Introduction

ArticlesFinancial Frontier toStrengthen and Widen
the Opportunity for
Developing Economies
Case Study of Indonesia

Sumimaru Odano

Shiga University / Professor Emeritus

Shingo Muraoka

KEA Institute / CEOFormer Managing Director at Japan
Credit Rating Agency
and Economist at World Bank

Economists have paid a lot of attention to
the role and influence of money and finance ineconomic development.1) Recently, financial
economists have emphasized the role of financial technology (Fintech) and, indeed, haveseen it as playing a crucial role in the economic
development process.
Many Fintech companies have been signaled out for the disrupting role they haveplayed in the banking and investment industries. It is undeniably true that Fintech has thepower to inculcate new grow in areas wheretraditional financial service providers havebeen unwilling or unable to venture into.
Cryptocurrency, for example, has proven capable of making and executing payments andmoney transfers instantly and at a fraction of
the cost charged by banks. This suggests thatbank offices and ATMS may be unnecessary.
Indeed, even traditional banking accounts may
no longer be required to sustain daily economic activities. The end of banks, as we have
known them, may be on the horizon. As Bill
Gates quipped in 1994, “Banking is necessary,
but banks are not.”This paper discusses financial inclusion in
the era of Fintech; in particular, the role of the
micro, small and medium-sized enterprises(hereafter MSMEs). Because, they have beenless paid attention by the traditional financial
institutions. The paper illustrates that MSME
financial inclusion should be encouraged towiden the financing opportunities for an in-

1) Importance of money and f inance in the area of

economic development has been recognized by someleading scholars since the 1960s. Some of the breakt h r o u g h c o n t r i b u t i o n s a r e J . To b i n (19 65) , R .
McKinnon (1973), E. Shaw (1973) and R. Goldsmith(1969). These studies, however, deal with the aggregate
economy model, so the MSMEs are not generally dealt
with in detail. The issue of MSMEs has been focused as
an independent research topic since around the 1990s.

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creased number of business entities. As will be
discussed in detail in the paper, genuine financial inclusion is directly related to the issue offurther economic restructuring; furthermore,
it requires the provision of economic development incentives.
In this paper, Indonesia will be the solecase study. Our research suggests this narrowfocus is appropriate since our preliminary investigation suggested that there are many
opportunities for MSME financial inclusion to(a) create sustainable businesses, and (b) tomake a big difference in the growth potentialof the national economy.
Our approach treats financial inclusion
solely in terms of an increase in lending and investment. Despite the apparent relevance of abroader range of financial services, such as payment/settlement and insurance, one clear
finding is that the creation of greater and fairer
funding opportunities is, without doubt, themost needed innovation for MSMEs.

The discussion proceeds as follows:
1. Importance of MSMEs
2. Landscape of financing gap at MSMEs
3. Indonesia’s efforts for MSMEs financial
inclusion
4. Fintech in action
5. Overall assessment
6. A breakthrough proposal

I

Importance of MSMEs

MSMEs are rarely singled out individually,
but, collectively, they account for some 99 percent of all firms and over 50 percent of
employment and world GDP. Such a picture iscommonly observed country by country, bothin advanced and developing economies alike,as exemplified in the following table:
The table indicates that MSMEs are economically as important as large businesscorporations. Their importance, in fact, ismore than the statistical data reveals. Consid-

Appendices

1
1.

$

Source: METI 2019 SME White Paper. Statistics are taken from World Bank and Asian Development Bank

2.

3.
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Sumimaru Odano
Shingo Muraoka057

er, for example, the supply of parts andmaterials in the automobile industry. Automakers buy in the range of 10,000 - 30,000
different parts and materials to assemble onecar. To meet their demand for quality, quantity, and timely delivery is tough enough. On
top of this, required spec and design changes
occur every now and then. Price must be competitive all the time. What if Toyota, forexample, were heavily dependent on the importation of needed items? Reflecting on thisquestion reveals the necessity of industry clust e r s w i t h d i v e r s e a n d s tr o n g M S M E ssurrounding Toyota HQs and providing dedicated supply chains. Should Toyota everattempt to internalize the entire production
process, it would soon appreciate the level of
MSME specialized skills, the agility of their response to changes, and their production andother efficiencies. The systemic importance of
MSMEs holds true in other businesses, industries, and in Japan’s national economy.

II

Landscape of
MSMEs’ Financing Gap

Given their systemic and economic importance, it is natural to inquire whether the levelof MSME financial inclusion in the nation’s
primary financial systems is commensuratewith their potential. We will address this issue
by examining the current role of MSMEs inthe capital markets and banking systems.
2.1 Capital Markets
From the outset, the question arises whether MSMEs have any access at all to the capital
markets. As it turns out, this market is exclusively organized to serve the largest of large

entities; namely, governmental bodies, multilateral organizations, and the large companies
selected by stock exchanges and/or credit rating agencies. This suggests that it is virtually
impossible for MSMEs to raise (a) equity capital and (b) debt by issuing bonds.
That said, the Indonesia Stock Exchange(IDX) does not appear to have lost interest in
helping MSMEs. Firstly, among its traditional
two sections, Main Board and Developing
Board, the latter appears to welcome the listingof MSMEs. When it was revealed that only
seven MSMEs were listed between 2003 and2015, IDX created a third section, Acceleration
Board, to encourage MSME listings. The incentive for listing was provided by lowering theconventional fixed amount of the listing fee.
Among Fintech companies, two equity
crowdfunding arrangers, Santara and Bizhare,
were licensed by OJK in 2019. So far, the number of MSMEs enabled have been 15 by Santara
and 35 by Bizhare. The new arrangement allows equity capital to be raised withoutbothering the IDX. Although the number offinancings to date is insignificant in the MSME
financing gap, a path has been opened for elite
MSMEs to gain recognition by and equity capital from the investment community.
2.2 Banking Systems
We next look at the current status of credit
and financial services available to MSMEs.
Since the commemorative study titled “Twotrillion and Counting”2), it is well establishedthat MSMEs, collectively, are largely “underbanked” in developing economies. The study
found that there are “approximately 70 percent” of “formal and informal MSMEs in thedeveloping world,” using no external financing
2) IFC and McKinsey, 2010 (Bibliography No.13)

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22.
Appendices1.

and3.there is an annual credit gap “in the rangeof US$ 2.1 trillion to US$ 2.5 trillion”. The annual2.global credit gap has since been estimatedover and over, with US$ 5.235 trillion being thelatest finding3).
It is instructive to see the situation in Indonesia in comparison with that of Japan:
There are several notable features in the table: (a) a nation’s banking system tends to bebigger in large, wealthy or growing economies,
with the only exception being the UnitedStates (62.45%/GDP), and (b) Japan holds oneof the largest banking systems, along with
Hong Kong, Singapore and China and wealthyWest European countries; while (c) Indonesia’sbanking system is exceptionally small even incomparison with other smaller developing
economies.4)
It should also be noted that Indonesia
made it mandatory for banks to allocate 20%of their loan portfolios to MSMEs5), so that
the MSME share, 19.90%, in the table reflects

3
3.

18 / 24

3) IFC, MSME Finance Gap, 2017 (Bibliography No.14)

4) The size of banking system herewith discussed in relative terms to the size of the national economy5 ) https://w w w.theg loba leconomy.com/rank ings/

bank_assets_GDP/

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4
4.

5.

an all-time best effort of its banks and is not
likely to be a turning point from a trend line of
growth in MSME lending. As shown in thefollowing table, the MSME share of bank loans
has not grown significantly over the observed
period.
We can also see up-to-date details of
MSMEs’ credit gap. The following table of selected fig ures updates results for today’s
Indonesia.
This table suggests less attention should be
paid to the right side, summarized as “Feel” factors. Even if an MSME has “no need for6.
external
finance” today, the situation may easilychange tomorrow. It is unlikely that a growing
nation’s MSMEs, upwards of 43% of them, cankeep going for years without external finance.6)
A more meaningful assumption is that those
MSMEs which do not have any credit access7.
today, accounting for 88% of them, will most
likely continue to find it difficult to get funding when necessary.

6) We do not believe that only 1% of Indonesia’s MSMEs

would manage to grow to the size of sustainable SMEs
(Oliver Wyman). We believe the current ca. 60 million
will be reduced to 8-12 million during competitive
growth and integration of the nation’s supply chains.
7) In this paper, the government (GoI) represents all

IIIIndonesia’s Efforts
at MSME Financial
Inclusion

Given MSMEs’ importance, the Governm e nt o f In d o n e s i a ( h e r e a f t e r G oI 7 ) ’ )announced, in an MOU8) (2007) with majorbanks, a firm commitment to promote MSME
financial inclusion. Since then, a wide range ofpolicy measures have been implemented, including : (a) a government credit guarantee
system and (b) official supportive funding, and(c) schemes for credit information sharing.
These are highly commendable and straightforward measures for addressing the main
obstacle—information asymmetry. Their effectiveness has been demonstrated in the earlier
history of advanced economies.
Following the MOU of 2007, GoI createda special MSME lending program named“Kredit Usaha Rakyat (KUR).”9) Under the
new measure, two program guarantors, Serum
Jamkrindo and PT Askrindo, were appointed
and provided with IDR 2 trillion (USD140

8) GOI entered an MOU with 4 state-owned-banks, 26
regional banks, 2 Sharia banks and 1 private bank) toprovide easier access to financing for MSMEs.
9) “People’s Business Credit Program”
10) GoI funding is added annually. It covers guarantee

fees payable at the participating banks, but not the prinbranches of the government, including Bank of Indonecipal of loans. In line with the principle of partial guar19/
24
sia, unless more precise identification is necessary.
anteed schemes, the risk of loan loss as well as the cost ofcollection is supposed to be incurred by the lenders.

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million) of guarantee funds.10) Participatingbanks obtain protection against default for up
to 80% of the principal amount of each KURbacked loan.
For credit information sharing, GoI starte d , in 20 07, m o d ern i z ing th e D e b to r
Information System (SID) under managementof the Bank Indonesia (BI). Under the scheme,
the central bank collects credit information for
all categories of debtors11) on a monthly basis
from all financial service providers across thecountry. Created in 1998, SID had become
outdated and infested with unreliable data andoperational troubles. Its original aim was enabling financial institutions to share credit
information under a clear policy objective “toexpedite the process of provision of funds(credit) to encourage the development of Indonesia’s growing economy.” 12) In 2010 theIndonesia Central Bureau of Statistics started
collecting financial data for MSMEs. Finally,in 2017, OJK, the newly created Financial Services Authority, launched SLIK 13) (System
Layman Informs Keuangan), or Financial Information Services System, as an upgradedsuccessor of SID.
The governmental system extended further
down to the transaction front, where State
Banks were the largest program lenders with
about 50% of their combined share but thesewere soon found to be lacking capacity and information necessary to identif y bankableMSMEs in every rural town and village 14).
Consequently, GoI had them team up withlinkage institutions with local presence. On top11) Mostly individual consumers.
12) Idris Gautama So et al., Enhancing Bank Reputa-tion by Centralizing Bank Debtor Information System.

13) At the start, SLIK took over 96.4 million debtors

from SID. Although no announcement was made on thecompany-consumer compositions thereof, it is unlikely
it holds millions of MSME debtor data, let alone their financial data.

14) The word “bankable” has been commonly utilized in

Financial Frontier to Strengthen and Widen the Opportunity for
Developing Economies

of borrower identification, the linkage institutions assist MSMEs in preparing a proper loan
application, participate in the guarantee contracting process on their behalf, and initiate
loan disbursement through them. Debt payment follows a similar process. These changes
accelerated the nationwide penetration of
KUR, especially from 2015 onward, when the
BI directed banks to increase, step by step,
their MSME lending up to 20% of total loan
portfolios. Regional Development Banks (BPDs) joined in the scheme as linkag einstitutions. By 2018, when the BI decree waslargely fulfilled, the total disbursement of KUR
lending amounted to IDR506.37 trillion15), orUS$ 35.74 billion. The accumulated number ofbeneficiaries in the same period was approximately 26 million, with over 4 million ofannual count16) in the recent four years since2016.
It is worth noting that, despite its success,
KUR lending accounts for a mere 12.2% of total MSME loans outstanding as of 2018. With
13.8% in 2019 marking a historical high, loans
are expanding very rapidly. The program’sachievement, in terms of the accumulated
number of beneficiaries, reached around 30
million or half of Indonesia’s MSME population in 2019. This is truly remarkable, but its
share in overall MSME lending remains rather
limited as a share of total loan portfolios as is
its impact on the national economy.
Another notable development about KUR
is the reported shift in the program’s focus
from credit enhancement by official guarantees

various World Bank reports. Nevertheless, it is rather
difficult to identify the pioneering publication on thiscase although the Cambridge Dictionary lists the word
Bankability. This suggests that this word has been commonly used to deal with lender and borrower relations.
For example, Hampel and others (2013) and World Bank
Report (2017) are some of the useful sources.
15) source: ADB Asia SME Monitor 2020 database.
16) source: ADB Asia SME Monitor 2020 database.

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5.

4.
5

6.

towards interest subsidies of government proviwhere MSMEs are all registered and equipped
sion. GoI introduced the new initiative on July
with reliable financial statements.
30, 2015. The renewed KUR with interest subIn Indonesia, in contrast, MSMEs are
sidy7.scheme increased GoI expenditure morelargely unaccountable, and the KUR supports
than proportionately. In 2016, the case countthe least accountable MSMEs in the bottom
for5.eligible lending jumped three times and thesegment of business lending markets. A possitotal loan amount more than doubled.
ble explanation for such unusual NPL behavior
The non-performing loan (NPL) ratio ofis that the increase in KUR lending was directKUR-backed loans dropped as much as twoed more to recurring borrowers whom banks
thirds in the years since 2016. It seems contrary
know well , rather than ne w, unknown
to common sense, because the occurrence of
MSMEs.17) This resulted from a perverse inNPL would be expected to increase along withcentive whereby banks could exploit thethe rise in the number of borrowers, as is thesubsidized, enlarged earning opportunity withcase in advanced economies where the bankout risking deterioration in asset quality.
has (a) an established way of MSME due diliThe following is a listing of GoI’s othergence, and (b) adequate numbers of wellpolicy measures of significance for addressing
trained loan officers are in charge, and (c)19 / 2466.

7.
17 ) KUR was originally dedicated to new borrowers

but, in 2019, 90% was reportedly disbursed to recurringborrowers. (ADB, Asia SME Monitor 2020)

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MSME information asymmetry and/or credit
gap:
A. Coordinating with Ministry for Economic Affairs–C reated and promoted SAK , theMSME-special accounting standard
and formats.
– Published e-commerce roadmap andpromoted digital transformation of
MSME commerce and financing.
B. Bank of Indonesia– Created and promoted SI APIK, a freeaccounting app for MSMEs.
– P rovided education programs for
MSME accounting.
C. Ministry of Cooperatives and SMEs
– In collaboration with the Ministry ofCommunication and Information
Technolog y, created and promoted
Aye UMKU Juan Online, an e-commerce platform for MSMEs.
– Created the Revolving Fund Management Agency (LPDB) and extended
IDR trillions of MSME loans in collaboration with P2P lenders.

IV

Fintech in Action

A growth opportunity for Fintech in
MSME financing markets has been created given the importance of MSMEs for the national
economy and the urgency of filling their prolonged financing gap as well as the inadequacyof conventional financial services in terms of(a) the unfilled financing gap and (b) unimproved accessibility as perceived by MSMEs.
Despite the much propagated and provocative imag es of incumbents vs. Fintech,Indonesian banks seem to be highly open and18) OJK, Financial Inclusion for MSMEs through Fin-tech, December 2020.

19) The issue of Financial Inclusion has received muchcooperative in promoting the rise of Fintech
companies. A good example is Mandiri Capital, a largest Fintech-specific venture fundcreated by Bank Mandiri, the largest stateowned bank in 2016. Another example is an
incubation laboratory for Fintech companies
named BnV Labs which is a creation of a
MSME-specialized local bank.
GoI is supportive. Even more than thebanks, as OJK itself states 18), “Indonesia isamong Asia’s most prominent countries whenit comes to FinTech use” due to the existence ofa huge financing gap and fast-growing Internet
and smartphones users in the enormous middle-class population.19) Furthermore, “OJK
encourages the presence of technology-based
financial services to increase financial inclusion, especially for MSMEs.” While there is
uncertainty about its future, the perspective of
OJK’s administration is forward-looking andwell-balanced between promotion and regulation. It should be noted that governments ofdeveloped countries tend to be slow in reacting
to the economic and human-right problems
caused, typically, by GAFA and other unicorn
enterprises of the data business. Considering
this, Indonesia’s regulatory framework overFintech looks reasonably well-prepared on issues, such as consumer protection, data privacy,
and abuse of superior commercial position.
Regulatory Sandbox, introduced by BI in2017 and later subjected to the division of labor
between BI and OJK20), is worth special attention as it reflects GoI’s high expectation for
Fintech to promote financial inclusion. Regulatory Sandbox aims, on the one hand, to be a“safe space” for Fintech companies to test theviability of their products/services, technologies and business models for a period of 12 tocharacteristics. In the case of Indonesia, Shrestga (2020)
is dealing with the fundamental role of Financial Inclusion.
20) Roughly speaking, BI is responsible for the supervi-

attention by many scholars concerned with individual
economic or sectoral investigation. In this line of studies
there is a need for more specific information on sectoralsion of e-money and payment system providers, whereas
OJK oversees financial service providers.

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18 months and, on the other hand, for the authorities to watch them in action and establish
an in-depth understanding of them to makesure of their fitness and positive/negative implications for the market and economy. Should
any problem of an examinee arise, the Regulatory Sandbox provides an opportunity for its
correction. Given continuing innovation of
the Fintech companies, it also helps develop
ways of effective regulation and supervision.
In general, a Fintech startup is required tofile an application with OJK to get Recorded,undergo Regulatory Sandbox for 12 months under OJK/BI super vision, and obtain
Registration subject to OJK/BI assessment as“Recommended” (as opposed to “Not recommended”). The term is to extend another 6months for correction or improvement in thecase that the evaluation indicates “Correction/
Improvement”. Fintech registration is not justpromoted by sandboxing but enforced by regulatory authority. When any unregistered
Fintech companies are found at work, the OJK
via SWI, the Investment Risk Warning Team,orders them to stop business, have all their apps
deleted immediately, and requires them to apply for the Sandbox/Registration process.
As to accomplishment, it is rather difficult
to find much convincing evidence of credit gap
reduction, although Fintech is certainly making a difference in individual cases and intransactional levels:
1) P2P lending is highly demanded forworking capital, or short-term credit of
1-12 months, while KUR lending is dominated by investment capital, or longterm credit of 3-5 years.

2) Crowdfunding has enabled a greaternumber of MSMEs to raise equity capital than IDX.
3) In general, Fintech provides unbanked
MSMEs with a reasonable chance to get
funded, and in a fraction of the time andlabor that banks would require, forwhich it embraces superior technologies
and innovative approaches, not necessarily by individual entity but surely as its
growing ecosystems, which include:– K YC on owners by digital signatures 21), face recognition, ID-card
scanning, etc.
– Credit scoring by algorithm using alternative data, such as power bills,
telecom bills, etc. and non-financial
data, such as shopping and communication traits, etc.
– Credit enhancement and monitoringby grouping of borrowers withknown reliable characters.
– B lockchain-based contracting andcollecting/distributing transaction
proceeds.
– Project finance for the joint investment by MSMEs of uncertain
credit standing.
– S aaS and Cloud services of consulting, accounting, tax reporting, etc.
An interesting development is that there
are a fair number of Fintech companies who
employ significant amounts of human labor in
their business processes. Some of them, for example, use more than a thousand people asagents to coach borrowers on loan applicationand payment collection. Others spend time
before contracting in the manual task of due
diligence about borrower’s businesses and in21) OJK requires the use of digital signatures and pro-

motes e-KYC in its Sandbox-Registration processes.

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7.

8.

19 / 248
9.

vestment projects. It may be a sign of theirpracticality, but the dependence on human labor is reducing the effect of digitization.
P2P lending platforms, so-far the largest
group of available Fintech services, have grown
fast but, unfortunately, have not added muchto the volume of credit in total commercial
lending.22) Considering the fact that the figures in the following table include bothconsumers and MSMEs, it is hard to assume

P2P lenders prefer MSMEs to consumers, since
the share of MSME borrowers is likely to berather limited, perhaps to the same proportion
as in conventional lending—around 20%. The
amount of P2P disbursement as of 2020 comesto IDR25.72 trillion or 2.36% of total MSME
loans outstanding.
The following is the composition of Indonesia’s Fintech companies as of May2019.

22) Volumes of the loan disbursement and the outstand-ing are not directly comparable. But the amount of P2P
lending outstanding, if available, is less meaningful, as
20 / 24
its tenure tend to be shorter than a year.

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V

Overall Assessment

Can Indonesia’s MSME financial inclusion
since 2007 be deemed successful? Whether it
is fair to say or not, we do not find the nation’s
remarkable efforts well rewarded, and Fintech,so far, has not brought about much change either in the landscape of the financing gap or in
the progress of its reduction. Is it, perhaps, amatter of time before the Fintech companies
can establish a significant market presence andshare in Indonesia’s financial industry?23)
This case study suggests a more realistic
stance would entail being cautiously optimistic.
We do find all necessary institutions and regulatory supports in place, but not one of themseems to be truly operating towards the intended goal. This is due to their intrinsic weak
link—the still largely missing financial data of
MSMEs.
Official credit guarantees are an established way of risk abatement on the part ofbanks, but it only transfers an amount of credit
risk incurred by banks to the government andit does not reduce the risk itself. On what
ground can we believe that the government isin a better position than the banks for assuming the risks of M S M E lending ? It is
groundless, unless the government holds superior knowledge of the credit standing of aparticular borrower, which, obviously, seems
unrealistic. The truth is that, in all cases of theofficial guarantee scheme, the government cannot help and must trust the banks’ ability tomake suitable borrower selection and credit assessment.
With such problems in mind, GoI createdan MSME-specialized credit rating agency(CRA). This has been superimposed on top of

the existing two CRAs, for the same purposeof information asymmetry resolution for large
companies. To date, little has been heard about
its performance, however. Such is the case withother CRAs and we are not surprised because
we doubt the effectiveness of CRAs when it
comes to the MSME markets. Once again, thequestion surfaces: on what ground can a CRA
be superior to banks in the knowledge of
MSME borrowers given that a CRA has few
offices, less than a hundred credit analysts, andmakes few visits? In fact, it is simply impossible in the MSME markets for CRAs to be of
any use. Also, the level of their addiction to
the capital market practices of large companies
is no better than bankers. If banks need help
in coping with unaccountability of MSMEs, so
do CRAs.
Fintech boasts AI and machine learningtechnologies for “alternative data”, and GoI
praises such “technology-based” credit scoring.
Since MSME financial data is largely missing,
not only in Indonesia but in many other countries, it is common for people to hold highopinions on the use of “alternative data”. Useful as they might be for limited types offinancing and for closely monitored borrowers
in some closed community, such as the suppliercredits extended by an e-commerce portal operating company for its tenants and theautomotive credits of a ride-share service company for its drivers, etc., we seriously doubt
their applicability in general to the broader use,
least of all for nation-wide MSME credit gap
reduction. It is unthinkable that there will be
any big data, even with further data-tech advancement, becoming so powerful as to makethe financial data of individual MSMEs unnecessary.

23) As of 2019 Fintech is not regarded as a SLIK report-

ing member. Its lending market share is less than 1%.

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Another question about “alternative data”
is whether it is desirable to not use financial data for MSMEs, which would not be acceptablein the case of large companies. In other words,
consider the situation in which we have twodifferent ways of credit assessment—one is forthe large companies, which use financial statements as standard records of given companies’
actual operations and financing; the other isfor MSMEs, which do not use financial statements of given companies, but, rather, so-called“alternative data” of lenders’ choice, such as
power bills, phone bills, credit cards bills, logistics and SNS footprints, etc. The choice ofdata is done behind MSMEs’ back, and there is
no way the MSMEs can learn the explanation
for why their application was approved or declined. This uncertainty is not the result oflender intentions, but because lenders, them-selves do not know the reason for the decision.
After all, “alternative data” provides only partial
and circumstantial evidence, which can hardly
tell the whole facts of a given business or businesses.
The reason P2P lenders favor short-termloans is not due to their strategic choice to differentiate banks who do not care much about
short-term lending. Instead, Fintech lenders
are forced by their awareness of the limited applicability of “technolog y-based” credit
scoring. Likewise, the reason for banks singlemindedly making 3–5-year loans is primarily
because of the design of KUR which forces
such behavior for loan eligibility. Given thesmaller risk of shorter-term lending, their preference for long-term lending looks
contradictory to the principles of portfolio
management. Considering this, along with an-

9.

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other peculiarity of their MSME lending ,namely the absolute dominance of the least accountable micro business borrowers, it is hard
to find commercial motivation behind the current practice of MSME lending.
In conclusion, it seems rather certain that
all concerned know the desirability of the useof financial data regarding the credit assessment of MSMEs, if only it were available.
Fintech would choose the use of “alternativedata” only if practical and as a second-best solution to meet the market demand. There is noother choice given the absence of MSME financial data. On the same grounds manybanks do not take a stance on increasing
MSME lending more than required to meet
regulatory and public expectations for their action. They cannot go further, because, so far,they are not really convinced of the level ofcredit risk assessment they can do on MSME
borrowers without financial data.
The last chapter presents some ideas on asocial project for the resolution of MSME information asymmetry, which OJK might call a
Digital Financial Innovator project. The chart
below is the famous IFC/McKinsey depictionof the global financial markets in 2010 (plus
one clear addition of Fintech in its best potential). It shows MSMEs’ dependence oncommercial banking services, which looks evenmore practical and meaningful today with Fintech. This study finds the project will help
make MSME financial data available and thereby contribute to the resolution of both MSME
information asymmetry and the financing gap.

068

VI

A Breakthrough Proposal

Assume Indonesia has established the necessary social and political consensus as well as
the legal and regulatory frameworks, public
and private institutions, and technological andindustrial capabilities, and, finally, it is readyfor a great leap forward on the road to MSME
financial inclusion. Given these prerequisites,
our study outlines some ideal yet operational
ideas for a social project of digital services. The
services required are made clearer in order todirectly address the last troublesome issue—
namely, the absence of reliable financial data of
individual MSMEs.
The project is designed to enable MSMEs
to generate financial data in accordance withthe principles of financial accounting. A significant number of MSMEs, we believe, havestructures simple enough to need nothing
more than double-entry bookkeeping to be accountable. It would be inappropriate, however,to presume any level of accounting standard.
Instead, we will make sure that they have theproper accounting for their commercial and financial transactions by the double-entry
system. Small as such a step may be, it is theminimal requirement for MSMEs to makethemselves accountable. It is essential and crucial to have those recommended standards andforms of financial statements, etc., readily installed in the system for the use of qualified
MSMEs.
As previously stated, it is crucial not to neglect the commercial viability of the MSME
financial inclusion project. Therefore, its accounting service is to be made most useful andaffordable for MSMEs, so that it can obtain as
many users as possible. Hence, it is free of

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charge, and equipped with artificial intelligence
to help account selection, etc. for the users withlittle to no knowledge of double-entry accounting.
Assuming MSME financial literacy to be
next to nil, automatization is a necessary condition for the accounting service to be usable,
but it is not sufficient. In order to be perceived
useful, the service should be made available
when they feel most desperately in need of it—at the time when they try to make an approachto banks or other financiers for the needed
funding.24) Incidentally that is the time when
the financiers find their need arises for information gathering on those MSMEs. Hence,
the financing needs on the side of MSMEs become a great, intrinsic incentive for them to try
the free-of-charge, easy-to-use accounting service, and their loan requests provide an
excellent opportunity to gain open access tothe service.
We assume Indonesia’s on-going efforts at
raising MSME accountability continue, butthere is no further need of marketing for theirown sake. For example, MSME-specialized accounting standards and formats (SAK) can bebuilt-in as an optional part of the proposed accounting ser vice, which we call ARS for
Accounting and Reporting Support, for the useof selected capable MSMEs. Also provided
will be so the APIK (BI’s free accounting app)and other apps and software for financial accounting . A R S is desig ne d to ma ke aplatform/marketplace to which all interested
vendors/service providers get connected andfind new clients and obtain shares of profit according to the count of usage.
ARS service is half of the platform, which
we call Financial Inclusion Platform (FIP).

The other half is DDS, the Due Diligence Support service. As readers might have suspected,
ARS cannot be free, unless there is someone
who pays for the cost willingly on the users’ behalf. We believe financiers hold such a motive,
since, firstly, they want loan applicants to be as
accountable25) and, secondly, they can expect
cost recovery by way of interest earnings fromthe loans--not in every case, but in total. Suppose three out of four loan applications end up
unconsummated, the interest charge on the
successful one should be larger than the compensating cost of four counts of ARS services.
It seems certain that Indonesia possesses a viable opportunity, g iven that the current
situation of prevailing high rates of interest.
This situation26) is expected to continue foryears to come until (a) the nation’s financial
systems achieve a reasonable market efficiency
along with resolution of the currently prevalentand large information asymmetry and/or (b)Indonesia succeeds in overcoming the structural macroeconomic imbalance; that is, thechronic current account deficit and weak exchange rate prospect, and the prevalence of
inflationary pressure. From the banking business’ point of view, if there is anything todiscourage banks from expanding MSME
lending on a commercial basis, the biggest concern would be the steadily rising cost of due
diligence. It is discouraging enough if threeout of four loan applicants are found to be nonbankable, and the result is only known after somuch time and so much manpower have been
expensed. Harder yet is communicability. For
generalists, as most financiers are, it is next to
impossible to make a meaningful business conversation with MSME owners and managers

24 ) As in Japanese history, the use of accounting was25) There are more than a few banks who are, directly or

promoted often with some tax incentives, making certain forms of tax reporting eligible for refunds and/or
lower tax rates. We consider it better to avoid such a policy in Indonesia, however, unless it is deemed necessary.
Retrospectively it was misleading as a matter of accounting culture, as well as counterproductive for the management efforts, to raise operational productivity.

Financial Frontier to Strengthen and Widen the Opportunity for
Developing Economies

indirectly, providing their borrower MSMEs with accounting ser vice for the purpose of raising their accountability.

26) Fortunate refers to the high interest rate spreads

that banks can exploit to pay fees to FIP.

Sumimaru Odano
Shingo Muraoka069

with no reliable company data and no publicly
available industry statistics.
Hence DDS, once integrated along with
ARS into the FIP, is to be subscribed and paid
for by banks and other financiers of MSMEs.
DDS internally receives financial and non-financial data of given MSMEs from ARS anddelivers initial27) due diligence reports on themto the relevant subscribers. The reports composed with the results of algorithmic scoringon the credit standing, solvency, earning power,
equity performance and others that are supposed to be valuable and useful for thefinanciers to contemplate the bankability ofgiven MSME lending. Hence, our preferredname for the process is “bankability rating” instead of “credit rating”. The delivery is made in
the form of pages of a digital dashboard that isviewable through any browsers installed on
PCs and/or smartphones.
The operation flow starts with (1) the financiers’ admission of MSMEs’ loan requests,
online or over-the-counter, and proceeds to (2)KYC opens or updates their accounts, (3) send
KYC to FIP and instruct the applicant to create an account of FIP at its website, (4) the
MSME is connected to FIP and starts using
ARS or, if it has on-going use of an accounting
software, connects it to FIP by way of API (tobe provided for free) so that the data selected
becomes transferrable to FIP, (5) ARS processes all data made available by the MSME into
journals and financial tables, (6) DDS computes scores of bankability and writes an initial
due diligence report for delivery.
Seen from the viewpoint of functionality,
FIP looks like a digitized CRA, the credit rating agency. It serves the investors/lenders byproviding for the resolution of information

asymmetry. “Bankability rating” is an adaptation of “credit rating” in the practice of MSME
lending. So is ARS. Its accounting service
constitutes FIP’s way of information gathering 28) for its own use. Therefore, A R S
accounting service should be carried out at its
own expense.
Please note that independence has merit as
an accounting service. Were it provided by thefinancier, for instance, borrowers might become suspicious. They would be tempted tomake up perceived weaknesses in such things as
a down-trend of sales or profits. Given theirintrinsic conflict of interest with lenders, it issimply impossible to convince them to go
along. If the provider were the government,
any business owner or manager would become
hesitant to use it because any information reflected in the collected data might be appliedwith unforeseeable tax implications. Thus, afundamental requirement for this service is unquestionable prudence and confidentiality.
FIP is, therefore, designed to be an operationof an independent agency for all parties, analogous to CRA. It serves all banks and otherfinanciers equally and regardless of competition or any other relations with each other.
With respect to the FIP’s need for independence, it would be better to elaborateanswers to these questions:– Why shouldn’t FIP provide original financial tables, or all the data, of MSMEs,
which it collects on behalf of its subscribers?
– Why shouldn’t FIP contribute MSME
data of it collected to SLIK, the nation’scentral credit information database?
These are legitimate questions and valid
points. Firstly, the borrowers’ financial tables

27) DDS is used also on the periodical credit reviews.

28) For the sake of CR A’s independence, the informa-

Thus, it occurs at the time of credit events. We name it“initial” as we assume the financiers conduct due diligence of their own whenever they find it necessary in the
DDS reports.

070

tion gathering on its own is more important than whopays the fee. The latter can be mitigated by discipline but
not the informational dependence.

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would be the most useful piece of information,
especially since they are largely missing. Banks
and any other financiers who subscribe to FIP
are perfectly entitled to get them. Secondly, if
the financiers are helped by FIP, so, too, is the
SLIK collection of the otherwise hard to obtain financial data of MSMEs. SLIK, after all,serves a larger population and purpose than
FIP. However, although FIP is technically capable, it is not recommended to have FIP
become involved in either of those ways. If it
did, MSMEs would have second thoughts
about their honest use of the ARS accounting
service. Suppose FIP is a hen for producing
golden eggs, it would be desirable to give her
the most productive environment. As a matterof fact, it is not necessary to move her around.
Instead, since banks and the government know
the very existence and whereabouts of readily
available original data, MSMEs could not decline to release them if legitimately and directly
requested by banks for the purpose of, say, negotiation of the terms and conditions on therequested loan or the government throughbanks, as members of SLIK.
Among many possible ways of incorporation of the project to secure its absoluteindependence, we would recommend a nonprofit Joint-Venture of all financiers concerned,
with 10-20 top banks acting as founding shareholders. In all cases the entity must becommercially sustainable on its own. This fundamental condition should be preserved andhonored by all participating partners.

Financial Frontier to Strengthen and Widen the Opportunity for
Developing Economies

Concluding Remarks:
To close the chapter, let us summarize, forthe sake of clarity, the arguments made above.
A. FIP enables double-entry financial accounting to penetrate into MSMEs, directly
raising their accountability, and allows
MSME loan applicants to establish a readyaccess to credit by way of (i) opening abank account and (ii) completing the firststep of due diligence by way of being assigned a DDS Bankability Rating , forwhich:
1) ARS helps bookkeeping,2) ARS helps prepare best possible financial
statements,
3) DDS helps present “well-structured financial reports”, and
4) DDS helps communication with the financier.
B. It allows financiers to save cost and labor in
the initial screening process of finding
bankable MSMEs, and of information
gathering for due diligence, and thereby
discovering commercial justification for expanding MSME lending, for which:1) ARS helps make all MSME loan applicants the most accountable by way of
double-entry accounting.
2) ARS makes all transactional and financial data readily available, as much as
possible, in the form of financial statements up to their abilit y at g iven
MSMEs.
3) DDS helps identify at a glance the best
bankable MSMEs from the summary
page of the DDS due diligence report onits dashboard.

Sumimaru Odano
Shingo Muraoka

071

4) DDS helps conduct 2nd-phase due diligence for selected MSMEs; namely,
management interviews on an informed
basis by way of detailed bankability
scores along with their explanatory comments and graphics.
C. It allows P2P lenders and other Fintech
companies to make the most of their technologies and collaboration with banks, forwhich:
1) FIP creates, for the first time, big data of
MSME financials as well as all sorts oftransactions, logistics and supply chains,
all of which are direct and purposefulcapture.

2) FIP helps scientific clarification of an
MSME’s risk profile as well as its financing needs and eligibility, which facilitatestarget segmentation with banks.
3) FIP helps find suitable borrowers withgreater speed and certainty.
The following illustrates FIP’s macroeconomic implications:

10.

10

11.

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11.

11

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Financial Frontier to Strengthen and Widen the Opportunity for Developing Economies
Case Study of Indonesia

Sumimaru Odano
Shingo Muraoka

This paper discusses the financial inclusionof MSMEs under the rapidly emerging fintech
influence. The needs and effects are discussed
in addition to the status of on-going efforts andsome of the underlying inherent problems.
This paper deals exclusively with the case of Indonesia where fintech and financial
restructuring are being seriously debated within
the related policy-making agencies.
After reviewing the economic and systemic
importance of MSMEs, the study describes thelandscape of underbanked MSMEs and theways and amounts of their financing gap bothof which have remained largely unchanged
even in the last decade. It must be noted that
more than 80% of MSMEs have been kept
away from any means of accessing formal credit
opportunities. As many research findings
point out, MSMEs should be acknowledged tohave the potentiality to be competent players
and technological suppliers. It highlights thefact that the vast majority of MSMEs are notutilizing and facilitating formal accounting
knowledge and practice. This, in fact, is thelargest and single most important impedimentfor further advancement for MSMEs. The
study finds problems in the use of so-called alternative data to overcome such a disadvantage,
but suggests it is only a second-best solution.

This study describes the situation of
MSMEs in Indonesia and proposes a scenario
to overcome the current underdevelopment situation. A key message of the study is the needto generate financial data in a more practicaland operational way. This approach will also
serve to initiate more relevant studies. The discussion is concluded by presenting an idea for asocial project to encourage the practice of double-entry accounting in Indonesia’s MSME
sector.

Financial Frontier to Strengthen and Widen the Opportunity for
Developing Economies

Sumimaru Odano
Shingo Muraoka

075