loans. Currently, there are three stated objectives of KUR: (i) increasing and expanding access to finance for productive businesses; (ii) increasing the capacity and competitiveness of MSMEs; and (iii) encouraging economic growth and development (Regulation No. 1 2022, Section 2).

In its current form, KUR provides public financing to subsidize interest rates on loans for MSMEs and fund a partial credit guarantee for these loans. The government provides interest subsidies directly to participating banks, allowing them to lend to MSMEs at capped interest rates.<sup>6</sup> The interest rate subsidy also covers a guarantee fee which banks pay to selected Credit Guarantee Companies (CGCs), but the loan capital comes from the banks themselves. Each year, the banks and financial institutions which participate in KUR (‘distributors’) submit an estimate of the amount of KUR loans they expect to be able to disburse in the coming year. Based on estimates and past performance, the government formulates annual lending quotas and performance targets for each bank, as well as an aggregate annual target for the KUR program. All participating banks must offer loans according to conditions outlined in the KUR Regulations in order to receive the subsidy.

All banks participating in KUR report into a central Credit Program Information System (SIKP), which registers and tracks each KUR borrower. To become a KUR distributor, financial institutions or cooperatives must meet certain criteria: (i) being healthy and having good performance; (ii) cooperating with a KUR guarantor company in distributing KUR, and (iii) having access to the online KUR data system (SIKP). Financial institutions that meet these criteria can apply to become a distributor by submitting documentation and entering into a financing cooperation agreement (Permenko No 8 of 2019, Article 6). In 2022, there were 44 KUR distributors. However, the majority of KUR loans are disbursed by one distributor, Bank Rakyat Indonesia (BRI), which distributed approximately 70 percent of KUR loans in 2022.<sup>7</sup> The fiscal cost of the KUR subsidy program amounted to approximately 0.1% of GDP in 2018-21, rising to 0.2% in 2022-23. Total spending on KUR in 2023 amounted to approximately US$2.76 billion, with the majority of the expenditure program derived from the cost of the interest subsidies and a small portion derived from the cost of the credit guarantees. The total fiscal cost of the KUR program since the introduction of interest rate subsidies in 2015 totals approximately US$12 billion. Earlier estimates found the cost of interest subsidies to be approximately ten times the cost of the credit guarantee.<sup>8</sup> The program claims approximately 90%

> 6  For Islamic financial institutions the proper term is margin subsidy. Throughout this paper, for simplicity, “interest rate subsidy” is used to refer to the interest rate subsidy given to commercial banks and to the equivalent “margin subsidy” given to Islamic financial institutions.

> 7  Data drawn from the SIKP as reported on the CMEA’s website: http://sikp.kemenkeu.go.id/dashboard.

> 8  Indonesia Economic Quarterly, March 2017. “The New Kredit Usaha Rakyat (KUR) Program.”

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