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The Role Of Evidence In Strengthening Your Credit Claim: Boston Attorney’s Advice

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Improving access to and performance of formal credit through financial literacy and credit terms in micro, small and medium-sized enterprises

Maria Widyastuti Maria Widyastuti Scilit Preprints.org Google Scholar * , Deograsias Yoseph Yustinianus Ferdinand Deograsias Yoseph Yustinianus Ferdinand Scilit Preprints.org Google Scholar and Yustinus Budi Hermanto Yustinus Budi Hermanto Scilit Preprints.org Google Scholar

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Received: 11 November 2022 / Revised: 8 January 2023 / Accepted: 12 January 2023 / Published: 16 January 2023

The purpose of this study is to examine financial literacy and credit conditions by determining formal access to credit to determine SME performance. This research involves an associative type of research accompanied by hypothesis testing. This study was conducted on MSMEs consisting of 324 creative industry players in four cities in East Java (Mojokerto, Pasuruan, Gresik and Sidoarjo) with a sample size of 100 participants who had access to formal credit using a stratified random data sampling method. collection. The results of the Smart PLS analysis show that financial literacy and credit conditions directly and significantly affect access to formal credit and MSME performance; availability of formal credit has a direct and significant impact on MSME activity. Similarly, financial literacy and credit conditions indirectly affect the activity of SMEs. These results imply that financial literacy and credit conditions play a strategic role in explaining why access to formal credit increases and attracts SMEs to strengthen capital to improve performance.

Micro, small and medium-sized enterprises (MSMEs) are important assets for Indonesia’s economic sustainability. The industry is essential to promote economic growth and create new jobs for Indonesians (Susan 2020). The contribution of SMEs is quite high, especially as providers of employment and regional income growth (Irman et al. 2021). The success of SMEs in Indonesia is reflected in their performance. Funding from financial institutions is essential to improve SME performance and government support for access to additional capital (Sriary and Nyoman 2020). The role of financial institutions in economic growth and development of economies is widely recognized and cannot be overstated. Financial institutions make a significant contribution to employment and poverty reduction, creating jobs and economic growth (Baidoo et al. 2020). Credit to micro, small and medium enterprises (MSMEs) in East Java increased by 3.95 percent in the second quarter of 2021, based on Bank Indonesia’s (BI) East Java Provincial Economic Report (LPP). The positive growth trend of SME lending was supported by the increase in investigative loans and working capital loans to SMEs.

The Covid-19 vaccination that has been taking place since the beginning of this year has also boosted the perception of business players, which affects the wider opening of productive sectors of the economy with health protocols in the second quarter of 2021, including MSMEs. in the industry. According to him, the share of MSME loans in total loans in East Java also continued to increase, increasing by 29.42 percent in the second quarter. Meanwhile, in the first quarter, the increase was 29.03 percent. To facilitate SME financing, the government is expanding SME financing opportunities in Indonesia through the People’s Business Credit program. People’s Business Credit aims to facilitate capital for MSME members, but it is yet to be fully realized. Until November 2021, KUR distribution was only Rp. 34.1 trillion, and Bank Jatim is targeting a 5-6 percent increase; however, not all SMEs noticed KUR distribution. The lack of credit experienced by small businesses was due to limited access to credit. According to Nkundabanyanga et al. (2014), one thing that affects the availability of credit for small businesses is the credit terms offered by formal credit providers. The terms of the loan include the loan repayment term, guarantee and interest rate. Small businesses hesitate to access credit if they do not understand why a guarantee should be a condition of the loan. Meanwhile, formal credit providers prefer borrowers who can provide guarantees.

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Technology is developing rapidly along with the industry 4.0 trend. Current technologies have successfully influenced people’s lifestyles, one of which is the transaction payment mechanism (Foster et al. 2022). Credit markets play a vital role in financial institutions. In developing countries, especially emerging economies undergoing industry restructuring, it is important to effectively identify the reasons for credit constraints to facilitate economic transactions (Tang and Guo 2017). As the economy continues to develop, the need for loans increases. Consequently, credit institutions have developed significantly in recent years (Tang and Guo 2017).

Defining the problem of access to finance poses a significant problem because financial services are very heterogeneous, including all types of savings, payments, insurance and credit, each with unique costs, risks and production functions (Ibenta 2021). The SME banking model adopted by banks in developing countries is different from that of developed countries. Banks in emerging market economies mainly use these two types of SME banking models: “credit-based offering with low-cost physical distribution” and “payment-based offering with direct channel distribution” because they have to maintain a trade-off between operating costs. and profit (Maiti 2018). A common feature of rural credit markets in developing countries is the coexistence of formal and informal credit (Tang and Guo 2017).

(Ahmad and Shah 2022) defines financial literacy as “a person’s ability to understand and apply financial concepts”. Financial literacy refers to the skills and knowledge that enable individuals to make informed and effective decisions using all their financial resources (Chileshe 2019). Financial literacy is the level of personal experience to understand the basics of a financial subject (Nathan et al. 2022). The financial literacy of the entrepreneur is crucial in the relationship between the lender and the borrower (Burchi et al. 2021). The results of the 2019 Financial Services Authority (OJK) survey showed that the level of financial literacy in Indonesia remained low at only 38 percent. Low levels of financial literacy lead to many challenges, especially in debt management, savings and credit, and planning for the future. SMEs need an understanding of financial literacy to avoid financial risk (Irman et al. 2021). Several researchers have studied access to credit and its relationship with financial literacy (Nkundabanyanga et al. 2014). In addition, access to credit has also been found to be positively correlated with the educational status of the household head. Inevitably, obtaining credit from any legitimate financial institution requires paperwork and submission of documents, which can discourage less educated farmers from approaching banks (Kumar et al. 2021).

On the other hand, in the previous study, it was found that the factors that significantly influence credit demand in general are education, group membership and household size; Formal, semi-formal and informal sources of credit are education and information about credit sources (Silong and Gadanakis 2020). Financial regulators are forced to improve the efficiency and quality of financial services in dealing with educated people. This is because financially literate investors are pushing financial institutions to offer more appropriate prices and more transparent services (Chileshe 2019). A previous study found that a low level of literacy makes financing of SMEs difficult for the SME financial business (Maiti 2018).

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This article is closely related to the literature on the determinants of access to formal credit for SMEs. Previous research has focused on the importance of financial literacy on SME performance (Li and Qian 2020). Our paper extends this literature by providing evidence that financial literacy and credit conditions affect access to formal credit and performance of MSMEs in Indonesia. This paper also draws on research, providing evidence to investigate how access to formal credit impacts SME performance.

As SME access to credit increases, credit not only helps to stabilize the economy, but also benefits SMEs as a safe and sustainable source of credit.

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