A study by the Center for Entrepreneurship, Innovation, and MSME Studies at the Faculty of Economics and Business, Universitas Gadjah Mada (FEB UGM), in collaboration with Bank Indonesia, revealed that the majority of Micro, Small, and Medium Enterprises (MSMEs) in Indonesia have yet to adopt environmentally friendly business practices.
Despite contributing to more than half of Indonesia’s economy, MSME still faces significant challenges in transitioning to sustainable and green practices. Beyond regulatory barriers, most MSMEs face challenges, including limited green financing infrastructure, high investment costs, and a lack of incentives.
Dr. Widya Paramita, a researcher at the Center for Entrepreneurship, Innovation, and MSME Studies at FEB UGM, reported that 87.81 percent of MSMEs in Indonesia have not adopted green or environmentally friendly practices, while only 12.19 percent have partially implemented them.
“Although regulations for green financing already exist, to date, there is no financial product specifically targeting green MSME that has been effectively implemented in Indonesia,” said Dr. Paramita at UGM Campus on Wednesday (Oct. 1).
Several key regulations govern green financing in Indonesia, including Law No. 6/2023 Article 109 on corporate commitment to sustainable development through Corporate Social Responsibility (CSR), Law No. 4/2023 on the Development and Strengthening of the Financial Sector (P2SK Law) Articles 35A and 35B, and Presidential Regulation No. 98/2021 on the Implementation of Carbon Economic Value for Nationally Determined Contribution targets and greenhouse gas emissions control in national development.
Other relevant regulations include Presidential Regulation No. 59/2017 on the Implementation of Sustainable Development Goals and OJK Regulation No. 51/POJK.03/2017 on Sustainable Finance for Financial Institutions, Issuers, and Public Companies.
However, despite this regulatory framework, both financial and non-financial institutions have yet to extend green financing to MSMEs. According to Dr. Paramita, ambiguities and challenges remain in applying these regulations.
Among the obstacles faced are the complexity of green financing requirements and criteria for “green MSME,” limited financing infrastructure, lack of incentives, difficulties in attracting investors, and gaps in risk perception between MSMEs and financial institutions.
Further challenges include limited knowledge among green financing providers and low awareness, knowledge, and capacity of MSMEs themselves to adopt sustainable practices, as well as difficulties in accessing green certification. On the demand side, financing needs across different categories of MSME remain relatively similar.
“These include acquiring equipment and technology, accessing markets interested in green products, expanding market share, developing human resource capacity, and marketing green business practices. The differences lie mainly in certification needs for eco-entrepreneur MSME and in sourcing raw materials and gaining access to domestic and international markets for eco-innovator MSME,” she explained.
Dr. Paramita acknowledged that adopting green practices requires significant capital investment, with benefits not immediately realized due to relatively low market demand for green products. Meanwhile, MSMEs often have limited capital and require short-term returns to sustain operations.
Therefore, financial incentives are crucial to accelerate the adoption of green practices. Lower interest rates compared to conventional loans and access to schemes such as Kredit Usaha Rakyat (KUR) are among the most anticipated forms of support.
In addition to credit schemes, non-credit initiatives supporting MSME green practices are available in the form of grants and mentoring programs. These are often provided through corporate CSR initiatives, such as youth and women entrepreneurship programs that offer grants and mentoring through regular competitions.
Examples include the Hyundai Startup Challenge and BNI’s BUMI program, which provide funding and guidance to MSMEs that adopt sustainable practices.
“These non-credit initiatives are very valuable. Besides financial support, they often come with mentoring, which is crucial in helping MSMEs transition to green practices. Such approaches can fill the current gap in green financing products and serve as alternative strategies for promoting sustainable MSME business models,” Dr. Paramita added.
She emphasized the need for strategic steps to encourage the participation of MSMEs in green business activities. MSME requires comprehensive assistance in production, finance, and marketing. In the short term, mentoring programs should target MSMEs that have yet to adopt green practices to accelerate transformation.
Priority sectors for green financing include manufacturing and trade, while greater support is needed to help MSMEs secure green certifications.
Stronger collaboration between the government, financial institutions, and academia is also essential.
“This synergy is needed to ensure MSME receives proper assistance in accessing green financing. Green financing schemes must also be expanded and tailored to MSME needs,” she said.
To strengthen MSMEs’ participation in the green financing market, Dr. Paramita emphasized the importance of expanding awareness campaigns, providing mentoring, offering subsidies, and implementing incentives. She also highlighted the need to enhance the role of supporting institutions such as aggregators, accelerators, and incubators by integrating their programs with green financing schemes.
“We also recommend that Bank Indonesia strengthen its role in supporting MSMEs so that their readiness to enter the green financing market can be further optimized,” she concluded.
Findings from this study were presented at the National Seminar on Green Finance, part of the Indonesia Creative Works (KKI) 2025 series, organized by Bank Indonesia at the Jakarta Convention Center on Friday, August 8, 2025.
The seminar, themed “Strengthening Green Financing Synergy to Support the Transition to a Sustainable Economy,” featured several speakers, including Bank Indonesia’s Senior Deputy Governor, Destry Damayanti; Head of the Inclusive and Green Economy Department, Nita Anastuti; Deputy President Director of BNI, Alexandra Askandar; and Head of GEKH, Kurniawan Agung W.
FEB UGM was represented by Dr. Paramita, who delivered the study’s findings on the green financing ecosystem and recommendations to strengthen green finance policies. The research was conducted in 2024, involving 631 MSMEs across the agriculture, trade, and manufacturing sectors in Indonesia.
Reporter: FEB UGM/Kurnia Ekaptiningrum
Author: Agung Nugroho
Post-editor: Rajendra Arya
Photographs: Zero Waste Indonesia Alliance & FEB UGM