Indonesian Fintech Industry: Serving the Unbanked

According to a 2014 report from the World Bank, about two thirds of Indonesia’s 261 million population do not possess bank accounts, making the country home to the third largest unbanked population in the world. These unbanked individuals, most of whom are impoverished, have no means to access basic banking services such as the ability to save, borrow, make electronic payments and manage their financial risk. Indonesia’s lack of financial inclusion has hobbled its effort to achieve the inclusive and sustainable economic growth that it requires to escape the so-called “middle income trap” and this presents a challenge to the country’s lawmakers.

There are various factors that make it so challenging to incorporate Indonesia’s unbanked into its formal banking ecosystem. Firstly, most of these individuals lack basic financial literacy — they are simply unaware of the benefits of maintaining a bank account. Secondly, many individuals are put off by the inconvenience, bureaucracy and fees associated with being a banking client. Finally, many people, especially those living in Indonesia’s far-flung islands, have no means of physically accessing a bank — some have never even set foot in one.

The sheer number of Indonesia’s unbanked creates an opportunity for the country’s technologically-savvy entrepreneurs. The past few years have seen a proliferation of startups that make use of financial technology (“fintech”) tools to bring financial services to greater slices of the Indonesian population. Judging from the investment they received, these startups are doing pretty well; according to the tech website TechInAsia, between 2013 and 2017, Indonesian fintech startups had received US$56 million of funding.

Given their central role in shaping the Indonesian financial system, these startups and the products they develop warrant a closer look. In this two-part series, Datarama presents an overview of the fintech landscape in Indonesia. We discuss in this article one of the most important fintech innovations that have recently received much media attention in Indonesia: peer-to-peer lending (P2P lending).

What is P2P lending?

Taking loans constitutes one of the most basic financial services offered by banks to their customers. However, Indonesia’s poor financial inclusion means that many individuals and small businesses are unable to take bank loans. Without access to fair loans, it is challenging for many individuals to pursue entrepreneurial endeavor and escape the cycle of poverty.

P2P companies are poised to break this vicious cycle by offering cash-strapped individuals a more accessible alternative to bank loans. Essentially, P2P lending is the practice of borrowing and lending money without going through banks or any other financial institutions as intermediary. Instead, the lending proceeds through a platform, often virtual, that is managed by a P2P company. These P2P companies take advantage of Indonesia’s relatively high internet and mobile phone penetration rate. With P2P lending, individuals can take out loans without having to deal with the hassle of going to banks and dealing with their prohibitive paperworks.

P2P players in Indonesia

The prominent role that small and medium enterprises play in the Indonesian economy and their difficulty of accessing the financial system render Indonesia a fertile ground for P2P lending. According to a January 2018 Reuters article, there are around 30 P2P providers operating in the country and 36 more firms are waiting to be approved.

Most of these companies are built along similar lines: they all provide platforms for lenders to invest in a portfolio of loans; loans with high risk will yield better interest rates for the lenders. As P2P companies have few overheads, some of them can offer more attractive lending terms compared to banks. However, they differ in the specific models they run and/or the profiles of customers they target.

One of the earliest entrants to the P2P sector in indonesia is Amartha. The company started in 2010. Initially, its business model consisted of collaborating with banks to disburse loans to members of “lending groups.” These lending groups usually consist of 15 to 20 individuals living in rural areas. Members of the group can take loans of up to US$750. The company takes a cut from both lenders and borrowers once the latter pay back their loans. In 2016, Amartha tweaked its business model; it now allows both individuals and banks to invest on its platform. Until now, Amartha has disbursed US$5.1 million in loans to 30,000 microentrepreneurs in Indonesia, mainly in West Java.

Another major player in the domain is Modalku. Modalku describes itself as an online marketplace for small businesses to acquire loans and for lenders to fund small business loans to earn returns. The company claims that its technology-based approach enables borrowers to receive loans “at or lower than market rates”, while at the same time enabling lenders to earn returns “well above that of bank deposits, traditional fixed income products, and life insurance investment-linked products.” The company has distributed more than IDR 1 trillion (USD 74 million) in debt financing as of January 2018.

Another interesting company in the industry is GandengTangan, which is a crowdlending platform for small enterprises with social missions. On the first glance, the GandengTangan platform looks similar to that of the popular crowdfunding platform Kickstarter. Enterprises that want to borrow set up a project page on the Gandengtangan platform and solicit funds for their projects. However, unlike Kickstarter, those who lend money to GandengTangan project do not get any goodies in return — they will simply get back the cash they lend, without any interest. The lack of monetary compensation for these lenders is compensated by the satisfaction that they had contributed to a social cause. As of April 2017, the startup claimed to have facilitated more than 700 lenders, funding 20 enterprises, and “creating social impact” for more than 3,500 people.

Government response

These P2P providers have so far received a warm welcome by Indonesia’s financial regulator (OJK), who see them as a much-needed alternative to the country’s banks. In response to the rapid growth of the Indonesian industry, in December 2016, the OJK issued a P2P framework, which set a few ground rules by which all P2P startups should abide. These include a requirement that a P2P company have a minimum IDR 1 billion to start its operations. The P2P industry. The framework also regulates the amount of loans that the P2P companies can offer as well as restrictions on foreign ownership.

Despite the media attention and the capital they receive, the P2P industry in Indonesia is still in its infancy. It remains to be seen which startup will strike the winning formula and become the Go-Jek of the fintech industry.

Datarama extensively profiles Indonesian companies, from large firms to up-and-coming startups. Contact us at to find out more.

Written by Datarama Analyst Meraldo.