In 2023, MSMEs accounted for 99 percent of all business units or approximately 65 million entrepreneurs.
MSMEs contributed 61 percent to the Gross Domestic Product (GDP), equivalent to 9,580 trillion rupiah, and absorbed 117 million workers or 97 percent of the total workforce.
Despite being the leading sector of the national economy, MSMEs face challenges in innovation, financial access, and technology adoption.
MSME players encounter several challenges in marketing and business development, including product or service failures, business credit risk, competition, and market changes.
Dr. Boyke Rudy Purnomo, a lecturer at the Department of Management, UGM Faculty of Economics and Business (FEB UGM), stated that a mismatch with consumer needs often causes product or service failure in MSMEs.
The quality of MSME entrepreneurs is also considered insufficient.
“There is a sort of inability of products to reach their target market. In the MSME sector, this risk can arise from a lack of market research, limited capital, inadequate innovation, or competition challenges within the business itself,” he said at Multimedia Room 1, Tuesday (Nov. 12) during the UMKM CLASS SERIES #11 discussion on Managing Service Failure, Business Credit Risk, and Competition in MSMEs.
In his presentation, Dr. Purnomo quoted a report from the International Finance Corporation (IFC), which noted that around 60 MSME participants experienced issues related to product or service failure over the past three years.
He said failures often occur in the digital products and e-commerce sector due to a lack of innovation and an inability to adapt to changes in consumer behavior.
Therefore, MSME players must recognize various signals of potential failure. Increased complaints and declining revenue are emerging signals of failure.
“But failure can also be caused by declining market potential, a lack of innovation and differentiation, negative cash flow, loss of focus, and even insufficiently capable human resources,” he explained.
Lutfi Anggriawan, Branch Office Head of Bank Rakyat Indonesia, Yogyakarta Cik Ditiro, who spoke about Business Credit Risk and How to Overcome It, said that business credit risk arises from the potential for default or the inability of entrepreneurs to meet debt repayment obligations to lenders, such as banks or other financial institutions.
According to Anggriawan, credit risk can affect business liquidity and even lead to bankruptcy if not appropriately managed.
Several causes of business credit risk for MSMEs include weak financial management due to the lack of an adequate accounting or financial management system, making it difficult to monitor cash flow and debt repayment.
Other causes include unstable income, lack of understanding of credit, and external factors such as economic slowdowns, inflation, or rising interest rates, which increase credit risk for MSMEs. Poorly managed credit risk will hinder business growth.
“According to a Financial Services Authority (OJK) report, many MSMEs face non-performing loans, making it difficult to access new loans to expand their businesses. Bankruptcy or business closure occurs due to the inability to repay installments,” he explained.
According to Bank Indonesia data, Anggriawan said that non-performing loans in the MSME sector reached 4.29 percent of total loans in 2022. There was a decline in financial institutions’ confidence, so only about 20 percent of MSMEs have access to formal credit.
This business credit risk can be addressed with several measures, including better financial management and diversifying income sources by expanding products or services, which can reduce reliance on a single income source.
“It is also important to access financial advisory services, improve financial literacy to understand credit, interest rate risks, and more flexible payment terms, and utilize technology, such as digital platforms that can help MSMEs manage credit,” he added.
Dr. Ina Melati, a lecturer at FEB UGM, mentioned that around 60 percent of MSMEs in developing countries, including Indonesia, experience difficulties obtaining formal credit, which is necessary for investing in business innovation through digital means.
“In facing market changes, MSMEs need to enhance their competitiveness through innovation, digitalization, and collaboration with various parties, both government and private, to overcome challenges and seize available opportunities,” she said.
Director of Community Service at UGM, Dr. Rustamaji, said that discussions on MSME development are expected to increase MSME entrepreneurs’ understanding and help identify the root causes and impacts of product or service failure, business credit risk, market changes, and competition.
“We aim to equip MSME entrepreneurs with the skills to identify, analyze, and manage business risks effectively, thus minimizing potential losses,” he said.
Author: Agung Nugroho
Post-editor: Afifudin Baliya