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

Abstract

Micro, small, and medium-sized enterprises (MSMEs) play a significant role in the Indonesian economy, however most MSMEs have difficulties in accessing finance. The Credit Guarantee Scheme (CGS) is a popular program for guaranteeing bank lending to MSMEs by the government. The objective of this research is to evaluate and compare the performance of the CGS in rural and urban areas of Indonesia. The data used in this research are from the Indonesian Family Life Survey (IFLS) 2007 and 2014. We looked at the role of microfinance as a bridge for MSMEs to access credit, however our results show that this role does not function optimally for MSMEs that have no credit guarantee. MSMEs that do not have a credit guarantee 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.