The way forward for small businesses in Indonesia

History has shown that simple access to business capital can give startups the boost they need to become global powerhouses. Even if the vast majority are only moderately successful, a vibrant small-business sector still strengthens the production value of a nation at large. Micro, small, and medium-sized enterprises (MSMEs) in emerging markets like Indonesia are no exception.

Buyers and sellers at a market in Lombok, Indonesia / Photo credit: erikj57 / 123RF

The country’s current Cooperatives and Small and Medium Enterprises minister, Teten Masduki, says that although Indonesia’s MSMEs account for 60% of gross domestic product, only 14.5% of them are export-oriented. This is far less than in China, where the number stands at around 70% – a good target to aim for, according to economists.

A phenomenal increase in production volume and access to global markets is the key to making this goal a reality. To get there, the nation’s MSMEs will need a lot more backing than what has been made available to date. But earmarking a meaningful amount of capital for local businesses to become more globally competitive has been a struggle so far in the archipelago.

Up until now, Indonesian MSMEs have largely been excluded from the formal financial sector due to unique factors inherent to the landscape. Massive unbanked segments of society, complex regulations from legislators, and limited access to enterprise credit are just a few hurdles that routinely hinder them from getting business loans.

Recent research from Google, Temasek, and Bain & Company shows that there are 92 million adult residents in Indonesia that remain untouched by any kind of financial or banking services. That’s more than half the total adult population and the core of the economy. For their part, MSMEs employ 116.7 million people – over 97% of the total national workforce – and less than 15% of them have the proper access to financing, according to data from the Central Statistics Agency.

A 2018 PricewaterhouseCoopers report also revealed that Indonesia’s loan disbursements left around 74% of middle- to low-earning individuals and MSMEs without financial access. If the trend continues, Indonesia will be robbed (through financial neglect) of its chance to become one of the few top economies in the modern world.

As technology is transforming almost every aspect of life today, forward-thinking banks and microfinance institutions are seeking to improve access via fintech lending. Mobile apps and platforms are the best solutions if we hope to leapfrog the current obstacles.

The Wild West of digital lending

The idea of online peer-to-peer (P2P) lending platforms is to match borrowers with lenders without the involvement of tedious bureaucracy. Lenders – or investors, as they’re often called – can directly receive profit from loans, while borrowers can get loans far quicker and easier than going through traditional and complex bank processes.

With this model, digital lending is on its way to resolving the core problems of conventional lenders – poor infrastructure and risk management – by combining tech with innovative approaches and alternative business models.

However, Indonesia’s P2P lending industry is in its infancy, which means that compared to big banks and financial institutions, it’s still liable to cause more losses than profits for lenders. And this is despite the rigorous profiling that P2P startups claim to run.

These platforms are also as vulnerable to instability and bankruptcies as normal businesses. Additionally, users run the risk of unauthorized platforms charging high interest rates in return for more relaxed credit checks and, in extreme cases, abusing their private data in an attempt to force repayment.

There are a few platform operators that claim to be regulated and supervised by the Indonesian Financial Services Authority. However, banks are now moving into digital loan platforms with an equally easy process but with far more credibility (as their loans are guaranteed).

But is this enough to bring widespread capital growth for all segments of society?

High tech and high touch