Collateral imposition and financial inclusion: a case study among Islamic banks and MSMEs in Indonesia

What is it about?

The use of collateral is a customary feature of a credit contract between banks and their customers. The provision of collateral was aimed at reducing the presence of asymmetric information in the credit relationship since the problem of asymmetric information may lead to the credit rationing of the firms. However, despite the essential position of collateral to access external financing, many Micro, Small, and Medium-sized Enterprises (MSMEs) in Indonesia report significant financing constraints due to the imposition of collateral since MSME has limited or no asset to be pledged to obtain financing services, either from the bank or other financial institutions, which in turn exacerbate the problem of financial exclusion in the country. This paper aims to identify and compare the collateral imposition practices among Islamic banks in Indonesia to serve MSME clients and to explore the experiences and perceptions of MSME entrepreneurs pertaining to collateralisation in MSME financing.

Featured Image