Unlocking Finance: The Role and Challenges of Indonesia’s KUR Program for Small Businesses

The World Bank study on Indonesia’s KUR program reveals that while subsidized credit improves financial inclusion for small businesses, it fails to help them transition to unsubsidized commercial lending. Key challenges include collateral requirements and a lack of trust in the program’s partial credit guarantees.

A study by the World Bank investigates the effectiveness of subsidized credit and partial credit guarantees in improving access to finance for micro and small businesses in Indonesia. The research focuses on the People’s Business Credit (Kredit Usaha Rakyat, or KUR) program, one of the world's largest public business support schemes, which has disbursed over 50 million loans since its inception. By analyzing administrative data on over 8.4 million borrowers, the study explores whether subsidized credit successfully reaches those who have been excluded from formal financial systems and whether it serves as a stepping stone to long-term financial independence through unsubsidized commercial credit.

Financial Inclusion Success, but Limited Long-term Impact

The research finds that the KUR program has been successful in expanding financial inclusion by reaching previously unbanked micro and small businesses. Many of these businesses, which would not have qualified for traditional loans due to insufficient collateral, have been able to access formal credit for the first time. This boost in financial inclusion is one of the key achievements of the KUR program, as it helps businesses invest in their operations and grow. However, the study also reveals that KUR loans have not served as a bridge to accessing unsubsidized commercial loans. The majority of KUR borrowers do not graduate to commercial credit; instead, many continue to rely on subsidized loans, sometimes repeatedly. The data shows that approximately half of the businesses that received KUR loans between 2015 and 2020 took out multiple loans within this period, indicating that the program may be encouraging dependency on subsidized credit rather than promoting financial self-sufficiency.

Collateral Requirements Hamper Inclusivity

One of the main challenges identified in the study is the requirement for collateral, which undermines the program's goal of targeting businesses without sufficient assets. Although KUR is designed to support businesses that lack collateral, 96 percent of borrowers are still required to submit collateral to secure their loans. The study finds that, on average, borrowers provide collateral worth over four times the value of their loans, which is significantly higher than the collateral-to-loan ratio required for other loans of similar size. This collateral requirement disproportionately affects female entrepreneurs, who are less likely to own property or other assets that can be used as collateral, limiting their access to KUR loans. The study highlights that female entrepreneurs are underrepresented among KUR borrowers compared to the general population of micro-entrepreneurs in Indonesia, pointing to gender-related barriers in the program's implementation.

Challenges in Communication and Transparency

The study also examines the role of financial institutions in administering the KUR program and finds that inconsistencies in how loans are communicated and processed lead to confusion among borrowers. Some borrowers are unclear about the terms and conditions of their loans, and in some cases, they are unaware of mandatory fees or collateral requirements until after the loan is disbursed. This lack of transparency raises concerns about consumer protection and suggests that better guidelines and oversight are needed to ensure that borrowers fully understand their obligations. The decentralized nature of the KUR program, with multiple financial institutions involved in its implementation, contributes to this variability in borrower experience. The study suggests that clearer communication from financial institutions, as well as standardized loan terms and conditions, could improve borrower understanding and reduce confusion.

Partial Credit Guarantees Not Fully Trusted

The effectiveness of the partial credit guarantee, a key feature of the KUR program designed to reduce the risk for lenders, is also called into question. The fact that banks still require substantial collateral despite the guarantee indicates that the mechanism may not be functioning as intended. The study suggests that banks may not fully trust the guarantee to cover their risks, which reduces its ability to help businesses without collateral access loans. This issue is particularly important for women and other groups with limited access to assets, as it prevents the program from reaching the businesses that need it most.

New Regulations Offer Hope for Future Improvements

In response to the challenges identified in the study, the Indonesian government has introduced several policy reforms aimed at improving the KUR program's effectiveness. In 2023, new regulations were implemented to encourage borrowers to transition away from repeated KUR loans by gradually increasing the interest rates for each successive loan. This policy is intended to incentivize borrowers to graduate to unsubsidized commercial loans over time. Additionally, penalties have been introduced for banks that continue to request collateral for micro KUR loans, which are not supposed to require additional collateral according to the program's guidelines. These reforms represent a step toward addressing the program's shortcomings and ensuring that it better serves its intended purpose of promoting financial inclusion and supporting long-term business growth.

While the study provides valuable insights into the KUR program's impact, it also highlights the need for further research to understand the conditions under which subsidized credit can lead to financial independence. Specifically, more evidence is needed on how partial credit guarantees can be optimized to reduce reliance on collateral and how public credit schemes can better target underrepresented groups, such as women. In conclusion, while subsidized credit schemes like KUR can play a crucial role in expanding financial inclusion, careful design and implementation are essential to ensure that they fulfill their potential to help businesses grow and transition to financial self-sufficiency.