Corporate governance, credit risk, and financial literacy for Small Medium Enterprise in Indonesia
Abstract
The problem of SMEs in Indonesia as a “high-risk borrower” that has not been resolved until today. The purposes of this study was to analyze the financial literacy as mediating between corporate governance and SMEs’ credit risk in Indonesia. This sample method used purposive sampling: 1273 units of Trade and Service SMEs fostered by Central Java that received credit in 2018. Twenty percent of the totals were taken, so the total was 255 samples. The data collection technique used questionnaires and interviews. The number of questionnaires distributed were 255 with a response rate of 95%, so resulting 242 respondents. Data analysis used descriptive and Regression Method. The corporate governance shown by responsibility, independence, and fairness did not affect SMEs’ credit risk. In other words, transparency and accountability is effective in reducing SMEs’ credit risk. Also, financial literacy can strengthen the influence of transparency, accountability, and responsibility in reducing credit risk for SMEs in Indonesia.
Keyword : corporate governance, financial literacy, credit risk, Small Medium Enterprises
How to Cite
Mutamimah, M., Tholib, M., & Robiyanto, R. (2021). Corporate governance, credit risk, and financial literacy for Small Medium Enterprise in Indonesia. Business: Theory and Practice, 22(2), 406-413. https://doi.org/10.3846/btp.2021.13063
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
Abor, J., & Adjasi, C. K. D. (2007). Corporate governance and the Small and Medium Enterprises Sector: Theory and implications. Corporate Governance: The International Journal of Business in Society, 7(2), 111–122. https://doi.org/10.1108/14720700710739769
Adomako, S., Danso, A., & Damoah, J. O. (2016). The moderating influence of financial literacy on the relationship between access to finance and firm growth in Ghana. Venture Capital, 18(1), 43–61. https://doi.org/10.1080/13691066.2015.1079952
Agyei, S. K. (2018). Culture, financial literacy, and SME performance in Ghana. Cogent Economics and Finance, 6(1). https://doi.org/10.1080/23322039.2018.1463813
Andrews, A., & Gikunoo, E. (2011). Small scale foundries in Ghana: the challenges. Leonardo Electronic Journal of Practices and Technologies, 10(19), 1–12.
Ansong, A. (2013). Risk management as a conduit of effective corporate governance and financial performance of Small and Medium scale enterprises. Developing Country Studies, 3(8), 159–164.
Belas, J., Smrcka, L., Gavurova, B., & Dvorsky, J. (2018). The impact of social and economic factors in the credit risk management of SME. Technological and Economic Development of Economy, 24(3), 1215–1230. https://doi.org/10.3846/tede.2018.1968
Ciftci, I., Tatoglu, E., Wood, G., Demirbag, M., & Zaim, S. (2019). Corporate governance and firm performance in emerging markets: evidence from Turkey. International Business Review, 28(1), 90–103. https://doi.org/10.1016/j.ibusrev.2018.08.004
Dao, B. T., & Pham, H. (2015). Corporate governance and bank credit risk: default probability, distance to default. SSRN Electronic Journal, 1–22. https://doi.org/10.2139/ssrn.2708994
Dzigba, D. (2015). Corporate governance practice among Small and Medium Scale Enterprises (SMEs) in Ghana; Impact on access to credit [Thesis, Blekinge Tekniska Hogskola].
Eniola, A. A., & Entebang, H. (2015). Financial literacy and SME firm performance. International Journal of Research Studies in Management, 5(1), 31–43. https://doi.org/10.5861/ijrsm.2015.1304
Fatoki, O. (2014). The financial literacy of micro entrepreneurs in South Africa. Journal of Social Sciences, 40(2), 151–158. https://doi.org/10.1080/09718923.2014.11893311
Fulop, M. T. (2014). Why do we need effective corporate governance? International Advances in Economic Research, 20(2), 227–228. https://doi.org/10.1007/s11294-013-9430-3
Glaser, M., & Walther, T. (2013). Run, walk, or buy? Financial literacy, dual-process theory, and investment behavior. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2336109
Handriani, E., & Robiyanto, R. (2019). Institutional ownership, independent board, board size, and firm performance: evidence from Indonesia. Contaduría Y Administración, 64(3), 1–16. https://doi.org/10.22201/fca.24488410e.2018.1849
Hanifah. (2015). The implementation of good corporate governance in efforts to increase profit in Small Medium Enterprises (SMEs). International Journal of Business, Economics and Law, 7(3), 38–45.
Hussain, J., & Matlay, H. (2007). Financing preferences of ethnic minority owner/managers in the UK. Journal of Small Business and Enterprise Development, 14(3), 487–500. https://doi.org/10.1108/14626000710773565
Hussain, J., Salia, S., & Karim, A. (2018). Is knowledge that powerful? Financial literacy and access to finance: An analysis of enterprises in the UK. Journal of Small Business and Enterprise Development, 25(6), 985–1003. https://doi.org/10.1108/JSBED-01-2018-0021
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X
Ko, C., Lee, P., & Anandarajan, A. (2019). The impact of operational risk incidents and moderating influence of corporate governance on credit risk and firm performance. International Journal of Accounting and Information Management, 27(1), 96–110. https://doi.org/10.1108/IJAIM-05-2017-0070
Kolapo, T. F., Ayeni, R. K., & Oke, M. O. (2012). Credit risk and commercial banks’ performance in Nigeria: A Panel model approach. Australian Journal of Business and Management Research, 2(2), 31–38.
Kryvko, A. & Reichling, P. (2012, April 19). Corporate governance and performance of European commercial banks. In International Conference “Improving Financial Institutions: The Proper Balance between Regulation and Governance” (pp. 1–20). Helsinki.
Kurniawati, S. L., Sari, L. P., & Kartika, T. P. D. (2018). Development of good SME governance in Indonesia: An empirical study of Surabaya. International Journal of Economics and Management, 12(1), 305–319.
Lusardi, A., & Mitchell, O. S. (2014). The economic importance of financial literacy: Theory and evidence. Journal of Economic Literature, 52(1), 5–44. https://doi.org/10.1257/jel.52.1.5
Lusardi, A., & Scheresberg, C. de B. (2013). Financial literacy and high-cost borrowing in the United States. In Global Financial Literacy Excellence Center Working Paper No. 2013-1. https://doi.org/10.2139/ssrn.2585243
Maseko, N., & Manyani, O. (2011). Accounting practices of SMEs in Zimbabwe: An investigative study of record keeping for performance measurement (a case study of Bindura). Journal of Accounting and Taxation, 3(8), 171–181. https://doi.org/10.5897/JAT11.031
Menike, L. M. C. S. (2019). Effect of financial literacy on firm performance of Small and Medium Enterprises in Sri Lanka. In 2019 Financial Markets & Corporate Governance Conference (pp. 1–25). https://doi.org/10.2139/ssrn.3306719
Mutamimah. (2020). Financial technology and E-corporate governance model for Small Medium Enterprises. In Advances in Intelligent Systems and Computing (Vol. 993, pp. 907–913). Springer International Publishing. https://doi.org/10.1007/978-3-030-22354-0_84
Mutamimah, & Hendar. (2017, December 13–14). Islamic financial inclusion: Supply side approach. In 5th ASEAN International University Conference on Islamic Finance (5th AICIF). Jerudong Brunei Darussalam.
Mutegi, H. K., Njeru, P. W., & Ongesa, N. T. (2015). Financial literacy and its impact on loan repayment by small and medium enterprenuers: an analysis of the effect of book keeping skills from equity group foundation’s financial literacy training program on enterpreneurs’ loan repayment performance. International Journal of Economics, Commerce and Management, 3(3), 1–28.
Mutezo, A. (2013). Credit rationing and risk management for SMEs: the way forward for South Africa. Corporate Ownership and Control, 10(2), 153–163. https://doi.org/10.22495/cocv10i2c1art1
Okello, G. C. B., Ntayi, J. M., Munene, J. C., & Malinga, C. A. (2017). The relationship between access to finance and growth of SMEs in developing economies: Financial literacy as a moderator. Review of International Business and Strategy, 27(4). https://doi.org/10.1108/RIBS-04-2017-0037
Postnova, A. (2012). Does good corporate governance reduce credit risk? [Department of Economics, Hanken School of Economics]. Helsinki. https://helda.helsinki.fi/dhanken/bitstream/handle/10138/37072/postnova.pdf?sequence=5&isAllowed=y
Saeed, A., Javed, A. Y., & Noreen, U. (2018). Microfinancing, governance, and performance: A South Asian perspective. Journal of Economics, Finance and Administrative Science, 23(46), 247–265. https://doi.org/10.1108/JEFAS-01-2017-0014
Siekei, J., Wagoki, J., & Kalio, A. (2013). An assessment of the role of financial institutions in financing Small and Medium Enterprises (SME’s) in Ghana. International Journal of Innovative Research & Development, 2(8), 111–124.
Smith, S. W. (2011). Beg, borrow, and deal? Entrepreneurs’ choice of financing and new firm innovation. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1573685
Wernerfelt, B. (1984). A resource-based view of the firm. Strategic Management Journal, 5(2), 171–180. https://doi.org/10.1002/smj.4250050207
Wise, S. (2013). The impact of financial literacy on new venture survival. International Journal of Business and Management, 8(23), 30–39. https://doi.org/10.5539/ijbm.v8n23p30
Adomako, S., Danso, A., & Damoah, J. O. (2016). The moderating influence of financial literacy on the relationship between access to finance and firm growth in Ghana. Venture Capital, 18(1), 43–61. https://doi.org/10.1080/13691066.2015.1079952
Agyei, S. K. (2018). Culture, financial literacy, and SME performance in Ghana. Cogent Economics and Finance, 6(1). https://doi.org/10.1080/23322039.2018.1463813
Andrews, A., & Gikunoo, E. (2011). Small scale foundries in Ghana: the challenges. Leonardo Electronic Journal of Practices and Technologies, 10(19), 1–12.
Ansong, A. (2013). Risk management as a conduit of effective corporate governance and financial performance of Small and Medium scale enterprises. Developing Country Studies, 3(8), 159–164.
Belas, J., Smrcka, L., Gavurova, B., & Dvorsky, J. (2018). The impact of social and economic factors in the credit risk management of SME. Technological and Economic Development of Economy, 24(3), 1215–1230. https://doi.org/10.3846/tede.2018.1968
Ciftci, I., Tatoglu, E., Wood, G., Demirbag, M., & Zaim, S. (2019). Corporate governance and firm performance in emerging markets: evidence from Turkey. International Business Review, 28(1), 90–103. https://doi.org/10.1016/j.ibusrev.2018.08.004
Dao, B. T., & Pham, H. (2015). Corporate governance and bank credit risk: default probability, distance to default. SSRN Electronic Journal, 1–22. https://doi.org/10.2139/ssrn.2708994
Dzigba, D. (2015). Corporate governance practice among Small and Medium Scale Enterprises (SMEs) in Ghana; Impact on access to credit [Thesis, Blekinge Tekniska Hogskola].
Eniola, A. A., & Entebang, H. (2015). Financial literacy and SME firm performance. International Journal of Research Studies in Management, 5(1), 31–43. https://doi.org/10.5861/ijrsm.2015.1304
Fatoki, O. (2014). The financial literacy of micro entrepreneurs in South Africa. Journal of Social Sciences, 40(2), 151–158. https://doi.org/10.1080/09718923.2014.11893311
Fulop, M. T. (2014). Why do we need effective corporate governance? International Advances in Economic Research, 20(2), 227–228. https://doi.org/10.1007/s11294-013-9430-3
Glaser, M., & Walther, T. (2013). Run, walk, or buy? Financial literacy, dual-process theory, and investment behavior. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2336109
Handriani, E., & Robiyanto, R. (2019). Institutional ownership, independent board, board size, and firm performance: evidence from Indonesia. Contaduría Y Administración, 64(3), 1–16. https://doi.org/10.22201/fca.24488410e.2018.1849
Hanifah. (2015). The implementation of good corporate governance in efforts to increase profit in Small Medium Enterprises (SMEs). International Journal of Business, Economics and Law, 7(3), 38–45.
Hussain, J., & Matlay, H. (2007). Financing preferences of ethnic minority owner/managers in the UK. Journal of Small Business and Enterprise Development, 14(3), 487–500. https://doi.org/10.1108/14626000710773565
Hussain, J., Salia, S., & Karim, A. (2018). Is knowledge that powerful? Financial literacy and access to finance: An analysis of enterprises in the UK. Journal of Small Business and Enterprise Development, 25(6), 985–1003. https://doi.org/10.1108/JSBED-01-2018-0021
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X
Ko, C., Lee, P., & Anandarajan, A. (2019). The impact of operational risk incidents and moderating influence of corporate governance on credit risk and firm performance. International Journal of Accounting and Information Management, 27(1), 96–110. https://doi.org/10.1108/IJAIM-05-2017-0070
Kolapo, T. F., Ayeni, R. K., & Oke, M. O. (2012). Credit risk and commercial banks’ performance in Nigeria: A Panel model approach. Australian Journal of Business and Management Research, 2(2), 31–38.
Kryvko, A. & Reichling, P. (2012, April 19). Corporate governance and performance of European commercial banks. In International Conference “Improving Financial Institutions: The Proper Balance between Regulation and Governance” (pp. 1–20). Helsinki.
Kurniawati, S. L., Sari, L. P., & Kartika, T. P. D. (2018). Development of good SME governance in Indonesia: An empirical study of Surabaya. International Journal of Economics and Management, 12(1), 305–319.
Lusardi, A., & Mitchell, O. S. (2014). The economic importance of financial literacy: Theory and evidence. Journal of Economic Literature, 52(1), 5–44. https://doi.org/10.1257/jel.52.1.5
Lusardi, A., & Scheresberg, C. de B. (2013). Financial literacy and high-cost borrowing in the United States. In Global Financial Literacy Excellence Center Working Paper No. 2013-1. https://doi.org/10.2139/ssrn.2585243
Maseko, N., & Manyani, O. (2011). Accounting practices of SMEs in Zimbabwe: An investigative study of record keeping for performance measurement (a case study of Bindura). Journal of Accounting and Taxation, 3(8), 171–181. https://doi.org/10.5897/JAT11.031
Menike, L. M. C. S. (2019). Effect of financial literacy on firm performance of Small and Medium Enterprises in Sri Lanka. In 2019 Financial Markets & Corporate Governance Conference (pp. 1–25). https://doi.org/10.2139/ssrn.3306719
Mutamimah. (2020). Financial technology and E-corporate governance model for Small Medium Enterprises. In Advances in Intelligent Systems and Computing (Vol. 993, pp. 907–913). Springer International Publishing. https://doi.org/10.1007/978-3-030-22354-0_84
Mutamimah, & Hendar. (2017, December 13–14). Islamic financial inclusion: Supply side approach. In 5th ASEAN International University Conference on Islamic Finance (5th AICIF). Jerudong Brunei Darussalam.
Mutegi, H. K., Njeru, P. W., & Ongesa, N. T. (2015). Financial literacy and its impact on loan repayment by small and medium enterprenuers: an analysis of the effect of book keeping skills from equity group foundation’s financial literacy training program on enterpreneurs’ loan repayment performance. International Journal of Economics, Commerce and Management, 3(3), 1–28.
Mutezo, A. (2013). Credit rationing and risk management for SMEs: the way forward for South Africa. Corporate Ownership and Control, 10(2), 153–163. https://doi.org/10.22495/cocv10i2c1art1
Okello, G. C. B., Ntayi, J. M., Munene, J. C., & Malinga, C. A. (2017). The relationship between access to finance and growth of SMEs in developing economies: Financial literacy as a moderator. Review of International Business and Strategy, 27(4). https://doi.org/10.1108/RIBS-04-2017-0037
Postnova, A. (2012). Does good corporate governance reduce credit risk? [Department of Economics, Hanken School of Economics]. Helsinki. https://helda.helsinki.fi/dhanken/bitstream/handle/10138/37072/postnova.pdf?sequence=5&isAllowed=y
Saeed, A., Javed, A. Y., & Noreen, U. (2018). Microfinancing, governance, and performance: A South Asian perspective. Journal of Economics, Finance and Administrative Science, 23(46), 247–265. https://doi.org/10.1108/JEFAS-01-2017-0014
Siekei, J., Wagoki, J., & Kalio, A. (2013). An assessment of the role of financial institutions in financing Small and Medium Enterprises (SME’s) in Ghana. International Journal of Innovative Research & Development, 2(8), 111–124.
Smith, S. W. (2011). Beg, borrow, and deal? Entrepreneurs’ choice of financing and new firm innovation. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1573685
Wernerfelt, B. (1984). A resource-based view of the firm. Strategic Management Journal, 5(2), 171–180. https://doi.org/10.1002/smj.4250050207
Wise, S. (2013). The impact of financial literacy on new venture survival. International Journal of Business and Management, 8(23), 30–39. https://doi.org/10.5539/ijbm.v8n23p30