As one of the world’s largest archipelagos, Indonesia supplies around 10% of global marine commodities. Fish and seafood produced by MSMEs make up for 54% of Indonesia’s protein consumption as well as 2.6% of the country’s total GDP. [1]  Indonesia’s blue economy also plays a crucial role in generating long-term climate benefits and other revenue sources such as tourism. As such, there are significant social, economic, and environmental benefits to be derived from further investing in Indonesia’s blue economy, with a particular focus on MSMEs.

CPI’s Indonesia Blue Finance Landscape is the first study to capture the landscape of blue finance in Indonesia and further examine the extent of available financing access for MSMEs as a crucial component of Indonesia’s blue economy. We tracked over 550 financial flows directed towards blue finance in the country between 2015 and 2019, from public sources such as multilateral development banks, government budgets, and state-owned enterprises, as well as from private sources such as commercial banks, foundations, and corporate actors. 

KEY FINDINGS

Banks are still major players in blue financing…: While public international finance underpins the government blue economy programs, commercial banks dominate private finance. According to CPI’s finance tracking, commercial banks contribute about 92-93% annually (or over USD 327 million) to blue finance in Indonesia.

…but MSMEs still face obstacles in accessing finance from banks: Indonesia records a higher volume of loans for MSMEs compared to other Southeast Asia countries and has one of the lowest non-performing loan (NPL) rates. However, the overall MSME lending rate is low. It is still common for commercial banks in Indonesia to require physical collateral for loans, which poses a barrier for MSMEs as many of them do not own physical assets. This also explains why Indonesia has a very low NPL rate since MSMEs that cannot afford collateral are unlikely to access loans in the first place. Considering the central role MSMEs play in Indonesia’s blue economy, expanding MSME lending is both a major challenge and a significant opportunity.

Meanwhile, the size of blue MSMEs is still relatively small and concentrated: Historically, the wholesale and retail sectors still dominate the MSME loans portfolio in Indonesia, while blue sectors such as fisheries are very small in proportion. Furthermore, most MSME loans are concentrated in the most developed Java Island, although the highest growth is happening in the less developed Lesser Sunda Islands.

RECOMMENDATIONS

Based on these findings, the report proposes three main policy recommendations as follow:

1. Focus on reducing the barriers to entry as the first step to mobilizing blue finance for MSMEs in Indonesia: Many MSMEs lack physical collateral, appropriate credit history, and access to bank credits, especially in some of the outermost locations. The government could tackle this problem by pursuing potential solutions such as enhancing credit and risk assessment mechanisms for blue MSMEs, increasing the coverage of MSMEs financing, and providing customized assistance for blue MSMEs in accessing loans.

2. Invest public finance in building human capacity and increasing productivity: Most blue MSMEs still face underdeveloped business acumen, lacking skills to deliver financial strategies that will sustain their businesses. Policies could provide the necessary technical assistance, partnerships, and advisory services to help structure businesses and access financing.

3. Spur private investments in the blue economy through direct public finance investment in infrastructure, incentive mechanisms, and market access services: Several potential solutions include risk-sharing financial instrument / investment platforms, supply chain guarantees, concessional loans, and comprehensive natural disaster fisheries insurance.

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[1] https://www.bkpm.go.id/en/publication/detail/news/blue-economy-holds-the-key-to-indonesias-sustainable-prosperity