The Effect of Partnership on Access to External Finance: The Case of Micro Enterprises in Indonesia

Using unique data on the amount of money held by the Indonesian three largest banks in each district and firm-level data of Indonesian micro enterprises in 2013 and 2014, we examine effects of four types of partnership with a private company, NPO/NGO, bank, and the government on access to finance of micro enterprises. Previous studies consider social capital as unofficial connection with other organizations. However, we newly examine an effect of official contracts as partnership and contribute to the literature by investigating many types of partnerships which have never considered and considering effect of supplier's side by utilizing data on bank's money in our estimation. It is found that firms with partnership with NPO/NGO are more likely to obtain loaned money as well as that with a bank. However, indicators of firms' performance and ability, such as ROA, entrepreneurs' education, and firms' size are statistically insignificant for loan approval. In addition, the amount of banks' money does not have statistically significant effect on loan approval. Therefore, it becomes explicit that Indonesian banks cannot effectively allocate loans to private sector because of corruption between specific private companies and public institutions and a simple policy like increasing money holdings of banks has no effect on distributing corporate loans to enterprises.