Outlook 2017: Rise of Digital Lending in Indonesia

For platforms that boast superior debtor risk assessments and aim to compete with conventional banks, online peer-to-peer lending services have so far fell short of their promises. (JG Photo/Tabita Diela)

By : Tabita Diela | on 5:57 PM January 13, 2017
Category : Business, Banking/Finance

Jakarta. Digital lending firms anticipate rapid growth this year, banking on a new regulation on information technology-based lending by the Financial Services Authority, or OJK, that will give these companies a firm legal basis to operate in Indonesia.

Lending through services such as Investree, Kredivo, UangTeman and Doctor Rupiah to name a few, could reach Rp 1 trillion ($75 million) this year, which represents a nearly seven-fold increase from last year according to an OJK estimation. While this amount is still small compared to the nearly Rp 4,200 trillion in outstanding loans held by conventional banks, the authority sees potential in these digital services that could fill a gap in small business financing, currently under-served by banks and financing companies.

Digital lending firms tap into a wealth of consumer data shared publicly over the internet or social media and use that to evaluate loan applicants. That makes them more efficient and cost-effective compared to traditional banks, particularly for small loans. Still, the service remains a novelty to most Indonesians, with many not even having bank accounts.

Recognition from the regulator could give the industry a much-needed boost to be more aggressive in promoting the service.

"Fintech has positive prospects as an alternative [lender] for small and medium enterprises as well as consumers, due to a clear OJK regulation," said Adrian Asharyanto Gunadi, cofounder and chief executive of Investree Radhika Jaya, a digital service that acts as a matchmaker between lenders and debtors.

Investree's business model, known as a peer-to-peer lending marketplace, is specifically preferred by the OJK. Under the model, digital services do not use their own money to lend out, but instead help financing companies or individuals to find prospective loan applicants and vice versa.

The OJK regulation issued in December bars a balance sheet lending model because it is very similar to financing companies or banks, which are bound by much stricter regulations, said Hendrikus Passagi, an OJK senior research executive. Being a peer-to-peer lending marketplace also does not require large amounts of capital to cover risks inherent to lending money to strangers.

The regulation mandates lending services to have at least Rp 1 billion in capital to register and a further Rp 2.5 billion to secure a business license. That compares to Rp 10 billion required for establishing a financing company, or Rp 100 billion for a bank. Also, foreigners or foreign companies can have majority ownership of up to 85 percent in these digital lending firms. In banks, foreign ownership is capped at 30 percent.

The regulation also details a requirement for establishing a local data center, procedures for a disaster recovery center and data secrecy. Fintech companies that fail to comply with any of the requirements may face penalties, ranging from written warnings to permit revocations.

"The new regulation will protect consumers," said Aidil Zulkifli, chief executive and cofounder of UangTeman, the oldest digital lender in Indonesia.

Aidil said he "gladly welcomes the OJK's initiative as a regulator," even if that means he has to change UangTeman's business model from lending out investors' money, some of them foreigners, to a peer-to-peer model, in order to obtain a license from the OJK.

Changing the business model after all could only be a small inconvenience, compared to the potential in the country's lending market that is not yet tapped by banks or financing companies, which according to the OJK, amounts to around Rp 1,000 trillion per year.

In UangTeman's case for example, the lender is targeting people who need emergency cash, such as wage earners who cannot wait until they receive their salaries at the end of the month to pay hospital bills for relatives.

Operating outside direct competition with banks also allows the digital lenders to be less restricted in charging interest. The OJK for now, does not regulate interest rates for digital lending. Investree offers lending rates of 1.2 percent to 2.5 percent per month for individuals, while Kredivo offers 2.95 percent a month and UangTeman 34.8 percent interest for a 30-day loan. In comparison, the interest rates for credit card cash advances are capped at 2.95 percent a month.


By regulating how digital firms handle and store customers' data, the OJK addresses confidentiality issues that are central to any lending business.

The services use data that have already been accessible to the public and to which their owners already consented.

"People are increasingly comfortable with sharing aspects of their lives with each other. [...] Most Big Data analyses are based on self-reported and publicly available data about the user," said Akshay Garg, founder and chief executive of FinAccel, the company behind Kredivo.

"The best players in this industry will rely very heavily on Big Data," he said. "In fact, whoever uses Big Data best will likely emerge as a leader in the next few years."

But most digital lending service agree that they must have adequate safeguards to protect customers' data from hackers or security breaches.

"Trust takes time; it doesn't happen overnight," Garg said.

Show More