While Funding is the Solution, the Requirements Remain the Strain
Every business yearns for growth opportunities, including those in the MSME sector. Despite their contribution to a country’s workforce and financial development, MSMEs face many challenges pertaining to business operation, be it on the daily basis or for the long-term growth. Most MSMEs lack access to funding that can lead them to expansion opportunities. According to a study by the World Bank, around 200–245 million(1). MSMEs from the formal and informal sectors couldn’t earn business loan.
The same condition happens in Indonesia. Although many are aware that business loan can drive MSMEs to growth, there are still many cases of rejected business credit appliance. During 2018, credit net expansion reached only IDR34.549 million, from the total of IDR309 million, representing only 11%(2). One pertinent issue is inequality in credit account ownership. Recorded by Indonesia’s Minister of Communication, out of the 59.2 million(3) MSME units, only 16 million of them possess credit accounts(4).
There are two types of requirement stated by banks for MSME credit appliance. The first is the general requirement for legal documents which prove the validity of a business unit. Even in the first stage, the KYC, MSMEs cannot fulfill the necessities. Part of the problem is that many MSMEs are operating in the unauthorized, informal sector. For instance, they have no Trade Business License and Company Registration Certificate. This unavailability of legal documents also burdens them in tax reporting.
Some other factors, such as the business location of MSMEs being in rural areas, complicate the problem. They fail to routinely report their financial operation to a bank institution. Digital illiteracy also strains the possibility of keeping proper management and financial record. Moreover, special requirements, such as a long-term investment plan, is difficult to complete for small-scale MSMEs.
Other than document requirements, there are some other variables for checking validity in a credit analysis by bank institutions. The first is Capacity. Even when the MSMEs are already qualified in terms of economic capacity, they are still unbankable due to document incompleteness, having no legal documents or a transaction record of their daily business operation. A transaction record is needed by the banks to ensure that the business generates adequate revenue when it comes to loan repayment. Unfortunately, in MSMEs’ daily operation, transaction records are usually done manually or even unreported. Thus, valuable transaction data cannot be generated.
Next are Capital and Collateral. A survey by Bank Indonesia shows that most MSMEs do not possess any property which can be used as collateral. This is contradictory to banks’ requirement for a collateral asset to secure loan repayment, as required as the mechanism of mitigation risk. In contrast, large and multinational enterprises which already own a property have no problem accessing a bank’s loan. This is ironic for MSMEs because to expand their business, they firstly need to own a property.
A credit analysis also considers Character. Generally, the bank will set up an individual interview with a debtor to gain insights into how trusted the debtor is. The last one is Economic Condition, referring to the economic background of the specific area or the country.
The option left for MSMEs if the bank loan is inaccessible is individual credit, which is sometimes granted with a high and unmeasurable interest rate. This could be dangerous to MSMEs’ growth and may affect the economic condition.
Another safer option for MSMEs is to utilize technological infrastructure to make a structured, compiled record of their data as a valuable asset. In a business ecosystem, relevant data have an important role to analyze and reveal crucial business aspects, for instance, market potential and product dispersion.
Blockchain technology can facilitate the processing and distribution of data between related participants in the ecosystem. If only MSMEs possess complete and competent data as valuable assets, banks could obtain substantial and appropriate information about the character and credibility of their business units. In Tokoin, data information from MSMEs will be validated as assets containing values. The asset valuation is the solution for MSMEs to reach the banks as a form of credit scoring.
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