Indonesian Banks Exercise Caution in UMKM Credit Extension Amid Economic Challenges

Economic Pressure and Credit Growth

Indonesian banks are adopting a more cautious approach to extending credit to Micro, Small, and Medium Enterprises (UMKM) due to heightened economic pressure and default risks. The growth of UMKM credit has significantly slowed down in 2025, culminating in a 0.7% year-on-year contraction in November 2025 ¹

Factors Contributing to Cautious Lending

Ganda Raharja Rusli, Director of Risk, Compliance, and Law at Allo Bank, highlighted that the sluggish UMKM credit growth reflects the stagnant economic condition of UMKM, largely due to decreased consumer purchasing power and a wait-and-see approach among businesses. This economic environment has prompted financial institutions to be more selective in their lending practices to mitigate potential defaults ²

Regulatory Support and Initiatives

In response to these challenges, Bank Indonesia (BI) and the Financial Services Authority (OJK) have introduced measures to bolster UMKM financing. These include the establishment of a special UMKM department within OJK and the introduction of Macroprudential Liquidity Incentives (KLM). Such initiatives aim to encourage banks to increase their lending to the UMKM sector ¹

Industry Perspectives

Kemas Erwan Husainy, Director of Retail Banking at Bank Syariah Indonesia (BSI), welcomed the regulatory support, emphasizing the need for comprehensive government backing that goes beyond just access to capital. He stressed the importance of data integration and continuous assistance for UMKM to ensure healthy growth without escalating risks.

Conclusion

The cautious approach by Indonesian banks towards UMKM credit extension reflects the challenging economic landscape. However, with regulatory support and industry collaboration, there is potential for improvement in UMKM financing and overall economic growth.