Empowering Indonesia's small businesses: Insights and strategies for overcoming digital and financial barriers

• Seven out of 10 MSEs are confident in their ability to utilize digital tools to enhance their operations. However, 64% admit that they don’t know which digital tools are right for their businesses.

• Nearly 70% of MSEs acknowledge the critical role of business, digital marketing, and finance skills training. Surprisingly, only a third have accessed support services for their businesses.

• Majority of MSEs report that they have not used credit or loans in the last 12 months. The primary reason cited was not needing credit (62%), followed by being unable to afford credit (28%).

A new study, the Small Business Barometer Report published by the Mastercard Center for Inclusive Growth in collaboration with Mercy Corps Indonesia and 60 Decibels, has identified three primary hurdles hindering the growth trajectory of Indonesia’s Micro and Small-Sized Enterprises (MSEs): a lack of digital literacy, insufficient support structures and limited access to credit.

Conducted by 60 Decibels, an impact measurement company, this research offers crucial understanding of the circumstances encountered by Indonesia's small businesses, such as their difficulties, assistance requirements, credit availability, ambitions, and digital uptake, incorporating an analysis sensitive to gender issues.

Small businesses see value in digital tools, but lack the skills to use them

Small business owners are enthusiastic about digital tools, with two-thirds of MSEs using them, including high usage of online e-commerce platforms (46%) and mobile wallets/online banking (34%). A staggering 81% of these entrepreneurs recognize the significance of digital tools for their future business growth, a sentiment echoed evenly across both small and micro-enterprises. However, they face a formidable challenge: a lack of digital literacy in how to leverage these tools to their full potential. 64% reported not knowing which tools best suit their specific needs.

MSE owners cited a lack of digital literacy skills (38%), uncertainties about which technologies to adopt (35%), and the prohibitive costs associated with technology investment (31%) as the most pressing issues hindering their utilization of technology to improve business operations. This corresponds with the finding from the Indonesian Ministry of Communications and Informatics¹, which showed the Indonesian digital literacy index score at 3.54 out of 5 in 2022, categorized as moderate, illustrating a gap between awareness of the need for digital tools and the lack of skills needed to use them effectively.

Support services are critical for small businesses, but only one-third of them have accessed support

While 70% of small businesses in Indonesia consider support services such as business, finance, digital and human resource training important for their business growth, they faced significant challenges in accessing these. Access to finance skills training (89%), digital marketing training (88%) and business and human resource training (89%) were the most important forms of support that Indonesia's MSEs expressed a strong demand for while access to digital tools training (86%) and mentoring (82%) were also in high demand. However, two-thirds of small business owners did not access any support in the past year, underscoring the need for targeted interventions to bolster the growth and resilience of small businesses in Indonesia.

Most MSEs that received support did so from Non-Government Organizations (57%), followed by government agencies (33%) and formal financial institutions (21%). However, when asked where they would go to seek support, 51% said government agencies, 47% friends or family, and 23% social media, indicating an awareness gap of where to go to access the necessary support for business growth. Addressing these challenges requires concerted efforts to bridge the gap in support, empower MSEs with essential resources, and foster a conducive environment for their sustainable growth in Indonesia's evolving digital landscape.

Limited access and low appetite for credit, financial tools

With two-thirds of MSEs not accessing credit or loans in the past 12 months, 62% cited no need for credit, reflecting a trend of financial self-reliance. This aligns with World Bank data showing that Indonesian businesses prefer self-financing through profits.^[2] Although nearly half of those who sought credit reported no barriers to access, significant challenges persist, with high interest rates (31%), lack of collateral (16%), and insufficient information (15%) being major obstacles. Ease of application (75%) was by far the highest reason why MSE owners chose their source of credit and loans.

A similar proportion of MSEs who reported no barriers to credit access (34%) were able to access credit as those who mentioned at least one barrier to credit access (33%), a testament to MSEs’ resilience. While 51% said capital access and training were the support that they need to overcome challenges, MSEs feel that access to the skills to manage their finances (89%) is more important than access to capital (77%). Finance management digital tools were the top (34%) and second most (27%) important digital tool that MSEs wished they had to help their growth.

Closing the gender gap with access to financial support

MSEs led by men and women stand on a fairly equal playing field when it comes to access to support services. An almost equal percentage of MSEs run by men (33%) and women (32%) were able to access support services, while the MSEs led by women report business performance almost equal to men across multiple metrics.

37% of female business owners used credit, 10 percentage points more than male business owners, likely showing the impact of recent initiatives to increase Indonesian women entrepreneurs’ access to credit. For example, Pusat Investasi Pemerintah (PIP), a government agency, has disbursed loans to 5.4 million micro-entrepreneurs since 2017, 95% of whom are women.

Since 2017, Mastercard, through small business initiatives such as Mastercard Strive and Mastercard Academy 2.0 has supported over 1.8 million small businesses to accelerate access to financial products and digital solutions through training, mentoring, and bite-sized educational content. This has been achieved by collaborating with key public and private sector players, alongside non-profit organizations.

Maliki, Ph.D., deputy of population and manpower at Bappenas, said: "The insights gained from this barometer report offer a comprehensive understanding of the current situation of MSEs digitalization. By shedding light on the challenges faced by MSEs and identifying areas of opportunity, this report equips policymakers with the necessary tools to implement targeted interventions for the sustainable development of micro and small enterprises in Indonesia."

Subhashini Chandran, vice president, social impact, Asia Pacific, Mastercard Center for Inclusive Growth, said: "Adopting a deep listening approach, the Small Business Barometer Report presents an analysis of insights gathered from small business voices around the country who have shared what they struggle with every day and where they need help to grow. The Center’s goal is to inform and inspire focused action. Through this work, Mastercard Strive continues to serve as a pivotal catalyst for digitalization and access to credit and markets for Indonesia's small businesses.”

Ade Soekadis, executive director of Mercy Corps Indonesia, stated: "This knowledge sharing not only serves to bridge the gap between stakeholders and small business owners, but also signifies an important tool to ensure that MSMEs receive the comprehensive support they need to flourish. Through Strive, Mercy Corps Indonesia is committed to facilitating further collaboration so MSMEs can thrive in the ever-evolving business landscape of Indonesia."

The insights from this study hold great potential for empowering Indonesia's small businesses. Stakeholders across the public and private sectors, as well as non-profit organizations, can leverage this report to design innovative policies, enhance products, and create impactful programs that boost capacity and productivity.

Methodology: This study interviewed 835 small businesses, evenly split between urban and rural areas, from November 2023 to January 2024. It specifically targeted micro businesses (defined as having one to four employees) and small businesses (defined as having five to 19 employees) in the food and beverage, fashion, non-furniture crafts, and tourism-related sectors. Given the vast and diverse segment of small businesses in Indonesia, the study excluded medium-sized enterprises and businesses outside these four sub-sectors.

Download the Small Business Barometer Report by Mastercard Center for Inclusive Growth in collaboration with Mercy Crops Indonesia and 60 Decibels is available here.

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¹Tingkatkan Literasi Digital, Kominfo Latih Lebih dari 24 Juta Orang

²Women-owned SMEs in Indonesia: A Golden Opportunity for Local Financial Institutions