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Empowering SMEs with Islamic Finance

November 29, 2018 • Responsible Finance, World Development

By Danis Nurul Yunita and Nur Dhani Hendranastiti

The success story of SMEs in Indonesia began to attract public attention from their strength during the financial crisis in 1998. However, their true potential has not yet been fully actualised due to their difficulty in securing financing from conventional banking. The authors argue that Islamic banks can play a key role on the provision of instruments and capital SMEs need in order to grow, and create a better wealth distribution in the society at large.

 

Small Medium Enterprises (SMEs), in many countries, act as the backbone of development with great socio-economic significance. Their contribution to the socio-economic development was channelled through the reduction of unemployment numbers, the improvement of economic stability and the growth of real income per capita. Even though SMEs have many advantages, they are constrained by a number of factors, including lack of human resources, skills, training and difficulty in accessing formal credit.1  Indeed, those obstacles have hampered SMEs’ ability to realise its potential and getting developed.  This article attempts to explain the availability of Islamic financial institutions and how it has been putting their efforts in accommodating the financing needs of SMEs. Using survey data collected by Central Bank of Indonesia, consisting of 4,752 SMEs, this article also provides characteristics of SMEs, and how supporting them can affect their ability to obtain financing from Islamic financial institutions.

The success story of SMEs in Indonesia began to attract public attention from their strength during the dark ages of Asian financial crisis in 1998. At that time, SMEs contributed to employment growth and steady decline in poverty rate.2 In addition, SMEs have higher contribution towards economic growth compared to large enterprises, due to SMEs’ independency from formal market and credit, implying that they have the flexibility to respond to any changes compared to the large enterprises.3 Statistically, Indonesia Ministry of Cooperatives and SMEs acknowledged that SMEs have been contributing for approximately 58% of national GDP as well as a significant 97,16% to job creation.4

 
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About the Authors

Danis Nurul Yunita is currently pursuing a Master Degree in Islamic Finance and Management, Durham University. Her research interest areas are Islamic Banking, Microfinance, Islamic Accounting and Islamic Management.

 

Nur Dhani Hendranastiti is currently pursuing her PhD in Islamic Finance in Durham University after obtaining an MSc in Islamic Finance from Durham University and BSc in Economics majoring in Financial Management from Universitas Indonesia. Her research interests are in the fields related with Islamic finance, sustainable development, and SMEs.

References

1. Beck, T. and Demirguc-Kunt, A. (2006). Small and medium-size enterprises: Access to finance as a growth constraint. Journal of Banking & finance, 30(11), pp.2931-2943

2. Nurhalim, Y. (2014). Reforming Small and Medium Enterprises (SMEs) in Indonesia: Proposal of a New Legal Entity. Thesis International Business Law. Tilburg University.

3. A. Berry, E. Rodriguez and H. Sandee (2001), “Small and Medium Enterprise Dynamics in Indonesia”, Bulletin of Indonesian Economic Studies, Vol. 37, No. 3, pg. 363-384.

4. Dipta, I. (2017). Indonesia SME Strategy, Ministry of Cooperatives and SMEs. Presentation on ILO/OECD Workshop. Jakarta.

5. International Finance Corporation. (2017). Msme Finance Gap. Assessment Of The Shortfalls And Opportunities In Financing Micro, Small And Medium Enterprises In Emerging Markets. Washington, D.C, p.52.

6. Baas, T. and Schrooten, M. (2006). ‘Relationship Banking and SMEs: A Theoretical Analysis’. Small Business Economics, 27(2-3), pp.127-137.

7. Central Bank Indonesia (2016). Perkembangan Kredit UMKM dan MKM Des 2016. Available at: https://www.bi.go.id/id/umkm/kredit/data/Pages/Data-Kredit-UMKM-Desember-2016.aspx

8. Hainz, Christa; Nabokin, Tatjana (2013) : Measurement and Determinants of Access to Loans, CESifo Working Paper, No. 4190, Center for Economic Studies and Ifo Institute (CESifo), Munich

9. Hasanah, A., & Yusuf, A. A. (2013). Determinants of the Establishment of Islamic Micro Finance Institutions: The Case of Baitul Maal wa Tamwil (BMT) in Indonesia. Retrieved from http://www.ceds.fe.unpad.ac.id

10. Dewanti, D. S. (2013). Prop Poor Strategies Using Sharia Microfinancing in Indonesia: Case Study of Baitul Maal Wat Tamwil (BMT). JESP: Jurnal Ekonomi & Studi Pembangunan, 14(1), 1–8.

11. Nazirwan, M. (2015). The Dynamic Role and Performance of Baitul Maal Wat Tamwil: Islamic Community-Based Microfinance in Central Java. Victoria University.

12. Nasution, R. E. F., & Ahmed, H. (2015). Outreach and Profitability Trade-off: Does Synergy between Islamic Banking and Islamic Microfinance Institutions Matter? Indonesian Capital Market Review, 7(2), 57–73.

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