Promoting Financial Literacy through Digital Lending in Indonesia

Indonesia is one of the highest underbanked market in Southeast Asia. The lower socio-economic bracket neither have bank accounts nor do they have organised saving and emergency funds systems in place to meet their future needs. In terms of borrowings, almost 70% of MSMEs do not have access to financial services firms to obtain capital. As per an OECD survey, the main reasons cited for the same are low financial literacy, infrastructure related issues and limited capital and resources.

Given this low banking penetration within the country, the government and financial regulator of Indonesia took a challenge and promoted digitalisation and technology adoption. This resulted in the emergence of a lot of e-commerce players, peer to peer (P2P) platforms and fintech companies in the last few years. They took advantage of increasing internet penetration within the country and leveraged technology to provide Indonesians with better access to financial products and investment options. E-wallets, electronic toll payment, digital wallets, mutual fund investments and savings programs were launched and promoted to increase the banking coverage. These fintech firms mostly catered to the needs of unbanked and under-banked population or sub-prime borrowers which had been completely left by the banks. P2P firms commenced lending to both MSMEs and individuals and also started accepting deposits and investments from these subprime borrowers. As a result of these efforts, Indonesia’s unbanked population decreased from 64% in 2016 to 51% in 2019. (Source: PWC and Indonesian Fintech Association).

Covid 19 and Indonesian Financial Services Sector

The Indonesian economy as well as banks and financial services sector had been growing substantially pre-covid. With the promotion of financial literacy, banking penetration as well as fintech firms and their portfolios grew exponentially. However, as the restrictions and social distancing norms pertaining to Covid -19 were imposed, the Indonesian economy saw a dip in GDP for the first time in 20 years. Its GDP declined to -5.3 percent year on year in the second quarter of 2020. It led to almost no-growth in the loan book of formal banks as they began shying away from lending and taking any undue risks.

The situation proved to be a gain for digital fintech and P2P firms. These companies pushed their products and penetration deeper into the markets by promoting financial literacy and digital payments. The overall easier structure of lending of P2P players without collateral and digital processes attracted more borrowers as compared to banks. In return, these companies also offered higher rate of return to depositors which enticed these sub-prime borrowers. As a result P2P companies saw a portfolio growth of 135% in July’20 as compared to July’19.

Risk Analysis

Risk analysis involves the study of Non-performing loans (NPLs) as well as overall regulatory structure. As across the world, Indonesian Banks are subjected to more compliances and regulations as compared to fintech and P2P platforms. In general, this unregulated structure of digital platforms led to a higher growth in their deposit and lending books where they tapped all the unbanked borrowers in dire need of finances and capital. On the other hand, such unfettered lending also resulted in a higher NPL ratio. To compare, the NPL ratio of banks stood at 3.22% in July’2020 while it was 7.22% for P2P lenders. This indicates the riskier portfolio which P2P players have as compared to banks.

Risk Mitigation

Seeing this unregulated and large loan book growth of P2P players and their rising NPL ratios, the Indonesian Financial regulator realised the growing financial risk imposed by this structure in the near future. In addition, given the riskier borrower profile as well as their limited knowledge about financial markets and products, it became all the more important for the regulator to increase supervisory control over these companies. Thus to begin with, the regulator first banned a large number of illegal and unregulated P2P companies from doing business. Secondly, they amplified their efforts to promote digital knowledge among borrowers. These programs were not only meant for new borrowers but were also meant to educate existing debtors on how they should timely pay their EMIs online or through mobile applications.

Key Initiatives in the Past

Case Study: Tokopedia

In order to increase saving habits among lower income groups and boost financial inclusion, an e-commerce platform Tokopedia launched its “Rabu Nabung” campaign. Tokopedia launched various digital investment products like mutual funds and gold loans where miniscule investments were needed so that even weaker sections of the society could invest with them. Tokopedia works closely with state pawnshop Pegadaian in its gold investment product, while for its mutual funds product, it has worked together with PT Bareksa Portal Investasi as the selling agent, Syailendra Capital and Mandiri Manajemen Investasi for the investment management.

“The campaign also seeks to instill better financial management skills among people from as early an age as possible. They need to save and invest their money habitually and they can start small too,” Tokopedia Fintech Senior Lead Marissa Dewi said. (Source: “Jakarta Post”). As a consequence of the campaign, the number of mutual funds investors in Tokopedia multiplied 57 times since it’s first launched, with total transactions multiplying by 27 times for the same product. Meanwhile, Tokopedia also saw the number of people investing in gold multiply 20 times, with the number of transactions multiplying by 20 times.

Thus, as seen above, the digital push and financial literacy gave boost to Indonesia’s P2P business. However, this sudden growth and rise brought with it a series of challenges like fraudulent operators, over-borrowing from consumers, defaults and EMI collection issues. Having recognised these concerns, the regulators as well as the government took a comprehensive approach of not only educating borrowers and investors on benefits of savings but also elucidating them of their rights and threats imposed by these alternative channels of financing as well as cyber security related risks. Some example of these measures are as follows:

1. OJK with its regulation No. 77/ POJK.01/2016 on Information Based Lending Services banned P2P lending platforms from pooling capital and requires them to file trimonthly report to OJK.
2. OJK worked with Satgas Waspada Investasi or Investment Readiness Task Force to block 574 illegal P2P platforms from operations, since Pandemic and in the last 3 years they have blocked some 2591 illegal platforms.
3. OJK and Indonesia’s fintech industry association, Asosiasi Fintech Pendanaan Bersama Indonesia (AFPI) came forward to introduce safeguards to ensure human representatives are readily available to respond to customer queries and complaints in regards to product information, EMI payments, and collections.
4. The regulator Bank Indonesia has encouraged QR Code Indonesian Standards (QRIS) which enables one QR code to be used to accept payments using different e-money instruments. The industry players have been asked to standardise and collaborate in the implementation of the same.

Additionally, they increased their regulations and control on these fintech platforms by managing ways in which EMIs are collected. The regulators have also began educating borrowers on the increasing cyber security risk associated with digital lending. Through these financial literacy measures not only are they advocating digital lending but also communicating to the borrowers on issues like mis-selling, excessive borrowing, frauds such as phishing, hacking attacks, unauthorized use of data etc.

Way Forward

Financial literacy is financial knowledge about investments, savings, credit, and debt management which helps in making financially responsible decisions. Any lack of knowledge impacts the overall life of a borrower whose complete monies, savings, retirement benefits can also get lost.  BI and OJK have taken some measures to strengthen financial deepening, easier access to financial services, and monetary operations, by facilitating collaboration between the banking industry and Fintech companies. However, the government needs to further devise a clear financial inclusion road map, along with clear technical implementation details, to give financial institutions a clue about the concrete investments they need to make to accelerate financial inclusion in the next few years. They also need to educate the first time borrowers and regular debtors on the importance of financial prudence, cyber threats and frauds which can avoid any systematic threat to the economy in the future.