to assess the program’s impacts or to demonstrate causal impacts of the program.<sup>3</sup> Notably, we cannot detect what would have happened to MSMEs’ access to finance in absence of the KUR program. Moreover, while we see that borrowers access KUR loans repeatedly, we cannot determine whether repeated use of KUR loans is due to their favorable conditions or whether firms struggle to find unsubsidized commercial lending that can meet their needs. Despite these limitations, the study illuminates important trends based on a large, comprehensive administrative database of all KUR borrowers between 2015 and 2020 and a nationally representative survey of KUR borrowers.

Following the initial release of findings of this study in 2022, several key policy changes were introduced to the KUR program. In January 2023, a new regulation introduced a pathway to graduation from KUR loans, by reducing subsidies and increasing interest rates for each repeat loan from a single borrower.<sup>4</sup> The regulation also introduced penalties for participating banks that contravened program guidelines by requesting collateral from borrowers when it was not required and introduced other policy reforms to optimize the impact of the program and its outreach to first-time borrowers. Both lenders and firms now have greater incentives to access KUR as a time-bound subsidy, that can help unbanked firms climb the ladder of financial inclusion. The Government of Indonesia’s administrative data from the KUR program for the year 2023 shows that 72% of KUR borrowers were first-time borrowers, 49% were female, and 53% were graduating to larger KUR loans or commercial lending.<sup>5</sup> Our paper confirms some findings from existing literature on KUR while nuancing others. It also complements the literature by using large-scale, nationally representative data on KUR borrowers. Existing studies of the KUR program rely on internal program monitoring data, interviews with government officials, financial institutions, or small samples of KUR borrowers. Our findings on KUR’s large collateral requirements echo those in other studies (De Braw et al. 2020; Martokoesoemo et al., 2019; ILO 2019; OECD 2018; Dea 2019). We also confirm that KUR’s de facto collateral requirements pose a constraint for women’s access to the program (Martokoesoemo et al., 2019; Dea 2019; Farida 2015). Existing literature has cast doubt on KUR’s ability to reach first-time borrowers (Martokoesoemo et. Al. 2019; ILO 2019; OECD 2018). Nevertheless, using large-scale, nationally representative quantitative data, we find that the challenge is more nuanced. First-time borrowers are able to access KUR; however, the main challenge lies in the incentives to graduate from KUR to commercial lending.

> 3 The initial study design used genetic matching to identify potential borrowers in the program data who did not receive KUR. However, interviews revealed that almost all borrowers in the database had received KUR at some point, suggesting either a very low rejection rate or that the monitoring and evaluation data does not accurately capture individuals who apply for KUR loans and do not receive them.

> 4  Regulation Number 1 of 2023 of the Coordinating Minister of Economic Affairs, Concerning Guidelines for the Implementation of KUR. January 25, 2023. 5  KUR Administrative Data, provided by Coordinating Ministry of Economic Affairs (CMEA), March 2024.

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