Mitigating asymmetric information to enhance MSME Islamic financial inclusion by Islamic banks in Indonesia

What is it about?

The presence of asymmetric information in the banking system brings on critical challenges for the banking industry to serve the MSME segment due to the higher perceived risk. This issue becomes the primary factor of credit rationing and increased transaction costs, and further exacerbates the problem of financial exclusion for the MSME sector. By conducting multiple case studies on Islamic banks in Indonesia, this study found several gaps in credit assessment procedures performed by Islamic banks for their MSME clients, which in turn decreased the effectiveness and efficiency of the banks’ evaluation procedures for the MSME. This study also proposes several recommendations to lessen and remedy these credit assessment gaps in order to enhance the Islamic banks’ effectiveness in serving the MSME industry and augment the MSME Islamic financial inclusion.

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