Boosting the Growth of Indonesian SMEs with P2P Lending
Boosting the Growth of Indonesian SMEs with P2P Lending
It cannot be denied that Micro, Small, and Medium Enterprises (MSMEs) are a type of business that makes a significant contribution to Indonesia's gross domestic product (GDP). Recorded in 2019, the MSME sector contributed significantly to the GDP at 60.3%, with continuous growth from 2014 to 2018 at 10%. Besides their substantial contribution to the GDP, MSMEs also employ the largest workforce, accounting for about 97%. On the other hand, the presence of MSMEs has empowered certain communities that have limited access to knowledge about resource utilization in their surroundings, such as rural farming communities. These reasons make MSMEs a crucial sector, especially in boosting the economy in Indonesia.
MSMEs and Capital Challenges
Despite their significant contribution, MSMEs in Indonesia face challenges, with one of the biggest challenges being related to capital. Access to capital is crucial for MSMEs as it directly affects business operations, ranging from purchasing raw materials, equipment, to paying employee salaries. Even for some established MSMEs, capital is important for diversifying and developing products. In 2019, the Financial Services Authority (OJK) reported that only 18.3% of MSMEs received loan approval from conventional banking institutions. DSInnovate also reported that 70% of MSMEs consider financing as the main challenge in running their businesses. The difficulty in accessing capital is due to conventional financial institutions perceiving greater risks in borrowers, particularly MSMEs deemed to have insufficient and inadequate financial reports.
However, in recent times, the emergence of fintech in Indonesia, particularly peer-to-peer (P2P) lending, is considered capable of providing solutions to these issues.
P2P Lending, Solution for MSME Growth in Indonesia
Peer-to-peer (P2P) lending is part of financial technology as an online platform that provides financing or capital facilities. In Indonesia, P2P lending is regulated through the Financial Services Authority Regulation (OJK) No. 77/POJK.01/2016 concerning Information Technology-Based Lending and Borrowing Services. The regulation also explains that P2P lending can provide loans of up to 2 billion rupiahs. This significant figure indicates that the P2P lending industry sees high prospects due to the high enthusiasm of the Indonesian public for fintech-based credit needs.
The presence of P2P lending can accommodate capital needs that cannot be met by conventional financial institutions, particularly in terms of accessibility. P2P lending allows borrowers to obtain capital more easily without collateral, with lower interest rates ranging from 0.5% to 2%. Besides cost factors, P2P lending fintech services also provide access to other financial services that are difficult to obtain by MSMEs through conventional banking institutions. Many MSMEs also complain that they have difficulty in handling administrative matters and accessing the location of conventional financial institutions. With P2P lending services, MSMEs can access various banking services from anywhere with easier registration administration.
MSMEs do not need to attach financial reports or other difficult-to-provide documents such as land certificates or vehicle registration certificates. MSMEs wishing to apply for a loan also do not need to undergo assessment processes often conducted by conventional banks, such as time-consuming business place observation during registration.
The ease offered by P2P lending is considered to help MSMEs struggling to obtain capital through conventional financial institutions. The development of fintech in this field also proves that, on average, borrowers are from MSMEs. According to data compiled through Databoks, the majority of borrowers from fintech lending services are dominated by MSMEs, with 77% being online MSMEs and 42% offline MSMEs.
One of the largest P2P lending platforms in Indonesia is Amartha, which has successfully empowered female MSMEs. Amartha has disbursed credits amounting to 705.4 billion rupiahs to 167,349 female MSMEs and increased borrower income by 59.5% in 2018.
Another fintech company successful in providing loan solutions for MSMEs is Modalku. Since its launch in 2015 until the end of 2020, Modalku has disbursed loans of more than 20 trillion rupiahs to tens of thousands of MSMEs with a total of more than 3 million transactions in the Southeast Asian region, including Indonesia.
Other Challenges Faced
However, other problems arise with the development of fintech in Indonesia, such as financial literacy. The relatively low level of financial literacy in Indonesia is a factor that makes it difficult for entrepreneurs to access P2P lending. According to a survey by the Financial Services Authority (OJK), financial literacy in Indonesia in 2020 stood at 40%.
According to Didik Madiyono, a commissioner of the Savings and Loan Institution, through the IDX Channel, the reason for the low financial literacy in Indonesia is biased information about finance itself. In addition, Tirta Sagara, a commissioner of the Financial Services Authority in the Education and Consumer Protection sector, stated that people are reluctant to know and fully learn about financial risks. Ultimately, people receive biased information about financial services.
The lack of financial literacy also results in MSMEs struggling to manage their business finances, such as the importance of bookkeeping, business development costs, and taxation. Poor planning, both short-term and long-term, is a factor in the continued presence of many MSMEs undecided or even unaware of whether a loan is necessary. This demonstrates that public understanding, especially among MSMEs, regarding this lending model is still very minimal.
Opportunities for P2P Lending Players
Low financial literacy is both a challenge and an opportunity for fintech players, especially those involved in P2P lending, to educate the Indonesian public, especially MSMEs. There is a vast and large market segment for fintech players in Indonesia.
Firstly, the number of MSMEs in Indonesia itself, according to the Central Statistics Agency (BPS), constitutes 99% of the total number of industrial players in Indonesia, or around 64 million MSMEs in Indonesia. In addition, according to the Ministry of Cooperatives and MSMEs, only 13% of MSMEs are connected to MSME digitization, including financing. This low figure presents a great opportunity for new players in P2P lending to find the right market segment for their products and participate in the development of Indonesian MSMEs.
Secondly, conventional financial institutions have also gradually realized that they cannot work alone in providing loans to MSMEs. Many conventional banks are now collaborating with P2P lending fintech players, such as J Trust Bank with Investree and Modalku.
With the continuous growth of the MSME industry each year, the need for capital also increases, making P2P lending an alternative in providing business funds alongside conventional financial institutions. P2P lending fintech has the opportunity to create healthy competition within Indonesia's financial scope and contribute to the development of the digital ecosystem, especially in business financing in Indonesia. Nevertheless, the need for innovation and efforts to build consumer trust should also be considered to compete and meet market needs. ***
