Elevating Indonesia’s MSMEs: Enhancing Growth, Financial Inclusion, and Innovation

Micro, Small, and Medium Enterprises (MSMEs) are undeniably the backbone of Indonesia’s economy, playing a crucial role in employment generation and GDP contribution. As of 2023, Indonesia had approximately 66 million MSMEs, representing 99% of all business units and contributing 61% to the national GDP, equivalent to IDR 9.58 quadrillion (GoodStats, 2023; Kemenko Perekonomian, 2023). Their expansive presence highlights their importance as key drivers of grassroots economic activity and job creation.

MSMEs dominate various key industries, such as apparel, wood product manufacturing, and food & beverages. Of the 4.21 million MSMEs operating nationwide, the food & beverage sector leads with 1.51 million units (36%), followed by wood product manufacturing with 632,100 units (15%), and apparel with 591,300 units (14%) (Katadata, 2022). These industries have exhibited steady growth, with the apparel sector expanding at an average annual rate of 4% since 2021, while the wood product and food & beverage industries have grown at approximately 2% per year (BPS, 203).

Realizing the potential economic contribution of MSMEs, the government has initiated various support to foster their growth and resilience. Under President Prabowo Subianto’s administration, several strategic initiatives have been implemented to strengthen the MSME sector. One notable policy is Government Regulation No. 47 of 2024, signed on November 5, 2024, which provides debt forgiveness totaling approximately IDR 10 trillion (BPK, 2024). This program is expected to benefit around one million MSMEs, farmers, and fishermen, reducing financial burdens and enhancing productivity in vital economic sectors.

However, growth in these sectors has begun to plateau due to limitations in technology adoption and financial access, making it difficult for MSMEs to compete in advanced supply chains. With only 13% of MSMEs leveraging digital platforms for marketing and distribution and 60-70% lacking access to formal banking services, many businesses struggle to scale and integrate into higher-value production networks (ERIA, 2022; World Bank, 2016). Without stronger support for digitalization and financial inclusion, MSMEs risk being left behind in an increasingly competitive and technology-driven market.

The stagnation of MSME growth in Indonesia signals a deeper systemic issue. While growth opportunities exist, many MSMEs lack the financial, technological, and human capital needed to seize them, leading to stagnation across key sectors.

One of the most pressing challenges is the lack of accessible and affordable credit, which restricts MSMEs from expanding their operations. As of the latest data, 69.5% of MSMEs report difficulties in obtaining loans, with 74% citing issues related to insufficient collateral and unconvincing business track records (Kompas, 2021; DAI, 2021). This challenge is rooted in the “missing middle” phenomenon, where MSMEs are too large for microfinance yet deemed too risky for banks, and is exacerbated by rigid collateral requirements that exclude businesses lacking fixed assets. Systemic barriers, such as fragmented credit information systems and limited infrastructure to support regulations like the Law on Fiduciary Guarantees, further stifle MSME competitiveness by hindering the adoption of movable assets as collateral and reducing credit transparency. As a result, MSMEs face constraints in daily operations and miss opportunities for long-term growth.

Beyond financial barriers, limited education and business acumen among MSME entrepreneurs significantly hamper their ability to innovate and adapt to market changes. More than 50% of MSME owners have only completed primary school education, limiting their exposure to financial literacy, strategic planning, and digital integration (Katadata, 2022; GoodStats, 2024). This lack of business acumen reduces their ability to implement efficient management practices, expand into new markets or leverage technology. As a result, many MSMEs operate within traditional business models and face difficulties in navigating complex supply chains or adopting modern business strategies.

The lack of innovation further hinders MSMEs’ ability to compete, both domestically and internationally. This is evident in the 8% contraction in batik exports, driven by competition from cheaper imports utilizing advanced production processes (GoodStats, 2024). Dependence on traditional production methods and limited access to funding for modernization have weakened MSMEs’ position, even in culturally significant industries, and restricted their ability to respond to shifting market demands. Over time, this stagnation has heightened their vulnerability as industries increasingly adopt technological advancements.

These financial, educational, and technological constraints continue to shape the development of Indonesia’s MSME sector, influencing their growth trajectory and ability to integrate into higher-value economic activities.

To tackle the three key challenges hindering MSME growth, a thoughtful approach is advantageous. The following recommendations should be considered to support MSME sustainable growth:

Expanding financial access is crucial to enabling MSMEs’ growth potential and ensuring their sustainability. Adopting Innovative Credit Scoring (ICS) mechanisms that leverage QRIS transactional data, NIB registration records, and supply chain recommendations will broaden MSME credit assessments, allowing more businesses to qualify for financing. Additionally, integrating credit information systems through platforms like SI-APIK and incorporating alternative data sources, such as e-commerce transactions and utility billing histories, will improve credit transparency and accessibility. Moreover, diversifying collateral options beyond fixed assets—such as commodities, warehouse receipts, gold, and intellectual property rights—will further enable MSMEs to access capital, provided that clear valuation mechanisms, enforcement frameworks, and regulatory guarantees are established.

Driving innovation and accelerating technology adoption are key to enhancing MSME competitiveness. Studies show that fintech integration significantly increases MSME investment in innovation, while smart manufacturing has led to a 27.6% defect reduction and a 29.2% cost decrease for SMEs in South Korea. To support this transition, the government should provide R&D funding and incentives to encourage MSMEs to invest in process optimization, product development, and digital adoption. Subsidized access to digital tools and automation technology is essential, particularly for culturally significant industries such as batik and traditional handicrafts, ensuring they remain competitive while preserving heritage value. Expanding digital transformation initiatives through AI-driven solutions, fintech integration, and supply chain digitization will streamline MSME operations, optimize resources, and expand market reach. To accelerate adoption, affordable financing schemes, digital upskilling programs, and business incubators should be introduced, equipping MSMEs with practical knowledge and access to technology.

Strengthening business acumen is fundamental to empowering MSMEs with the skills needed for long-term success. Many MSMEs require structured financial literacy and management training programs to enhance their capabilities in cash flow management, supply chain efficiency, and digital integration. To bridge the knowledge gap, public-private mentorship programs should connect MSME owners with experienced entrepreneurs who can provide guidance on scaling operations, branding, and leveraging digital tools. Since digitalization is essential for modern business growth, subsidized digital skills training must be introduced to enable MSMEs to adopt e-commerce, enterprise resource planning (ERP) systems, and data-driven decision-making, ensuring greater operational efficiency and market adaptability.

However, ensuring MSME participation in these programs requires proactive incentives and targeted outreach strategies. Many MSMEs may hesitate to join due to limited awareness, time constraints, or perceived complexity. To address this, the government and industry stakeholders should offer financial incentives or certification benefits for participants. Additionally, localized outreach campaigns—leveraging business associations, cooperatives, and digital platforms—can help raise awareness and demonstrate the tangible benefits of these programs. Flexible training schedules, practical case studies, and peer success stories should also be integrated to make learning more accessible and directly relevant to MSME operations. By addressing challenges and emphasizing the direct business advantages, these initiatives can drive higher participation rates and ensure that MSMEs actively engage in upskilling programs to remain competitive.

Achieving sustainable MSME growth requires a holistic approach, as financial access, business acumen, and innovation are interconnected and mutually reinforcing. Without adequate financing, MSMEs cannot invest in technology or upskilling, while limited business acumen hinders the effective utilization of financial and digital resources. Moreover, fostering a culture of innovation and accelerating technology adoption are vital for enhancing competitiveness in this digital age. By implementing these strategies in parallel, Indonesia can create a resilient MSME ecosystem that drives the country’s competitive position in the global market.

Indonesia’s MSMEs hold immense potential to drive inclusive economic growth, yet systemic challenges continue to hinder their progress. Addressing these barriers is crucial to enabling MSMEs to transition from local economic contributors to high-tier businesses. Moving forward, a well-coordinated effort from policymakers, financial institutions, industry players, and MSMEs themselves is needed to implement the recommended strategies effectively. Policies must be consistently refined, financial solutions expanded, and digital adoption accelerated to keep pace with an evolving economic landscape. With a strong commitment to inclusive growth and continuous support for capacity-building, MSMEs can move beyond local markets, integrate into global value chains, and contribute significantly to Indonesia’s long-term economic prosperity.