The Signalling Trap: How Crisis Lending Reinforced Informal MSME Exclusion in Indonesia’s Financial System

This study examines access to Indonesia’s subsidised credit programme, Kredit Usaha Rakyat (KUR), during the COVID-19 pandemic using signalling theory. Based on logit regression of survey data from 2361 micro and small enterprises (MSEs), the study analyses how borrower characteristics were associated with loan approval across the Super Micro, Micro, and Small KUR schemes. The results show that prior credit history was the strongest observed signal of creditworthiness during the crisis. Previous receipt of KUR was associated with a 5 percentage-point higher probability of loan approval. Scheme-level estimations indicate heterogeneous signalling mechanisms. Prior credit history was positively associated with access to Micro KUR (15 p.p) and negatively associated with access to KUR Super Mikro that targeted non-bankable SMEs, whereas access to Small KUR was more strongly associated with collateral-based signals, particularly land ownership. The findings further indicate that borrowers lacking prior credit experience or formal assets were less likely to obtain KUR during the pandemic, suggesting that crisis-period lending created a “signaling trap” that stabilised liquidity while perpetuating exclusion. The study recommends reforms to KUR that incorporate hybrid risk assessment mechanisms, capacity-building, decentralised guarantees, and pathways to formalisation.