Democratizing Finance: Peer-to-peer lending in Indonesia
Thu, 27 Sep 2018 || By Ahmad Najmi Ramadhani

In the history of Indonesia’s economy, Micro, Small, & Medium Enterprises (MSMEs) has played an essential role in the time of crisis. Based on the Micro and Small Industry Survey held by Badan Pusat Statistik in 2017, there are 4.46 million business entities in Indonesia, and 4.10 million (91.96 percent) of them are in the form of MSMEs.[1] These MSMEs also contribute 60.34 percent to Indonesia's gross domestic product (GDP) by June 2018.[2] This fact further shows the significance of MSMEs in Indonesia’s economy.

Despite these facts, MSMEs still face many difficulties. 65.67 percent MSMEs stated that they experienced difficulties to access fund for their business. Around 70 percent of these MSMEs do not have access to banking system even though access to microcredit is a vital ingredient for them to succeed.[3]

Peer-to-peer lending in Indonesia


Exhibit 1 The digital revolution has arrived in Indonesia. Source: McKinsey & Company.

The growth of the digital revolution in the financial sector is coming to solve this problem. It is noted that there are four types of technologies that brings tremendous impact on Indonesia’s economy. There are the mobile internet, cloud technology, Internet of Things, big data, and advanced analytics. All of them, defined by particular metrics in exhibit 1, show an incremental increase from the year 2014 to 2015. This can be explained by the relatively low cost of mobile phone and data, resulting in many people have easier access to the Internet.[4] As shown in the exhibit 2 below, Indonesia’s mobile broadband costs just 50 percent of what consumers in some ASEAN neighbouring countries pay.[5] This untapped potential of digitization in Indonesia could be accelerated to overcome Indonesia’s problem like the problem of access to microcredit that experienced by MSMEs in Indonesia.

Peer-to-peer lending in Indonesia

Exhibit 2 Mobile broadband price in some country. Source: McKinsey & Company.

In the world where the wealthiest people—that is only one percent of the population—own half of the world's wealth, [6] financial exclusion is imperative for the government to maintain economic and political stability. In Indonesia, 51 percent of adults do not have access to the financial product of private bank[7]. This number shows a relatively large gap of access to financial products between adults in the developed and developing countries. 

If the digitization of finance could spread widely to the developing world, the economic growth potentially could reach $3.7 trillion or 6 percent added value to their GDP in 2025.[8] There were still $2.2 trillion of total credit gap in MSMEs financing in 2013 (Exhibit 3). This data shows that there are still a lot of MSMEs that unserved or underserved by the conventional banks. This situation required the government policy to encourage the digitization as one of the strategic policy to assist the MSMEs.

Peer-to-peer lending in Indonesia


Exhibit 3 MSMEs across developing countries cannot access microcredit. Source: McKinsey Global Institute.

As mentioned before, developing the MSMEs will be a strategic move for Indonesia’s economy. However, financing MSMEs is not an easy job to do. There are many requirements that banks requested from MSMEs who want to propose a loan like the track record of financial position. This becomes a problem because the majority of MSMEs do not have a well-maintained financial record. Another example for the requirement is collateral and high-interest rate, which the MSMEs cannot afford.

On the other hand, from the current view of the banking industry, lending credit to MSMEs is not a profitable business. To solve this issue, banks have to shift its operations to become more digital and branchless because that is what the consumers want (Exhibit 4). Moreover, for the start-ups, they have to enhance their ability to tackle the issue of requirements for a loan by harnessing big data to build effective credit scoring system so the issue of a non-performing loan will be lesser. On the other side, harnessing digital revolution for the finance industry will reduce the cost dramatically (Exhibit 5).

Peer-to-peer lending in Indonesia


Exhibit 4 Customers demands digital shift. Source: McKinsey Indonesia.

Peer-to-peer lending in Indonesia


Exhibit 5 Digital technologies cut the cost of providing financial services. Source: McKinsey Global Institute.

Nowadays, many start-ups offering a new mechanism called peer-to-peer (P2P) lending to solve the issue of MSMEs inability to access funds from conventional banks. P2P lending defined by as a method of debt financing that enables individuals to borrow and lend money without official financial institution as an intermediary[9]. As an example,, certified by Otoritas Jasa Keuangan (OJK), already channeled 538.41 million rupiahs and recorded 98.39 percent of performing loan[10].

To minimize the risk of a non-performing loan, use machine learning techniques to develop a more accurate credit scoring system. The fintech startups continuously develop its technology to make financial service industry more efficient and on the other side, the conventional banks also try to shift their business to the digital platform so they will still be relevant in this digital era.

Editor: Lia Wulandari & Treviliana Eka Putri

Read another article written by Ahmad Najmi Ramadhani or article about digital economy.

[1] Badan Pusat Statistik Republik Indonesia. (2017). Profil Industri Mikro dan Kecil 2017. Jakarta: BPS RI, 23.

[2] KPMG Siddharta Advisory. (2017). Finance in Indonesia: Set for a new path?. Jakarta: KPMG, p.25.

[3] Badan Pusat Statistik Republik Indonesia. (2017). Profil Industri Mikro dan Kecil 2017. Jakarta: BPS RI, 30.

[4] McKinsey Global Institute. (2016). Digital Finance For All: Powering Inclusive Growth in Emerging Economies. McKinsey Global Institute.

[5] Das, K., Gryseels, M., Sudhir, P. and Tee Tan, K. (2016). Unlocking Indonesia's digital opportunity. McKinsey & Company, pp.5-6.

[6] Harari, Y. (2018). 21 lessons for the 21st century. London: Jonathan Cape, p.103.

[7] World Bank Group. (2018). The Global Findex Database 2017: Measuring Financial Inclusion and the Fintech Revolution. Washington D.C.: World Bank, 124.

[8] McKinsey Global Institute. (2016). Digital Finance For All: Powering Inclusive Growth in Emerging Economies. McKinsey Global Institute, p.2-4.

[9] Investopedia. (2018). Peer-to-peer Lending (P2P), [Online] Available at: Accessed 27 September 2018.

[10] Amartha. (2018). Amartha,[Online] Available at: Accessed 27 September 2018.