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Why Micro and Small Family Enterprises Do Not Borrow from Microcredit Institutions? A Case Study in East Java, Indonesia

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It is assumed that MSMEs growth is limited due to lack of access to the financial markets, therefore MFIs play a role to refine such market imperfection. This paper aims to examine this assumption. A qualitative approach is used to obtain information from MSMEs and MFIs. Eight enterprises and three MFIs; two of them are cooperatives and one government microfinance agency are studied. There is a high demand for credit whereas not all the demand is satisfied mainly those family businesses involved in the informal sector. The main findings exhibit that even when MFIs credit is at disposal, formal and informal MSMEs prefer to draw a loan from Informal Financial Institutions (IFIs) because the market is more flexible than the MFIs which embrace the same strategies as commercial banks.