Background

Indonesia is highly vulnerable to natural hazard and climate change consequences. Positioned along the intersection of four major tectonic plates, the archipelagic nation is subject to frequent earthquakes, floods, and volcanic eruptions. Climate change is exacerbating these risks, intensifying natural disasters and increasing their frequency. Rising sea levels, extreme weather events, and environmental degradation pose serious threats to ecosystems and the livelihoods of millions of Indonesian people.

In 2023, Indonesia recorded around 5,400 disasters, with floods, forest fires and extreme weather being the top three. These events caused and displaced nearly 8.5 million people and resulted in extensive damages to properties and public infrastructures, with over 48,000 units affected.[1] The economic impact borne by the government and communities due to these disasters is enormous.

Micro, small, and medium enterprises (MSMEs) bear a significant portion of these economic impacts. As the backbone of Indonesia’s economy, MSMEs are crucial for economic growth and job creation. MSMEs contribute 60.5 percent to the national GDP and employ 96.9 percent of the workforce, according to the Ministry of Cooperatives and SMEs. However, many of these enterprises rely on climate-sensitive natural resources or operate in disaster-prone regions, leaving them especially vulnerable to disruption and loss (Pacillo et al., 2020; Utami et al., 2021).

Given these increased risks and vulnerabilities, building resilience of Indonesia’s MSME sector is not only critical to protecting livelihoods but also to ensuring long-term economic stability and sustainable growth. Accessible financing is critical for MSMEs, enabling them to invest in disaster preparedness, recovery measures, and adaptive strategies that fortify their resilience to future shocks.

Finding Innovative Solutions for Community Livelihood Resilience

Realizing the impacts to the community’s livelihoods, it is critical to have robust disaster risk reduction efforts in place, especially to protect their livelihoods, such as smallholder farmers, fishers, and artisans. A quick and effective response to disasters can save lives, protect infrastructure, and sustain the economy. However, limited government budgets and a lack of public awareness hinder these efforts, highlighting the urgent need for innovative solutions that can sustainably support disaster preparedness and recovery.

There are various financial mechanisms developed to reduce disaster costs, such as disaster pooling funds (Pooling Fund Bencana), disaster insurance, on call and contingency budgets. Nonetheless, it is important to find other sources of financing to protect the communities. While the previous funding sources have come in the sources of loan and grant, it is possible to consider a revolving fund model. This financial mechanism recycles capital, with initial investments being replenished as funds are used, repaid, and reinvested in new projects or initiatives. This approach ensures a perpetual pool of resources, providing immediate funding for disaster response while supporting long-term recovery. Moreover, revolving funds can incorporate technical assistance and capacity-building components, empowering MSMEs to strengthen their resilience and recover more effectively from climate-related shocks.