Financing needs of micro-enterprises along their evolution

• Date: 09 April 2020
• Pages: 263-284
• DOI: https://doi.org/10.1108/IJOES-05-2018-0071
• Published date: 09 April 2020
• Author: Ruslan Prijadi,Permata Wulandari,Putri Mega Desiana,Fajar Ayu Pinagara,Maya Novita
• Subject Matter: Economics,Social economics

Financing needs of micro-

enterprises along their evolution

Ruslan Prijadi

Department of Management, Universitas Indonesia, Depok, Indonesia

Permata Wulandari

Department of Management, Universitas Indonesia, Depok, Indonesia and

Institute of Islamic Banking and Finance, International Islamic University

Malaysia, Kuala Lumpur, Malaysia, and

Putri Mega Desiana,Fajar Ayu Pinagara and Maya Novita

Department of Management, Universitas Indonesia, Depok, Indonesia

Abstract

Purpose –The purpose of this paper aims to investigate micro enterprises financing in Indonesia and

examines how this financing differs, depending on the enterprise’s development stage. This research also

identifiessome structural problems related to micro-financingand provides workable solutions.

Design/methodology/approach –This research uses the entrepreneurial networkmodel of Schutjens

and Stam (2003) to examine how Indonesian micro and small enterprises (MSEs) evolve even before they

become regular small businesses. Contentanalysis is used on 10 micro-enterprises from Jakarta, the capital

city of Indonesiaand its surroundings. Financing issues at each stage of enterprisedevelopment are identified

and deeply examined.

Findings –This research not only confirms the significant financingproblems micro-enterprises face but

also clarifiesthat these problems are unique to each stage ofthe MSEs’development. One insight is that most

micro-enterprisesdo not use funding from formal institutions. That is, business owners rely moreon funding

from non-formal institutions. This is because these enterprises’managers generally cannot prepare loans

application and/or they are lackof knowledge/training on financing matters. They hesitate to borrow from

formal financial institutions, as the rates are high but the processing time is longer than those of the loan

sharks.

Originality/value –This research contributes to the field of entrepreneurial finance by identifying the

structural problems inherent in micro-finance and providing workable solutions for overcoming these

problems.

Keyword Evolution, financing, micro-enterprises, start-up, ongoing, content analysis

Paper type Research paper

1. Introduction

Micro and small enterprises (MSEs) comprise the majority of companies in Indonesia and,

thus, play an important role in the country’s economic development. They contribute to the

national economy through the production and distribution of goods and services and by

providing employment opportunities for a large portion of the population. MSEs are also

important because it is within these enterprises where the entrepreneurial skills and

perseverance requiredto run a small independent business are nurtured and developed.

A small enterprise is a businessentity with a net worth of between Rp. 50 and Rp. 500 m

(in 2016, US$1 = Rp. 13,500),excluding the value of land and buildings. A micro-enterpriseis

an enterprise with a maximum net worth of Rp. 50m or a maximum income of Rp. 300m

Financing

needs of micro-

enterprises

263

Received5 May 2018

Revised17 May 2018

13July 2018

2November 2018

5November 2018

13January 2019

3April 2019

28July 2019

24November 2019

Accepted27 January 2020

InternationalJournal of Ethics and

Systems

Vol.36 No. 2, 2020

pp. 263-284

© Emerald Publishing Limited

2514-9369

DOI 10.1108/IJOES-05-2018-0071

The current issue and full text archive of this journal is available on Emerald Insight at:

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per year. In 2016, these enterprises provided53.4 million jobs or 44.3 per cent of Indonesia’s

total workforce, generated for more than Rp. 850bn in total added value and contributedto

60.34 per cent of the country’s gross domesticproduct.

Owners/managers of MSEs oftenlack fundamental business skills or knowledge related

to financial reporting and marketing. This makes it difficult for them to access financing

from banks or larger business-development networks (Denis, 2004;Allen et al.,2016). As a

result, most MSEs remain small because their owners/managers cannot turn their know-

how into a commercial success (Coad and Tamvada, 2012;Wangmo, 2015). The human

factors also play important roles in MSEs growth, which are not limited to business and

financial aspects (Clark and Douglas, 2014). Although MSEs have certain shortcomings,

challenges related to financing often originate within external entities, such as banks and

financial and non-financial services or local governments and their regulations.

Governments should be aware that their primary role is to remove barriers to MSEs’

establishment and growth. Implementing policiesthat facilitate MSEs’access to affordable

credit will also improve the service sector and encourage economic growth in Indonesia

(Aduda and Kalunda, 2012).

This research presumes that MSEs evolve throughout its development. It identifies

and examines the financing challenges these entities face at each stage of development

and how these challenges differ from one stage to another. To connect these financing

issues within the concept of business development, this research follows the model used

by Schutjens and Stam (2003). In the model, the enterprise undergoes three stages of

development in terms of the evolution of itsnetworksasfollows:theconceptstageof

entrepreneurship, start-up and ongoing business operations. Figure 1 illustrates Butler

and Hansen’s application of the network model used in Schutjens and Stam (2003),which

is generally applied to examinations of newer companies.

Figure 1 shows each stage of MSES development, beginning with the initial

entrepreneurial stage,where the business opportunity is identified. Here, the entrepreneur is

focussed on building personal networks to help them develop their idea for a new business

(Stinchcombe, 1965; Aldrich, 1999).Butler and Hansen (1991) state that social networking is

very important in the entrepreneurial stage.This is because, in addition to building private

networks, extra effort is neededto mobilise existing resources (including social resources)to

promote the emerging business(Starr and MacMillan, 1990, in Johannisson, 1996).

Social networking involves cooperation, where members voluntarily work together to

achieve a common goal (Fukuyama, 1995). Penrose (1959) and Kirzner (1979) argue that

social networks increase opportunities because they allow entrepreneurs to identify

Figure 1.

Model of the

evolutionof the

entrepreneurial

network

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