Access to Green Financing for Rural SMEs: The Strategic Role of Banking in Promoting a Sustainable Circular Economy in Indonesia

Abstract

This study examines how Indonesia’s banking sector can unlock green financing for rural Micro, Small, and Medium Enterprises (MSMEs) and thereby accelerate the national transition toward a circular economy. Although rural MSMEs generate 61.1 % of GDP and employ more than 97 % of the workforce, most still operate in linear value chains and struggle to access sustainable credit. Green loans currently represent only 4.5 % of total bank lending and are concentrated among large corporations, leaving rural businesses underserved. Using a systematic literature review enriched with recent policy and financial data, we identify three intertwined barriers: limited green‑finance literacy, rigid collateral‑based credit scoring that overlooks environmental merit, and weak digital financial inclusion in rural areas. The paper proposes a strategic framework in which banks deploy inclusive green instruments such as earmarked micro‑green loans and blended‑finance guarantees embed environmental, social, and governance metrics into eligibility screening, and deliver targeted capacity‑building programs through digital channels. By adopting these measures and collaborating with government agencies and business associations, banks can simultaneously mitigate portfolio risk, broaden their rural market, and catalyse MSME investment in renewable energy, waste valorisation, and resource‑efficient production. The findings provide actionable guidance for policymakers and financial institutions seeking to scale sustainable finance and demonstrate the pivotal role of rural MSMEs in Indonesia’s low‑carbon economic transformation.