The Paradox of Stability: Banking Sector Resilience, Credit Allocation and Msme Finance in Indonesia

Indonesia’s banking system remains sound and stable despite the challenging recent macro-financial environment. Yet financial deepening remains shallow and uneven. The private credit-to-GDP ratio is low by regional standards, bank balance sheets continue to be tilted towards low-risk assets, and formal credit access is limited for many firms, especially micro, small and medium enterprises (MSMEs). We argue that Indonesia’s main financial deepening constraint is not aggregate banking capacity, but credit allocation. MSMEs illustrate this problem clearly. They dominate in terms of firm numbers and the employment they generate, but they continue to face barriers related to informality, weak financial records, limited collateral and high screening costs. The People’s Business Credit program has expanded subsidised lending and improved access for many micro and small borrowers, but repeat borrowing is still common, graduation into commercial credit is limited, and MSME lending remains concentrated in short-term working capital and trade-related activities. This paper argues that Indonesia needs to move beyond headline credit expansion towards better credit allocation, stronger borrower information, improved collateral infrastructure and clearer graduation pathways from subsidised to commercial finance. In a more challenging macro-financial environment, improving credit allocation is important not only for financial inclusion but also for supporting investment, productivity and banking sector resilience.