Indonesia Banks On P2P Lending Potential.

Updated: Apr 8












The geographic limitations on the country’s banking system have left millions without access to traditional financial services, a gap the fintech sector is rapidly plugging.


Indonesia’s peer-to-peer (P2P) lending sector has grown rapidly in recent years, driven forward by the rapid roll out of internet services across the country.


The growth of fixed and mobile internet users has seen the proportion of the country’s 270mn citizens with access to financial services grow from slightly less than 60% in 2013 to more than 75% in 2019, according to Financial Services Authority (OJK) data.


However, millions of Indonesians still have either limited or no access to traditional banking services, owing to rural communities’ lack of access to physical branches. The country has around 47mn underbanked and 92mn unbanked adults, according to a 2019 report by Google, Temasek, and Bain & Co.


The National Development Planning Ministry, meanwhile, has estimated that up to 70% of all micro, small and medium enterprises (MSMEs) do not have access to traditional capital raising facilities. The rise of financial technology solutions – particularly P2P lending and e-money digital wallets – hold the key to plugging these gaps.


Banking is seen as more of a luxury now, as seen in the high numbers of unbanked and underbanked. This has created an opportunity for fintech players to meet an unfulfilled demand.

Freddy Karyadi, Partner, ABNR


Gap in the market


Following the Asian Financial Crisis in 1997, Indonesia tightened regulatory requirements in the banking sector. The upshot of this was that opening a bank account became more challenging, explained Freddy Karyadi, a partner at Indonesian legal firm ABNR.


He said: “Banking is seen as more of a luxury now, as seen in the high numbers of unbanked and underbanked. This has created an opportunity for fintech players to meet an unfulfilled demand.”


Karyadi added that MSMEs often struggled to secure capital from traditional financial providers as their lack of acceptable collateral and low volume of trade made it harder for traditional lenders to approve loans. He noted, however, that P2P lenders did not operate under the same regulatory constraints as the banking sector when accessing financial risk.

P2P lending – alongside e-money digital wallets – is one of the fastest growing sub-sectors in Indonesia’s fintech space, with total assets climbing from US$203mn in December 2019 to US$237mn in May 2020, according to OJK data. OJK data also show that the sector disbursed IDR56.16tn (US$4.01bn) in new loans in the year to October 2020, up 23.88% year on year.


After several years of taking a somewhat more relaxed approached to online lending, however, the government is preparing to overhaul the regulatory environment. While lawmakers’ efforts have been geared at improving the sector’s transparency and overall performance, they also aim to use the sector to extend financial access to parts of the country that are currently underserved by the banking sector.


The industry is more mature than ever and players who already have a strong business model will take these stiffer requirements in their stride. Companies that can adapt will benefit as those players that cannot have to exit the market.

Freddy Karyadi, Partner, ABNR


Regulatory update


The OJK is currently revising the POJK regulations 77/2016 and aims to finalise its updates by the end of the first quarter. The changes will raise the core capital requirements of fintech companies seeking a permit from IDR2.5bn (US$179,000) to IDR15bn (US$1.07mn).


Fintech operators will also be required to raise the minimum percentage of productive loans in their portfolio from 15% in the first year to 40% over the next three years. P2P lending firms will also be expected to raise loan disbursement outside the island of Java from around 15% to 25% within the next three years.


The OJK also aims to introduce a greater degree of transparency into the sector, requiring P2P lending platforms to post key statistics – such as the borrower numbers and bad debt ratios – on their websites.


Karyadi said the introduction of new regulations would help with the long-term growth of the sector, thinning the herd through “natural selection”.


He said: “The industry is more mature than ever and players who already have a strong business model will take these stiffer requirements in their stride. Companies that can adapt will benefit as those players that cannot have to exit the market.”


His comments were echoed by a senior executive from the P2P lending sector, who said a tighter regulatory environment would only improve the overall health of the sector.


The executive, speaking on condition of anonymity, added: “The challenge of adapting will be good for stronger players, as they will be able to expand their market share as others shut up shop. We’re internet companies, with low physical costs and a high degree of flexibility, and the stronger outfits will be able to adapt readily enough.”


The sector is not without its challenges, however, with the coronavirus (COVID-19) pandemic and its economic impact still creating uncertainty about the future.


We’re more agile that way.The industry is more mature than ever and players who already have a strong business model will take these stiffer requirements in their stride. Companies that can adapt will benefit as those players that cannot have to exit the market.”

Freddy Karyadi, Partner, ABNR


Pandemic, performance and pressure


Fintech lenders’ total loan disbursements jumped 200% year on year in 2019, according to OJK data, which also showed that in the first 10 months of 2020 growth in new loans slowed to 23.88% year on year reaching a total of IDR56.16tn (US$4.01bn).


The industry executive said the pandemic remained the sector’s biggest concern as it affected the overall health of the economy. He added: “COVID is not ending and there is still uncertainty over how the vaccine rollout will affect the local and global economy. Will this uncertainty last the whole year? It’s possible, but it’s still too early to say.”


Another concern for P2P lenders is the rise in bad debts, which climbed steadily from April last year to a peak at 8.27% of disbursed loan values in September 2020. This compares poorly with conventional banks’ that recorded a ratio of 3.22% in July, according to Indonesian Joint Funding Fintech Association (AFPI).


Karyadi said: “As the sector grows the real-world value of these nonperforming loans is going to increase, and players are going to have to improve processes for dealing with debt recovery and risk management.”


He added that the banking system had greater experience in dealing with manually recovering debt and that, while the P2P lending sector was following the banking sector’s lead it still lagged behind.


We use the exact same processes that the banking sector has developed to pursue repayments and capital recovery, from teams tasked with follow ups to divesting long-term nonperforming loans to multi-finance outfits.”

Freddy Karyadi, Partner, ABNR


The P2P sector has made accessing financing easier than ever before, increasing its own risk of attracting subprime borrowers. The industry executive, however, argued that P2P lenders flexibility in streamlining and approving loans also gave it an edge in managing bad debt and the associated risks.


He said: “We use the exact same processes that the banking sector has developed to pursue repayments and capital recovery, from teams tasked with follow ups to divesting long-term nonperforming loans to multi-finance outfits.”


He added: “We also benefit from our use of automated technologies to track and monitor bad debt from a much earlier point in the cycle. While banks think in terms of months and quarters, we evaluate loan performance in terms of days and weeks. We’re more agile that way.”


Indonesia’s economic digitalisation will create new opportunities for those companies that can safely navigate the challenges the next 12-24 months will inevitably bring. The country’s fractured geography has limited penetration of the traditional banking sector and, while banks are catching up, the fintech sector has demonstrated its ability to be more agile where and when it counts.

This article was written by Andrew Kemp for Conventus Law in association with ABNR


The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position or policy of ABNR or its other employees and affiliates.



Freddy Karyadi, Partner, ABNR

Email: fkaryadi@abnrlaw.com

Freddy Karyadi has over two decades of practising law in Indonesia and has been heavily involved in numerous complex cross border deals including lending-fintech, TAX, restructuring distressed assets, M&A, investment, employment and dispute settlement/bankruptcy.


Karyadi was one of the pioneers who focused on the DIGITAL INDUSTRY and is the head of fintech practice team. Freddy led ABNR team in handling many transactions involving technology and fin-tech/health-tech/edu-tech/Media/TMT companies, from early stage fund raising, integration, incorporation-expansion, exit, public offering preparation to regulatory compliance and has represented independent power producers (IPP), giant ECAs and commercial banks for various electricity sector financing. Karyadi’s clients vary from multinational to start-ups which span across a wide range of industries including natural resources, energy, financial institutions (including MULTIFINANCE, P2P, insurance, insurance brokerage, bank, etc), health-care, private equity funds – venture capital, and property. With a strong knowledge of legal, commercial, TAX and accounting issues that these industries encounter, Karyadi can quickly identify the key issues and offer practical business oriented legal solutions.

On litigation matters, Karyadi handled various suspensions of payment and bankruptcy proceeding of various industries including aviation, shipping, and mining sectors and also assisted clients in TAX disputes.

Karyadi has been consistently rated as a leading lawyer by several international publications including Asialaw, Legal500, Asia Business Law Journal, and IFLR1000 for the last half decade.


He is a member of the Editorial Board of The Derivatives and Financial Instrument Journal of the International Bureau of Fiscal Documentations. He contributes numerous TAX and law articles of Conventuslaw, IFLR, International Tax Review, Thomson Reuters, International Comparative Legal Guide and Getting the Deal Through. Karyadi was also a speaker at IBA, IPBA, IFA and IFLR events and gave seminars for tech start-up communities.


Recent transactions highlight:


  • Leading ABNR team in advising PT Indo Raya Tenaga, the (around US$ 3 billion) project company Java 9&10 power plant; (2020);

  • Leading ABNR team in assisting project owner in EPC agreement with Doosan Heavy Industries & Construction Co. amounting to US$1.42 billion thermal power plant construction project in Indonesia (2019);

  • Leading ABNR team in assisting a divestment majority stakes in prominent multimillion dollars fintech to a leading Indonesian technology company (2020);

  • Leading ABNR team in assisting a world leading manufacturer in the rack-and-pinion rail vehicle industry in its cooperation (initial investment around USD 100 milion) with the Indonesian state-owned integrated rolling stock manufacturer (2019);

  • Leading ABNR team in assisting a multi million dollars partial divestment in a market leading printing company to a major Japanese printing company and the relevant cooperation (2019).








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