by Supari
Micro, small and medium-sized enterprises (MSMEs) are the backbone of Indonesia’s economy, accounting for more than 60% of GDP and nearly 97% of its workforce.
But the value that credit banks lend to this segment does not represent its importance. Only 7% of credit in Indonesia goes to MSMEs, due to low financial literacy and poor business management and accounting in the sector, which hinders banks from conducting credit feasibility analysis.
To provide subsidized financing to MSMEs and support financial inclusion, business empowerment and national economic growth, in 2007 Indonesia launched the Kredit Usaha Rakyat or People’s Business Loans (KUR) programme. The ultimate goal of the program is to enable MSMEs to “graduate” from government-backed loans to commercial loans, giving them access to better rates, more stable financing, and higher credit limits, thus enhancing their financial independence and growth potential.
By building financial literacy and digitizing MSMEs, the program aims to reduce the access gap to financial services, and promote MSMEs as the main drivers of growth and economic equity in Indonesia.
Development of commercial loans
Over the past decade, KUR has focused on expanding access to finance for MSMEs, enhancing the competitiveness of MSMEs, and supporting economic growth. To achieve this mission, Indonesia modified the program in three stages.
In the first phase, Indonesia gradually lowered the interest rates on Korean loans and expanded the pool of beneficiaries, opened the doors to MSMEs underserved by financial institutions, increased the volume of loans, and enhanced the confidence of MSMEs in using South Korean financing to expand Her works.
When the pandemic struck in 2020, KUR shifted its priorities to supporting MSMEs during the resulting recession by lowering interest rates and providing additional subsidies to serve the most vulnerable business sectors. KUR has significantly increased its loans, which has led to the recovery of the national economy and the maintenance of employment levels.
In the recovery phase, which began in 2023, South Korea returned to its pre-pandemic policy goals of improving loan disbursement, including targeting digital productive sectors.
Throughout the political transformations of the past decade, Korea has been able to accelerate economic growth, reaching 57 million employers by 2023, and improving the socio-economic conditions of micro, small and medium enterprises.
The average sales volume of micro, small and medium enterprises receiving these loans has increased by 60%, and their labor absorption has increased by more than 25%. Businesses that received KUR loans saw significant increases in spending on education and health care, and GDP in the regions and cities of these businesses rose faster than those who did not receive the loans.
Challenges ahead
After nearly a decade as the backbone of SME financing, KUR now faces five structural challenges to its sustainability:
1. Limited loan eligibility
The number of eligible KUR beneficiaries is shrinking and will reach a saturation point by 2029, according to the BRI Research Institute. Today, only 3 to 4 million beneficiaries are eligible for loans, down from 7.6 million.
2. Deterioration of credit quality
The rate of non-performing loans (NPL), including loans that are more than 90 days delinquent or classified as substandard, doubtful or bad, has risen to more than 1 million since the start of the pandemic. For KUR to remain viable and sustainable, it requires better risk management.
3. More claims on warranties
The number of claims on KUR guarantees has increased, according to the BRI. Combined with the increasing trend toward non-performing loans, these pressures increase the risk burdens borne by lending banks, as well as their guarantee institutions, which may deplete their leverage and risk tolerance if these trends continue. The domino effect leads to higher security premium costs, which may lead to higher interest rates on financing MSMEs.
4. Graduation rate of micro, small and medium enterprises
More than 45% of KUR beneficiaries are eligible to graduate to business credit, but lack of preparedness among debtors reduces the impact of this program.
5. Victim mentality
Since the pandemic, some KUR beneficiaries have had difficulty with payment discipline and.
New policy strategy
Having implemented its pandemic and post-pandemic policies, KUR now needs to improve its disbursement strategy to ensure greater economic and social impact. The right approach involves focusing on selecting target beneficiaries to prioritize digitally productive and growth-ready MSMEs, enhancing risk mitigation through robust monitoring and evaluation systems, and integrating advanced digital tools to streamline operations and scale up outreach.
More adaptive and sustainable policy strategies include:
1. Develop a graduation plan based on business ability and provide technical assistance to debtors to prepare them for the transition to commercial credit.
2. Improving credit ceilings and using a risk-based approach to maintain exchange quality.
3. Enhance synergy among stakeholders by improving coordination between the government, exchange banks and guarantee institutions to design effective policies.
4. Empowering MSMEs with digital tools, including a single online application platform and pre-employment portal.
KUR has proven its value as a strategic tool in supporting the growth of SMEs and the economy. Since its launch, the program has expanded access to financial services and created significant social and economic impacts, especially in rural areas.
However, addressing challenges such as saturation in the number of beneficiaries and declining credit quality requires a more adaptive approach. With the right strategies, KUR can continue to promote MSMEs, empower more people, and promote financial inclusion in Indonesia
Supari He is the Small Business Manager at PT Bank Rakyat Indonesia (BRI) Tbk. He oversees the implementation and management of BRI’s Kredit Usaha Rakyat programme, focusing on expanding financial inclusion for micro, small and medium enterprises in Indonesia. His work focuses on digital transformation, financial literacy, and risk management to support sustainable economic growth.
Learn more about Kredit Usaha Rakyat (KUR) and lending to small and medium enterprises (MSMEs) at the following link: Bank Rakyat Indonesia (BRI).
