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The Role of Credit Guarantee Schemes for Financing MSMEs: Evidence from Rural and Urban Areas in Indonesia

Publication | June 2019
The Role of Credit Guarantee Schemes for Financing MSMEs: Evidence from Rural and Urban Areas in Indonesia

Micro, small, and medium-sized enterprises play a significant role in Indonesia's economy, but most of them have difficulty accessing finance.

Micro, small, and medium-sized enterprises (MSMEs) play a significant role in Indonesia's economy, however most MSMEs have difficulty accessing finance. The Credit Guarantee Scheme (CGS) is a popular program for guaranteeing bank lending to MSMEs by the government. Using data from the Indonesian Family Life Survey (IFLS) 2007 and 2014, we evaluate and compare the performance of the CGS in rural and urban areas of Indonesia. We look at the role of microfinance as a bridge for MSMEs to access credit, and find that this role does not function optimally for MSMEs with no credit guarantee. Without a credit guarantee, MSMEs do not have much opportunity to access credit from formal microfinance institutions. In addition, MSMEs in rural areas have significantly fewer opportunities to gain access to credit from formal institutions than MSMEs in urban areas.

WORKING PAPER NO: 967