Financing Gap and Digitalization

In this chapter, two issues are discussed: financing gap and digitalization. They are frequently emphasized by analysts and social planners, although from the MSMEs’ perspective, they are not keys that cause low productivity. International data show that Indonesia is one of the top 5 economies with the highest density on MSME (per 1,000 population), yet among those having the lowest lending/GDP ratio. With the exception during COVID, credit rationing as a supply-constraint contributed to the country’s unduly low credit to MSMEs, where banks’ willingness and capacity to lend played a significant role. In addition to asymmetric information, higher transactions costs were behind the rationing. The case of trade financing was even more severe. While digital usage can help reduce financing gap and provide numerous benefits for MSME productivity, it remains to be seen whether the increase during COVID is only temporary (cyclical) or permanent (structural). Overall, the digital technology adoption remains limited. One thing for sure, for certain segments of society and certain MSME businesses, leveraging digital usage and payments is likely to remain low. The difficulty in assessing the actual usage is due to the fact that merchants and consumers may claim to use and accept the digital technology but in practice they may not really use it, either because of outright opposition, rejection, or postponement.