The Power of Intermediaries in Driving Digital Lending amongst Indonesia’s Micro, Small and Medium Enterprises (MSMEs) Learnings from AwanTunai, GandengTangan and Modalku Challenge Fund Investments

What you will find in this case study:

  • Partnering with distributors can help to de-risk lending and increase the uptake of the service.
  • Mitigating the risk of lending to micro businesses requires larger ecosystem support.
  • New technology needs to be complemented with human interaction to encourage behavioral change.
  • Focusing on the user experience while designing fintech services can help to boost and maintain their usage.

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.

Story from the field – Meet Daryn

Daryn is the second-generation owner of Toko Cung, a major FMCG wholesaler and distributor based in Mampang, South Jakarta for over 50 years.

When an AwanTunai agent introduced their services nine months ago, I thought it was too good to be true!

Nevertheless, he decided to give it a shot and has never looked back since. His cash flow has improved due to lower amounts of credits provided to micro merchants from Toko Cung’s own accounts, and he also retains more customers because they enjoy using AwanTunai. His customers have also increased their purchases from him.

As AwanTunai moved away from direct sales to working through distributors, the reach of AwanTunai’s loans dipped after the first quarter. Over time, as they refined this new business model, the number of clients receiving a loan increased and a loan approval rate of 53.5 percent was achieved by the end of 2019. The repayment rate also increased from 92.5 percent to 99 percent. Gender parity has been maintained since the launch of this project.

AwanTunai is currently working with approximately 60 distributors across Indonesia. The loan size has increased over time as a larger percentage of AwanTunai’s clients are small rather than micro businesses. Interviews conducted by SHIFT ASEAN revealed that while these businesses are typically not unbanked, none of those interviewed had previously received a formal loan. The loan product is therefore meeting their requirements in that the repayment period is longer, the loan amounts are higher, the delivery system is good, and the application process is simple and fast.

AwanTunai Implementation Learnings

AwanTunai recognized that partnering with wholesalers and distributors was key to the success of their business. The management recognizes the potential growth of this model and intend to scale up by growing their existing network of distributors.

Their business model pivoted from one of direct sales to via distributors. They rely on the existing relationships between distributors and merchants to keep the lending risk low, and the connections between distributors themselves to increase the uptake of the service. To scale the business, they found it effective to first establish a partnership with a reputable distributor, which subsequently crowded in other distributors. Introducing fintech amongst underserved communities requires building trust, and the wholesalers served as well-positioned mediators in this process.

The majority of AwanTunai’s clients are small enterprises earning between SG$ 5,000 to 10,000 (US$ 3,598 – 7,196) a month in revenue. They found that there are more repeat customers in this segment, thus making it more sustainable for their business model. While AwanTunai’s service offering loan sizes of SG$ 500 is attractive for the larger micro businesses one shortcoming is that they could not meet a segment of the envisioned clientele – the lower spectrum of micro businesses. AwanTunai shifted their focus to larger micro businesses both because the risk of lending to smaller businesses was too high but also with the philosophy to help micro businesses grow into small businesses where they can contribute even larger to employment and economic growth.

Through this, a few key lessons were learnt:

  • Partnering with distributors can help to de-risk lending and increase the uptake of the service.
  • Mitigating the risk of lending to micro businesses requires larger ecosystem support.

Moving forward, SHIFT ASEAN will continue to monitor progress and provide guidance to AwanTunai as they expand their business.

GandengTangan: Facilitating access to finance for MSMEs growth through distributor-backed working capital micro loans

Siti serves up delicious plates of Indomie (instant noodles) to elementary school students during their recess. In 2002, shortly after giving birth to her third child, she opened her store in the school canteen as a necessary source of additional income.

I buy my supplies from a distributor as it is significantly cheaper. If I have enough money to buy in bulk, I can save up to IDR one million (US$ 71) per month.

This is where GandengTangan has helped her business – her unit cost has been reduced thanks to increased credit access. In the past, she relied on daily loans offered by a local cooperative and had to repay an IDR 200,000 (US$ 14) installment every day. With GandengTangan, her installments have fallen to IDR 75,000 (five US$).

Increased access to working capital can help micro merchants like Siti increase sales, generate more income, and improve livelihoods. GandengTangan is a peer-to-peer lending platform founded in 2015 for microbusinesses. While distributors had already been integrated in GandengTangan's business model, they applied for a matching grant in SHIFT ASEAN’s “Indonesia Microenterprise Fintech Innovation Challenge” to digitalize this process. After a competitive deliberation process, the project was approved by SHIFT ASEAN’s Investment Committee and was initiated in December 2018 with a committed investment of US$ 43,000 from Gandengtangan matched with a US$ 40,000 grant from UNCDF.

Overview of GandengTangan's Digital Inventory Management and Cashless Payment Apps for Microenterprises

GandengTangan has successfully designed and developed a mobile application for small informal shops (i.e. kiosks) to order stock inventory from distributors and get the necessary loans for this. Kiosks receive loans in the form of tokens; once the token is exchanged, the money is transferred to the distributor. They also created a mobile dashboard for distributors to receive orders and cashless payments, and withdraw money. This results in a closed-loop payment mechanism between the kiosks (buyers), distributors (sellers) and GandengTangan via smartphones.

To mitigate default risk, kiosks are selected based on the historical performance and relationship with the distributors. GandengTangan also has access to multiple platforms to check the creditworthiness of their clients, such as whether they have applied for loans at other institutions, or if they are overindebted. Loan ticket sizes are around IDR one million (US$ 71) and the repayment period is one month.

Story from the field - Meet Takul

Itaquallah, or Takul as his friends call him, runs a small street-side drinks cart selling coffee, vitamin drinks and more. He earns about IDR 200,000 (US$ 14) daily and has been buying his supplies from distributor Toko Asak for the past two years. His loans with GandengTangan are his first.

I enjoy the low interest rates offered by Gandengtangan and with the loan, I can feature new products at my drinks cart.

These additional earnings help to better support his ten-year-old son living in his hometown Ciracap, who he sends money to every month.

Story from the field - Meet Asak

Asak is an FMCG distributor offering a wide variety of goods, from noodles and cooking oil to cigarettes. Toko Asak has been working with GandengTangan for the past ten months. His clients, like Takul, usually take loans of IDR one to two million (US$ 71 – 141) to stock up on supplies.

I like using Gandengtangan because the goods have essentially been paid for!

Besides enjoying the lower risk associated with GandengTangan, Asak also likes how he can now skip certain paperwork like signing a contract. Since he was properly introduced to the app, he has no difficulties using it and finds it user-friendly.

GandengTangan has been scaling up its business with significant progress. From the second to the third quarter of 2019, more kiosks are receiving loans, with 70.3 percent of them owned by women. The distributor-backed model is also expanding with three additional distributors on board. The default rate remained low and saw a slight improvement from the second to third quarter. Average loan size remains small as approximately two-thirds of their clients are micro enterprises.

Distributors highlighted that sales have increased and that they have stopped offering their own credit to the micro enterprises. In the past, 30 percent of their customers would request a store loan. As for the micro enterprises, although the interviewed loan recipients all have bank accounts, none had previously received a formal loan. The GandengTangan loans have improved their cashflow and stock. They also trust the service as it was recommended by their distributor, and half of the respondents interviewed by SHIFT ASEAN used the GandengTangan application independently to apply for loans.

Implementation Learnings from GandengTangan

Through its close-loop, distributor-backed lending model, GandengTangan has been effective in granting financial access to micro enterprises. The company sees its advantage as an early player in the micro lending market and plans to accelerate their business to secure market share.

The profile of GandengTangan's clients has been consistent since project implementation – close to 70 percent of their clients are micro enterprises. There has been a growth in the size of repeated loans, showing that these micro merchants are becoming more productive with the help of GandengTangan.

However, introducing the GandengTangan application to micro merchants has been a challenge. They realized that it takes time for kiosk owners and distributors to adjust their behavior and use technology for offline processes like loans. Many of them rely on their phones merely for YouTube and Facebook and are unfamiliar with doing business on them. As such, GandengTangan continues to place emphasis on the human connection when onboarding their partners.

They are also constantly improving the GandengTangan application to enhance the user experience and interface. For example, by introducing a shortcut button to paying installments since some kiosks are unaware of how to do so. They also hope for a more seamless integration between different digital service providers. As GandengTangan does not have the license to authorize digital signatures, the current ecosystem means that a third-party application must be used on top of the GandengTangan application while processing the loan. Improved integration between peer-to-peer lenders like themselves and digital signature firms can simplify processes and boost fintech uptake in the long run.

The key lessons learnt while introducing their digital service are as follows:

  • New technology needs to be complemented with human interaction to encourage behavioral change.
  • Focusing on the user experience while designing fintech services can help to boost and maintain their usage.

COVID-19 Update

In response to the surging demand for e-commerce, GandengTangan established partnerships with a new sector – online marketplaces in Indonesia offering food and sanitation products – to supply digital working capital loans to MSMEs using these platforms. UNCDF will continue to monitor the progress of GandengTangan's expansion and provide them with guidance.

Modalku: Facilitating access to finance for rural MSMEs through agent-based lending

“If I have a question, the Modalku agents will come and answer them.” Yayah is a 44-year-old shop owner selling LPG gas and large water bottles to residents in the neighborhood. Her biggest expense is on water bottles and refills, and she usually brings in a 20 percent profit. She took a loan for the first time with Modalku, using the IDR two million (US$ 143) to buy more water and expand her inventory. She finds Modalku’s agents convenient and approachable, and is thankful for their help whenever she has questions on her loan product.

Loan products can be complicated, and just like Yayah, it is common for borrowers to be left with many questions regarding their interest, repayment schedule or instalment amount. This is especially so for first-time borrowers, who have little knowledge about the product and process. As such, it is important that financial service providers dedicate sufficient resources to customer service, so as to encourage more people to take up formal credit products.

Modalku is a peer-to-peer lending platform for businesses seeking working capital. Recognizing the importance of human intermediaries in increasing uptake of digital financial services, Modalku applied for a matching grant in SHIFT ASEAN’s “Indonesia Microenterprise Fintech Innovation Challenge” to pilot an agent network to sell its microloans. After a competitive deliberation process, the project was approved by SHIFT ASEAN’s Investment Committee and was initiated in December 2018 with a committed investment of US$ 28,000 from Modalku matched with a US$ 40,000 grant from UNCDF.

Overview of Modalku’s Micro Enterprise Agent Network

With the support of the challenge fund, Modalku proposed an agent-based acquisition model to reach micro enterprises for microloans. A mobile application created by Modalku is used by sales agents to process the loan application and verification seamlessly. The application assists the agent in other areas such as when they recommend products to users and keep track of collections. The same application is used by surveyor agents, who are tasked to gather detailed information about the microenterprise to see if a loan should be approved. Surveyor agents conduct a thorough background check on potential clients, including investigating if shops are visited by debt collectors as a proxy for indebtedness.

During the pilot, Modalku encountered clients who either missed their repayments or made them late. As such, Modalku decided to expand the role of sales agents to relationship officers. By creating a relationship with the client, clients are more likely to pay on time, and with officers now responsible for the entire process from sales to repayment, officers are more intentional in promoting the service to micro enterprises with a suitable profile.

In order to attract and retain agents, sales agents are paid a commission on top of their base salary. They have also appointed team leaders as part of a structured training program to increase the productivity of their agents. Modalku has also adopted a “cluster” approach where agents target specific market areas with a high concentration of micro enterprises to achieve maximum reach. This would also be an efficient way to deploy relationship officers due to the geographical proximity of these micro enterprises.

Story from the field - Meet Nurdiyah

With Modalku, my daily earnings have increased by around IDR 200,000 (US$ 14), earning up to IDR 600,000 (US$ 43) on a good day.

Nurdiyah is a 29-year-old micro merchant living in Sawangan, Depok. She lives with her husband, who works in construction, and her nine-year-old daughter. Her dwelling place is actually her shop – she runs a Warteg (small street-side eatery) selling dishes such as eggs, potatoes and eggplants. She purchases her ingredients from a peddler or nearby shop and used to take daily loans to help with her cash flow.

She has now switched to Modalku and has taken three loans within her first month with them. These larger-ticket loans have allowed her to increase inventory, thus lowering costs and increasing profits. Her business has contributed significantly to her household’s income and provides support to her mother who lives in her hometown of Pemalang, Central Java.

Story from the field - Meet Rizik

Rizik has been a sales agent (i.e. relationship officer) with Modalku for a year. He works mostly with clients based in Depok, Java, where he also lives.

To me, the selling points of Modalku are the swift processing of loans, reasonable installments and provision of capital for micro merchants to grow their businesses.

Sales has not always been easy; he often visits potential customers twice or thrice to explain the product and build trust with them. Some clients also question him about Modalku’s product in relation to other competitors. Over time, he has learnt how to better understand his customers and focus on the common goal of helping their businesses thrive.

The number of clients receiving micro loans has generally increased with every quarter, except for the most recent one when data has been collected. The loan approval rate has improved significantly starting from the third quarter, which can be attributed to the transition of sales agents to relationship officers and the “cluster” approach to target suitable micro enterprises. Micro enterprises in these “clusters” (i.e. markets) also have higher turnovers and relatively larger loan requirements, which explains the increasing ticket size.

In terms of the customers’ profile, women consistently form more than 65 percent of the clients per quarter. Interviews conducted by SHIFT ASEAN showed that for most clients, their loan with Modalku is generally not their first and all of those interviewed have bank accounts which they use for savings and salary payments. As such, they did not seem to be financially excluded and a few have even worked with fintech companies before.

There was a large recruitment drive for sales agents in the second quarter, resulting in a huge spike in numbers. However, it has gradually dropped due to the high operational cost of hiring agents.

Learnings from Modalku Implementation

Prior to the adoption of the agent model, loan distribution and repayment were purely digital. The challenge fund helped to de-risk the initial idea of an agent-based model and encouraged Modalku to explore different ways to reach MSMEs. However, the high operation cost of the agent network proved to be a constant challenge.

Throughout the project’s implementation, Modalku introduced several initiatives to lower costs and strengthen their business model:

  • Expanded the role of sales agents to relationship officers: While this improved the loan approval and repayment rates, officers found it challenging to manage the increased workload. They had to manage their time between sales and maintenance.
  • Reach micro merchants through markets and partnerships: Sales agents target markets with high concentration of micro merchants to expand their reach. Modalku explored the use of partnerships, such as with distributors, to reach micro merchants, but with limited success in this regard.
  • Increase supervision of salesforce: Modalku launched an activity management mechanism in December 2019. This digital tool, for example, helps to track the agents’ locations to ensure that they met their customers in-person.
  • Increase efficiency of loan application process: The underwriting process was improved, shortening the loan application process to only five days.

Despite the above efforts to lower operating costs and increase productivity, Modalku’s agent-based lending network continues to operate but on a smaller scale with fewer sales agents.

This case study provides deeper insights into the challenges associated with agent networks in Indonesia. Fintech players in this field should continuously rethink how to strengthen the business viability of agent networks, such as by enabling agents to generate more revenue streams or expanding public and private partnerships that share banking agents. This is especially relevant for those working in rural areas and the micro business segment where high human interaction is needed to understand customer pain points and needs to grow their businesses.

COVID-19 Update

Modalku has responded to the booming e-commerce landscape by lending to its merchants. They also initiated supply-chain financing for the telecommunications, healthcare and FMCG sectors in Indonesia. As Modalku continues to adapt its business model, UNCDF will continue to work with them to document their learnings.

About the United Nations Capital Development Fund

The UN Capital Development Fund makes public and private finance work for the poor in the world’s 47 least developed countries (LDCs).

UNCDF offers “last mile” finance models that unlock public and private resources, especially at the domestic level, to reduce poverty and support local economic development.

UNCDF’s financing models work through three channels: (1) inclusive digital economies, which connects individuals, households, and small businesses with financial eco-systems that catalyze participation in the local economy, and provide tools to climb out of poverty and manage financial lives; (2) local development finance, which capacitates localities through fiscal decentralization, innovative municipal finance, and structured project finance to drive local economic expansion and sustainable development; and (3) investment finance, which provides catalytic financial structuring, de-risking, and capital deployment to drive SDG impact and domestic resource mobilization.

UNCDF’s Shaping Inclusive Finance Transformations (SHIFT) in ASEAN programme is supported by the Australian Government.


The views expressed in this publication are those of the author(s) and do not necessarily represent the views of UNCDF, the United Nations or any of its affiliated organizations or its Member States.