Microfinance Innovation Center For Resources and Alternatives

Considering the profitability and social contribution of SMEs, food crops, horticulture and value-added agricultural products are three potential subsectors. SMEs in these three sub-sectors experience steady growth in recent years. Demand in domestic as well as international market is high and supply is still below the demand.

Among success factors of SMEs in agriculture sectors is the abundance of raw materials. Natural resources of Indonesia are the main support of the sector. The management of the business is usually strong family-oriented with family members hold managerial role and practice close control over the business. Basic knowledge on business and products are learnt informally as family inheritance. SOP and quality control is rarely formalized but are closely supervised by owners.

Agribusiness is demand driven, with high potential in domestic and international market. SMEs in agriculture sector are characterized by low cost production because of the low price of raw materials, labor and transportation. Waste products are usually biodegradable, environmental friendly, recyclable, and potential for profit. Most SMEs surveyed are labor intensive with high percentage of women workers involvement.

SMEs in agriculture sector face common challenges. Quality control is based on owner’s knowledge on product and prone to inconsistency of quality. Most SMEs in agribusiness started as family-owned micro businesses, and are self-financing. The majority of SMEs do not have legal status. Raw materials often sensitive to climate and highly dependent on traditional method of production.

Although there is a high demand of SME agribusiness products, SMEs are often do not have access to the market due to limited linkages and access to market information. Marketing strategy is often overlooked and promotion is mainly through word-of-mouth.

Lack of working capital is among major barrier to business expansion. A significant number of SME are not accessing financing support from financial institutions. High interest rates, complicated procedures, irrelevant loan size and unavailability of collaterals are main barriers to access. Business plan are seldom documented. Most SMEs are weak in the areas of quality control, product development, marketing strategy, business planning and information management.

Financing to agriculture sector is highly recommended. Food crop, horticulture and value-added are high potentials subsectors with considerably high profit and social impact. Financial support to SMEs needs to be tailored to the need of business players. It is to consider tenure that match the production cycle, reasonable interest rates, simple procedures, relevant loan size and collaterals. It is also recommended to consider the financing of its supply chain and considering crop insurance. Financing to SMEs in agriculture needs to focus not only on the efficiency of production but also on the improvement of quality of product.

The involvement of local MFIs as channeling agent for financing is recommended. MFIs are closest financial service providers to business players in agriculture sectors which are mainly in rural areas. MFIs commonly know their clients. This lessens the risk of loan services. MFIs also have the local knowledge. They know specific need and demand of their clients at their locality. MFIs usually have the retail capacity. They are likely to be able to meet the demand of their clients at the scope needed and be sustainable.

Financing support for SMES in agriculture sectors need to be matched with technical assistance. Key areas that need supports are in quality control, product development and diversification, business planning that include marketing strategy, information system management and in licensing process.

In providing support of technical assistance it is important to involve local government agencies (Dinas Pertanian, Dinas Koperasi dan UKM, dan Dinas Perindustrian). Several agencies providing business development support are also available in locality. Educational institutions such as universities are also rich in human resources supporting SMEs in agriculture.