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.
Highlights
In developing country Small Medium Enterprises (SMEs) have important role at economic growth, but it has limited financing (Mutezo, 2013), do not have collateral and do not have adequate financial reports (Maseko & Manyani, 2011)
Aims this study to analyze the role of financial literacy in strengthening role of Corporate Governance (CG): transparency, accountability, responsibility, independence and fairness in reducing SMEs’ credit risk
After being moderated by financial literacy, this study found that transparency, accountability and responsibility as corporate governance mechanism can reduce credit risk
Summary
In developing country Small Medium Enterprises (SMEs) have important role at economic growth, but it has limited financing (Mutezo, 2013), do not have collateral and do not have adequate financial reports (Maseko & Manyani, 2011). The strategy to reduce credit risk is implement of corporate governance (Saeed et al, 2018). The existence of Corporate Governance (CG) can eliminate asymmetric information and credit risk can be reduced. Asymmetric information is occurred when the information held by banks is smaller than SMEs, which encourages the moral hazard in the use of capital by SMEs, thereby increasing credit risk. Corporate governance as the form of mechanisms and structures to regulate, monitor and control the behavior of SME managers will be able to reduce the moral hazard in the use of capital, increase transparency, accountability, fairness, and responsibility which can eliminate asymmetric information between banks and SMEs, so that can reduce credit risk. Asymmetric information encourages SME managers to carry out opportunistic behavior to prioritize their interests which will harm creditors and other stakeholders. The CG in SMEs is different from CG in large companies, because SMEs in Indonesia was still a one-man show and family business, majority of SMEs in Indonesia have not yet gone public, so agency problems in SMEs in this study is a problem between creditors and debtors
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