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Indonesia ranks among the lowest in ASEAN in terms of broad money (M2) to GDP ratio, indicating the shallowness of its financial sector. Key challenges include over reliance on traditional funding sources, insufficient regional financial capacity for public services, unmonetized property assets, and inadequate financing for Micro, Small, Medium Entreprises (MSMEs). To address these issues, innovative financial products are critical: (i) Project Finance Bonds for long-term infrastructure projects, (ii) municipal bonds to fund regional development, (iii) Real Estate Investment Trusts (REITs) to unlock property value; and (iv) partial guarantee schemes to expand support for MSMEs.

Indonesia’s MSMEs face significant barriers to accessing credit, primarily due to the “missing middle” phenomenon, where they are too large for microfinance but too small and risky for formal financial institutions. Key issues include reliance on traditional collateral, insufficient and fragmented credit information systems, poor credit ratings due to rigid assessments, and low financial and digital literacy among MSMEs. To address these challenges, the paper recommends (i) diversifying collateral assets, such as movable property and intellectual property, (ii) enhancing credit information systems, (iii) improving the credit rating system, and (iv) increasing financial and digital literacy.