In September 2018, with support of the Australian Government, UN Pulse Lab Jakarta partnered with the United Nations Capital Development Fund (UNCDF) Shaping Inclusive Finance Transformations (SHIFT) in ASEAN program to launch the “Indonesia Microenterprise Fintech Innovation Challenge”. The aim of the Challenge was to promote and accelerate the usage of digital technology solutions for micro enterprises in Indonesia that result in access and increased use of financial services to reduce economic vulnerability and improve income generation, efficiency, or business growth.
The challenge received 33 applications, and 12 out of 29 eligible applicants were shortlisted to deliver their pitches to the SHIFT ASEAN Investment Committee. By the end of November 2018, the 12 shortlisted applicants delivered their pitches and the Evaluation Committee, which included members from Indonesia Financial Services Authority (OJK), Indonesia Fintech Association (AFTECH), UN Pulse Lab Jakarta, Better Than Cash Alliance, Visa, Kejora Ventures, and TISCO Financial Group PLC, selected the six final winners. These winners were introduced at the Singapore Fintech Festival in November 2018 and were awarded a matching grant of around US$ 40,000 each to implement their business models. They ran their pilots from January 2019 to June 2019, with mentorships provided by Visa, Oracle and Deloitte. One of the winning projects, AwanTunai, was also showcased during the 74th UN General Assembly in New York in September 2019.
The six winning projects, by area of experimentation, are as follows:
This case study aims to illustrate how a selection of these business models, namely those implemented by AwanTunai, GandengTangan and Modalku, helped to move the digital MSME lending market in Indonesia through the use of intermediaries.
Learnings from Challenge Fund Investments: Using the power of intermediaries to drive the MSME Lending Market in Indonesia
Despite Indonesia’s immense economic potential, access to finance for MSMEs is low. According to a study by PwC, approximately 74 percent of MSMEs had no access to credit in 2018. Traditionally, infrastructure and risk management have been among the main barriers for conventional lending providers to provide access to credit for MSMEs. Expanding into rural areas often involve high operational costs and low transaction volumes, making it difficult to scale the business. The underwriting process often further requires a credit history, proof of a steady income or collateral, which are things that MSMEs lack.
Fintech has emerged as the leading way to overcome these barriers. Examples of innovative approaches include online-to-offline (O2O) channels and alternative data for credit assessment. A variety of business models, such as peer-to-peer (P2P) lending, are matching lenders with different risk appetites, thus catering to the broader segments of Indonesia’s society. In Indonesia, total P2P lending reached US$ 1.62 million in 2018, registering a 645 percentage year-on-year increase. As of 2019, 13 P2P lenders have been granted full operational licenses from The Financial Services Authority (OJK), and 127 lenders are registered with the authorities. Some of the leading players include Akseleran, Amartha, CROWDE, Crowdo, Danamas, Gradana, Investree, KoinWorks, Mekar and Modalku. The interest rates offered by these players range from seven to 30 percent per year. Default rates are lower than 1.3 percent across the board.
The regulatory ecosystem in Indonesia is transforming to support the rapid emergence of fintech. The Financial Service Authority (OJK) regulates all fintech that provides financial services, including P2P lending. Some of the key relevant regulations include:
- Regulation No. 77/2016 on P2P lenders, which supports the growth of fintech P2P lending platforms while mandating customer protection;
- Regulation No. 13/2018 on fintech innovation, which serves as a principle-based regulation for the fintech industry and aimed at creating a responsible digital finance innovation;
- Regulation No. 37/2018 on equity crowdfunding, which aims to boost economic growth in Indonesia by providing access to start-up companies and SMEs to raise funds electronically for their businesses.
The Indonesia Fintech Lenders Association (AFPI) was also established in 2018 to centralize collaboration between regulators and industry stakeholders. In 2019, AFPI announced that it is providing risk management certification, public education campaigns and a compulsory code of conduct for its members. It also launched a new fintech data center, a platform for partnering P2P companies to exchange customer data to enhance credit assessment and prevent the rise of non-performing loans. Special measures have been taken to guarantee the privacy of these data.
Despite the promise of fintech, service providers face several challenges in reaching MSMEs and underserved communities. The number of borrowers and borrowing outside Java is significantly lower at 16 percent as of November 2018. Furthermore, as highlighted in the 2018 report by Pulse Lab Jakarta, the introduction of fintech to MSMEs often requires a personal approach in order to ensure its uptake. This leads to increased overhead costs for the business, threatening its viability to scale up.
Value of intermediaries: two models to drive access
Three of the six winners in the Indonesia Microenterprise Fintech Innovation Challenge designed supply-side solutions to improve MSMEs’ access to financial services. Specifically, they looked at how to strengthen the role of intermediaries in the MSME lending market. They identified two different types of intermediaries – distributors in the supply chain and human sales agents.
AwanTunai and GandengTangan focused on strengthening their digital systems to enable distributor-backed lending. By leveraging on the existing relationships between distributors and MSMEs, they could reach out to MSMEs with a lower credit risk. Through this model, MSMEs benefit from increased working capital and sales, while distributors are relieved of the burden of granting MSMEs loans on their own credit line.
Modalku developed an application to complement its agent-based customer acquisition model. They introduced a new humanistic element to their existing lending practices and leveraged on technology to ease the workload of human agents.
AwanTunai: Facilitating access to finance for MSMEs growth through distributor-backed working capital micro loans
Yuni Irawati runs a medium-sized shop selling food and FMCG goods in central Jakarta with her husband. Most of her customers are coffee peddlers who come by to pick up their supplies of Kapal Api. “Besides coffee, I also sell things like cigarettes, sugar, rice and eggs. I have been getting my goods from Toko Cung for the past five years.” In a typical month, she earns a profit of IDR 21 million (US$ 1,536), which is the only source of income for the couple and their three children.
In April 2019, she took a loan for the very first time. AwanTunai was introduced to her by Toko Cung, the distributor she has been working with. Ever since, she has been taking a loan once every two weeks. She enjoys the ease of using AwanTunai and never misses her repayments thanks to a WhatsApp reminder from them.
Since taking the loan, my shop has more inventory and I can sell more types of products.
Her sales have also improved, thus bringing in more income for her family.
Like Yuni, many micro merchants in the Fast-Moving Consumer Goods (FMCG) sector develop long-term relationships with their distributor. Distributors often take on the dual role of a seller and lender – when micro merchants purchase goods from them, many distributors also offer credit for micro merchants to purchase more items, which in turn boosts their own sales. However, distributors have limited capital for such purposes, thus limiting the amount of inventory micro merchants like Yuni can purchase. AwanTunai therefore recognized the opportunity to partner with wholesalers to provide micro merchants with inventory purchase financing. Through this innovation, they acquire valuable transaction data given the existing relationships between wholesalers and micro merchants and use it to underwrite unbanked credit risk.
Founded in early 2017, AwanTunai is a mobile-based lending platform that aims to provide convenient, affordable and safe personal financing to Indonesia’s mass market. To assist the growth of micro merchants in the FMCG sector, AwanTunai applied for a matching grant under the “Indonesia Microenterprise Fintech Innovation Challenge”. After a competitive deliberation process, the project was approved by SHIFT ASEAN’s Investment Committee and was initiated in January 2019 with a committed investment of US$ 794,000 from AwanTunai matched with a US$ 40,000 grant from UNCDF.
Overview of AwanTunai’s Mobile Application Platform for Microenterprise Loans
Initially, the objective of the pilot was to offer a product that would replace and formalize the informal ‘kasbon’ credit system that micro merchants provide their customers. However, when this product was launched, there was a lackluster response from the market. AwanTunai adapted and pushed the idea up the supply chain by offering the concept to the merchant clients of distributors who work with a similar ‘kasbon’ mechanism. AwanTunai offered to replace distributors’ credit system with loans, and as such lower their risk and potentially increase their sales.
In the model, micro merchants are first introduced to AwanTunai through partnering distributors. Those who wish to apply for a loan will do so through a sales agent, who uses the AwanTunai application to complete the request. Upon approval, micro merchants are given a supplier credit to spend at the distributor. Loan amounts can vary between IDR 19-200 million (US$ 1,356 to 14,000) and the repayment term is typically one month.
Such distributor-backed lending hopes to provide MSME owners with more cash flow to diversify their inventories and provide more buffer to weather financial shocks. Furthermore, clients’ credit performance with AwanTunai is being reported to Indonesia’s credit bureau (PEFINDO) to help build up their credit history and unlock access to more formal channels of financing in the long run.