Introduction: The Importance of Credit

International evidence suggests that access to credit is important for firm performance and growth. For example, Vogelgesang's (2001) study on the impact of micro-credit on productivity and growth of borrowers in Bolivia showed that those borrowers with larger numbers of loans and greater average values of loans than in their previous loans had a higher rate of growth than did other borrowers. An analysis of cross-section data on sales revenues showed that borrowers who had previously taken loans experienced greater increases in sales revenues than did others with a given level of assets.

Similar results have been found in Indonesia. For example BRI and the Center for Business and Government, JFK School of Government, Harvard University (2001) showed that the businesses of customers of BRI Units’ Rural General Credit (Kredit Umum Pedesaan, KUPEDES) showed better performance over the previous five years than did non-KUPEDES-customer respondents. In all such studies, strict causality — i.e., does credit cause enterprise success, or do successful firms get credit? — is difficult to establish, but it is also somewhat beside the point. There can be no doubt that credit can and does help increase the growth rate of the substantial proportion of firms that are ready to grow and also plays a useful role in improving the investment and consumption patterns of households with stable businesses but more limited enterprise growth prospects.

This chapter presents an analysis of the constraints to credit access facing rural non-farm enterprises (RNFEs) in Indonesia and of the extent to which these constraints inhibit enterprise growth. The map for this chapter is as follows:

1. (i) An Overview of Financial Services Available to RNFEs. This section provides a brief snapshot of the institutions and financial services available to RNFEs in Indonesia.

2. (ii) Is Financing a Problem? This section discusses the extent of credit constraints for households and small businesses.

3. (iii) The Nature of Credit Constraints. This section contains a discussion of the factors that constrain non-farm enterprises’ access to credit, from the perspective of both borrowers and lenders.

4. (iv) Policy Recommendations. This section presents recommendations for action, prioritizing interventions that are likely to have the greatest impact on enterprise growth.