet Service Providers, only less than 10 per cent of internet users have connection to Wi-Fi at their home, office or in public spaces. High-speed, affordable and reliable internet connections are key for MSMEs to transform from brick and mortar to online business models. 

Tight and limited cash flow is also a challenge for many MSMEs. As such, one of the key ways to grow their business is to have a sustainable funding source, including in terms of pricing and tenor of such credit facilities. Further, as many MSMEs may not keep comprehensive financial records, they are likely to find it hard to obtain bank loans at suitable interest rates.

The ratio of Indonesian MSMEs’ credit to GDP has remained at around six per cent to seven per cent (the country’s ratio of total bank loans to GDP stands at 40 per cent). With low tier Book 1 (core capital below S$100 million) and rural banks (core capital around S$10 million) at a high rate, People's Business Loans (KUR) are one of the most probable way for MSMEs to get financing; though that only account for 2.5 per cent of total outstanding loans in Indonesia. To improve their access to credit and financial performance, Indonesian MSMEs would need greater training and support in areas such as accounting, financial reporting and financial literacy.

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Unlike MSMEs in other parts of Southeast Asia, many in Indonesia are still disintegrated with the larger corporations domestically. Research from the International Labour Office shows that many MSMEs lack the high product or service quality that is required by their target customers or partners – which are the mid- to large-sized corporations.

Logistical and timely delivery capabilities create another barrier for MSMEs in the collaboration with their larger counterparts. A very large proportion of the sales orders received by MSMEs are offline, untraceable process and progress and lack of clarity in instructions. Consequently, it is typical for contracts to be handwritten with communications typically done through unverified and legally-unbinding ad-hoc channels such as WhatsApp chats. The informal and inefficient utilisation of resources adds to the already strained cashflow situation these MSMEs face.

Digitalisation as a start for MSMEs to become stronger economic drivers

Digitalisation, access to credit and access to a larger business ecosystem will enable MSMEs to scale their business and to remain competitive. For a start, MSMEs as merchants can adopt digital payment options to enable their customers to make payments simply and almost instantaneously just by using their mobile phones.

Through UOB BizSmart, UOB is helping Indonesia’s MSMEs benefit from digital solutions to drive business performance. UOB BizSmart, which is an integrated suite of cloud-based business management solutions, enables MSMEs to handle their operational processes digitally and more efficiently, reducing the time spent on administrative tasks as well as their reliance on manpower.

Through innovation, digital transformation and greater financial flexibility, coupled with extensive support from the public and private sectors, Indonesia’s MSMEs will be able to contribute strongly to the domestic economy. They will also be able attract more foreign investments from other parts of the region.

The writer is an economist at UOB.