Macroeconomic analyst at the Finance Ministry’s directorate general of budget
The Indonesian Financial Services Authority (OJK) has just released a regulation on financial technology (fintech) lending, which stipulates rules in the provision of lending services based on information technology.
This fintech-based lending will not only play an important role in supporting the financial inclusion program that the government has recently promoted, but will also become an important alternative for unbankable individuals and micro, small and medium enterprises (MSMEs) to access funds to start and develop their businesses.
According to the World Bank, only 36 percent of Indonesians have access to banking services and merely 13 percent borrow from formal financial institutions. While there are almost 60 million MSMEs, which provide over 100 million jobs in the country. Most of them cannot get the financing they need to expand.
Conventional micro credit and the government-subsidized micro lending scheme micro credit program (KUR) have not been able to boost up young entrepreneurs and MSMEs on a massive scale. Despite the government’s guarantee, banks are still reluctant about lending to these potential borrowers, mainly due to administrative issues.
Inexperienced aspiring entrepreneurs and micro-scale enterprises often have neither sufficient collateral to secure a bank loan nor the financial track records for lenders to evaluate. Geographical constraints also remain a challenge that has hindered people in rural and eastern part of the archipelago to get access to traditional bank services. KUR loans are provided by only a small number of banks, which rely on their limited branches, thus financial access remains pretty low in remote areas.
Fintech lending could definitely address these issues. Through leveraging technology, fintech makes capital available to the underbanked and unleashes potential economic activity, creates job opportunities and generates growth in a more inclusive manner.
Fintech-based lending can potentially fill the country’s existing financing gap of almost Rp 1 quadrillion (US$75 billion). In addition, peer-to-peer lending and crowdfunding fintech particularly can tap into the MSMEs, of which only 20 percent are currently bankable. Giving them access to initial or additional funding will definitely enable them to launch or to expand their business.
OJK has also previously promoted branchless banking system, locally known as Laku Pandai, which enables banks and financial service firms to reach out to new customers without having to open physical branches.
While Laku Pandai has increased access to saving in rural areas, its services unfortunately have not included lending. The agents still require a borrower to apply through the bank’s local branch. The OJK argues though that Laku Pandai agents will soon be able to administer lending.
With its less bureaucratic style, fintech also offers innovative methods to evaluate its prospective creditors. Tala Mobile, for instance, comes up with an alternative for creditworthiness evaluation for traditionally unbankable population in various countries. Its smartphone app evaluates daily mobile activities of potential borrowers, from simply making frequent calls to parents to paying bills on time, to determine their reliability.
Once a potential borrower is approved, the money will be delivered digitally in minutes.
Smartphones are inevitably enabling capabilities in the lending industry. With Indonesia’s rapid mobile penetration and growing online commerce, fintech lending increases financial accessibility to the unreachable and accelerates financial inclusion.
M-Shwari in Kenya, for example, leverages the success of mobile money, M-Pesa, to offer paperless and branchless banking services, ranging from saving to accessing micro credit.
Indonesia’s smartphone owners are flourishing and are able to access the mobile internet. These are the perfect infrastructures for fintech lending to explore and expand throughout the archipelago.
Peer-to-peer lending can also open up economic opportunities for women. Social norms, like the burden of domestic chores and property ownership, are most of the time unfavorable to women, leaving them with limited access to capital.
Darrell West from the Brookings Institute argues on his book,
Going Mobile, that smartphones have significantly enabled women and minorities to obtain a broader range of financial access. Fintech lending lets women make their own economic decisions.
On the other hand, with the newly launched regulation, fintech lending provides investors with access to an alternative investment portfolio and within a safe and regulated setting.
Modalku, a local peer-to-peer lending platform, for instance now offers individual investors to chance to provide funding to chosen MSMEs with a deposit as low as Rp 10 million.
Diversifying one’s investment portfolio, even if only within one platform, by lending small amounts to as many different borrowers as possible, will diversify an investor’s risk.
It is expected that this fintech lending regulation will create a more conducive regulatory environment for both existing and upcoming fintech players. Fintech can potentially help the government to achieve its goals, producing 1,000 technopreneurs and digitizing 8,000 MSMEs by 2020. These are the areas where fintech has the potential to have a major impact.
Through fintech, MSMEs will be more administratively neat and transparent, thus it enables the government to better oversee their commercial activities and eventually generate more tax revenue. Conventional banks or the government collaborating with fintech firms could also increase the number of governmentbacked loans KUR being delivered.
To take into account, MSMEs now contribute to around 60 percent of Indonesia’s gross domestic product (GDP). This suggests that these micro, small and medium sized companies are in fact the backbone of the Indonesian economy, and in the event that they grow rapidly, then the economy of the whole country will accordingly develop more rapidly.
Indeed, digitalized lending is not a simple quick fix to the issue of financial inclusion. Fintech needs to further improve customer experience while maintaining its prudential responsibility. The government also needs to adapt its policy and administration to provide a more accommodating environment following fintech dynamics. Simplification and responsiveness should be key for the government to help fintech grow. By doing so, the government would facilitate MSME expansion and eventually create a more inclusive economic development.
The writer is a macroeconomic analyst at the Finance Ministry’s directorate general of budget. The views expressed are his own.
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