Of the four programs the central bank, or Bank Indonesia, launched last week to empower micro, small and medium enterprises (SMEs), the development of geography- and commodity-based clusters of small businesses seems to be the most promising.
The other programs -- on-line business data and information services, a task force to find solutions to the various problems faced by SMEs in provinces and a visitor center at the central bank's headquarters -- will serve more as supporting units, providing information and technical advice on various aspects of business activities.
Bank Indonesia Governor Burhanuddin Abdullah said the central bank has established SME clusters for the production of rice crackers in Banten, paprika in West Java, seaweed in West Nusa Tenggara, rattan furniture in Central Java, shoes in East Java and for cassava-based products in North Sumatra.
The experiences of many other developing countries, including Indonesia itself, have shown that single-industry clusters can generate localization economies arising from a specialization and focus that extend to suppliers, labor markets, infrastructure and logistics, as well as innovation.
For example, a cluster of leather-based SMEs in Yogyakarta reduced production and transportation costs, and significantly improved supply chain management. This in turn resulted in a more efficient distribution and decreased the costs of other logistical arrangements.
Superior logistical capability in clusters of industries allows SMEs to revamp their supply chain management to ensure the smooth flow of goods to the final users. Such clusters also enable producers and the big retail chains to gain maximum cost savings. SMEs which operate in clusters can then benefit from up-to-date business information from Bank Indonesia's on-line information service center
The clusters of SMEs will make it much easier for commercial banks to assess credit risks of small enterprises. Most major banks consider lending to SMEs much costlier and riskier than to big borrowers as they simply don't have enough experience or adequate expertise to assess their commercial viability.
An acute lack of credit financing, along with arduous regulatory requirements and licensing red tape, has always been one of the main barriers to the growth of small enterprises. They simply don't have enough assets to be used as securities for their debts.
The development of SMEs could further be accelerated if the central bank also cooperates with the association of secondary banks in the development of industrial clusters. These smaller banks have built up a body of experience and a broad data base on the profiles and credit risks of SMEs, and developed a system and mechanisms that enable them to serve SME borrowers through fast and convenient procedures.
Even major banks already long experienced in lending to SMEs, such as state-owned Bank Rakyat Indonesia, have found that quite a number of SMEs are entirely commercially viable. Lending to SMEs is also highly profitable, as the experiences of secondary credit financing firms and various private organizations managing rural credit schemes have proven.
The strongest message from the successes in lending to SMEs is that creditors should know their SME customers, especially the owners, and keep apprised of their developments and needs.
It is impossible to overemphasize the important role of SMEs in the country's economy. According to the Central Statistics Agency, SMEs account for almost 60 percent of gross domestic product.
Even in developed countries such as the United States and in emerging markets like South Korea and Taiwan, SMEs contribute greatly to generating jobs and are well known for their flexibility, creativity and high rate of survivability in difficult economic conditions like the 1997-1998 economic crisis.
Though seemingly intangible, the impact of robustly growing SMEs is also quite positive on national pride. Because as most big companies become increasingly globalized in operations and ownership, SMEs sometimes are the only truly national assets and the economic and social fabric of a nation.
