Why ‘edfintech’ is ripe to thrive in Indonesia

Annisa is a communications student at one of Jakarta’s top private universities. But the economic disruption caused by Covid-19 cut into her family’s income, and she was unable to pay her school fees for the upcoming semester.

As a result, she was at risk of dropping out and hurting her professional and earning potential.

Through friends and social media, Annisa discovered that her university had partnered with an education-focused fintech company (edfintech for short), which offered her a loan to cover her tuition fees. After undergoing an application process that was entirely digital, Annisa got a loan and was able to continue her studies.

This is one example of the benefits of edfintech, a growing sector that has the potential to transform Indonesia.

In his August 2019 state of the nation address, Indonesian President Joko Widodo – widely known as Jokowi – emphasized that human capital was “the key to win in an environment of fierce international competition.”

Yet the status quo impedes the development of human capital in a number of ways.

First, access to education is stymied by a lack of affordability. A recent World Bank report on education in Indonesia cited “insufficient funds” as the most common reason why children aged 16 to 18 are not in school.

This isn’t surprising when you consider that tertiary education in the country costs US$1,000 to US$5,000 a year, while the average Indonesian family makes only US$2,700 a year. Such inaccessibility is apparent in enrollment rates, which drop significantly when students move from secondary to tertiary schooling.

Second, it is difficult to gain funding for education in Indonesia, where 77% of the adult population are either underbanked or unbanked, according to the e-Conomy SEA 2019 report by Google, Temasek and Bain & Company.

Access to credit cards is limited as well, with penetration rates of around 3%.

Banks have been reluctant to extend student loans, viewing them as “a high-risk business”. This has not escaped the notice of the government. In 2018, Jokowi urged banks to issue education loans.

Financial aid for students is widely available in other markets like the US where tertiary education is also expensive, but it is hard to come by in Indonesia, where such loans cover “only 3% of the total costs to attend,” according to the World Bank report.

Part of a wider ecosystem

For tuition fees and learning materials

Tech is key, but it’s not everything

Schools as borrowers

Who are the lenders?

Contextualizing high interest rates

Regulatory squeeze?