Expanding into Indonesia’s Informal Economies with Innovative Credit Scoring

Hailed as the savior during the Asian Financial Crisis (1998) and the Financial Crisis of 2008, Indonesia’s informal sector continues to struggle to gain access to credit.

The informal economy, also dubbed as the grey economy is the part of the economy that is neither taxed nor monitored by the government. These units typically operate at a low level of organization, with little or no division between labor and capital as factors of production, and operate on a small scale.

Examples of informal businesses include the typical warung (small shops), street vendors, home-based workers (garment), and many more. In the digital era, small online shops are also considered as part of the informal sectors.

Labour relations in the informal sector are based mostly on casual employment, kinship, or personal and social relations rather than contractual arrangements with formal guarantees. According to Indonesia’s Central Bureau of Statistics, 57% of the Indonesian labor force works in the informal sector.

The informal economy was hailed as Indonesia’s savior during the Asian Financial Crisis (1998) and Financial Crisis of 2008. They act as a buffer, absorbing laid-off workers into their labor forces.

However, the informal economy was severely hit during the COVID-19 and its related crisis. Unlike the previous crisis, COVID-19 related crisis was not caused by a financial crash. Rather, it was driven by the virus outbreaks which then impacted the real economy; the production, purchase, and flow of goods and services.

The supply of goods was disrupted as factories were shut down and shipping was delayed. On the other hand, demand was significantly reduced as shopping malls and public areas were closed and consumers were locked down.

To add salt to the wound, unlike the formal sector, the informal sector did not receive the economic stimulus package as they were unregistered, hence not recorded. It was reported that almost 500,000 businesses in the informal sector have gone bankrupt amidst the pandemic.

Informal Sector Post-Pandemic Recovery

As we enter the new normal era, where shopping malls and public areas reopened, both the formal and informal sectors are starting to recover.

However, as they were severely hit during the pandemic informal businesses require financial help to rebuild. Street vendors would need to restock, so do warung and small online shops. While home-based manufacturing would need working capital to restart operations.

Unfortunately, businesses in the informal sector are struggling to get access to credit. Traditionally, Kredit Usaha Rakyat (KUR) — business credit tailored to serve micro, small and medium businesses was the only viable option for informal businesses to get access to working capital loans. KUR’s interest rate is as low as 6–7%, a considerably low rate compared to other forms of credit. On the other hand, its distribution is limited to Rp 50 million per micro and small business.

However, despite the program being theoretically accessible, its execution was not flawless. There are a few document requirements, such as Surat Izin Usaha — a business license that makes it difficult for informal businesses to apply. Moreover, for loans larger than Rp 25 million, banks still require the applicants to provide collateral.

Enter the startup digital ecosystem

Realizing the huge potential presented in the informal sectors, startups have started taking action. Warung Pintar (with Cicil) and Credibook (with AwanTunai) have started offering loans to warung, while on the digital front, Tokopedia and even the payment gateway, Xendit have offered loans to the online sellers.

All of the startups mentioned above leverage their rich first-party data source to understand informal businesses’ creditworthiness. Both Warung Pintar and CrediBook are bookkeeping apps that make it easier for applicants to share their cash flow.

On the other hand, Tokopedia and Xendit process merchant transactions online, gathering data that can forecast the applicants’ profitability and repayment capacity.

How can Brick help?

Are you a lending institution and want to expand into the informal business segment? Brick can help you retrieve borrowers’ transactional data straight from various financial institutions.

Additionally, Brick also connects with the top two eCommerce platforms in Indonesia, allowing applicants’ to share their business cash flow with your institution easily.

On top of that, Brick also provides automated transaction categorization capabilities with machine learning allowing lenders to understand borrowers’ income, liabilities, and spending patterns.

Interested in learning more about Brick’s product? Schedule a demo to find out more.