In a recent Fintech investor brief in Singapore, where more than 50 investors participated, almost nobody was aware of the huge gold rush that is happening right across the Java Sea in Indonesia – Chinese mobile payday loan companies are flocking to the biggest country in Southeast Asia.

Every week, at least two new teams approach us for advice on short-term payday loan market in Indonesia. And the last time we counted (which was two weeks ago), at least 35 were already operating there.

They are attracted by the huge underserved demand, but they will need to consider many factors and cannot simply replicate the Chinese model in this Southeast Asian market.

Hungry for growth

On October 17, Chinese payday loan provider Qudian Inc (QD.N), backed by Alibaba Group affiliate Ant Financial, said it raised about $900 million in an IPO that represents the biggest-ever U.S. listing by a Chinese financial technology firm.

Qudian is the biggest player in the field in China, but far from being the only one. The 3-year old company has probably hundreds, if not thousands, of competitors doing the exact same thing, moving about CNY816bn (US$123bn) in loans outstanding as of the end of 2016 according to Financial Times’ number.

In the context of the Chinese government’s regulatory tightening in the sector, the various players are rushing for a slice in the domestic market before any regulatory eventuality. At the same time, many also began to shift their attention to foreign markets.

And Indonesia, with its mobile payday loan market still in infancy (almost non-existent), seems like the promised land. Many Chinese payday loan platforms are rushing over to invest, hoping to seize the market early.

Open the Finance Category of Google Play Indonesia, you will see a lot of names including Kredit (credit), Tunai (cash), Uang (change), Dana (fund), Rupiah (rupee, the Indonesian currency unit). Some names are straightforward in English, with keywords such as Cash and Loan.

Google Play Indonesia – Guess which consumer credit companies are Chinese

Many of these are Chinese teams – and it is not that hard to find out. Pull out the developer web site, and check their domain registration records. Those registered in China or Hong Kong are most likely Chinese teams.  Only a few are careful enough to mask that.  

Cashkilat – registered in China, for Indonesia

While we counted 35 companies, this figure is growing fast. To the current momentum, before the end of the year, it’s possible for the number to grow to more than 100.

Many teams are stationed inside these buildings

The promising land

Indonesia is becoming a fast-growing consumer finance market, thanks to its unique domestic environment, consumption habits and the recent rapid development of mobile Internet.

Indonesia has a population of 260 million, Internet penetration rate of 51%; social media users account for 40% of the total population, and mobile social media users 35% of the total population.

Penetration of traditional financial services (offered by banks and other institutions) is rather low.  Only 36% of the 260 million people have bank accounts, 2% have a credit card, only 9% use debit card transactions. Bank branch coverage per 100,000 is only one-sixth of that of Europe, and 19-27 year-old blue-collar workers amount to 30 million.

At the same time, it has huge potential for consumption. Indonesia’s consumer confidence index stood at 124 (i.e. very optimistic) in October; household debt accounted for only 16.9% of GDP ratio, and credit accounts for only 34.77% of GDP. All these numbers indicate that consumer finance has a huge market potential, and banks are not meeting this need.

As a result of culture and other factors, the Indonesian population generally has a pro-consumption attitude. There is no habit of saving money and investment, and thus consumption level is even higher than that of China at the same GDP per capita. There are a large number of consumer credit user cases where payday loan platforms can jump in: agriculture, wedding, home improvement, mobile phone, motorbike (and maybe car) and so on.

Every sign points to a huge, growing demand for consumer credit. The average economic growth rate of more than 5% after the financial crisis also contributed to the development of commercial credit, helping Indonesia’s Bank Central Asia overtake the spot of DBS as the largest lending bank in Southeast Asia .The Indonesian population base and rapid economic development are sure to create an active capital market.

However, with changes in the economic situation and policy, the total amount of bank loans in Indonesia has been dropping significantly from 2013, the non-performing loan (NPL) ratio has been rising, and risk did not improve until this year.

The state of private lending

Indonesia does have a private lending market, but coverage is limited. According to Financial Inclusion Insights statistics, 48% of adults have borrowed, but most of them do not borrow from a bank. The main reasons are:

  • not having the required documents (22 percent),
  • not qualifying for a loan (32 percent), and
  • not knowing where to get a loan (21 percent).

From the borrower’s point of view, in 2016, most borrowers turned to informal institutions as well as family and friends: 33% had loans with only informal institutions, 7% with only formal institutions, and 9% borrowed from both. The population below the poverty line was the most disconnected from formal institutions and more often turned to family and friends, as well as layaway purchasing and in-kind loans on crops for borrowing.

In addition to regional banks and cooperatives, as well as micro-credit institutions and civil non-profit organizations, recently, Internet payday loan platform model began to emerge.

Indonesia has the lowest interest rate in the Southeast Asian countries, yet net interest margin tops Southeast Asia

Room for growth

At present, Indonesia’s domestic mobile payday loan is mainly for white-collar P2P loans and personal micro-loans. Funding Societies, Taralite, Tunaiku, Investree, Koinworks and Amartha provide loans for small and medium-sized businesses and personal loans for white-collar workers. Only Uangteman provides domestic loans with terms of 10-30 days and amount of 1 million-2 million rupiahs ($74-$150); while PundiPundi is currently providing loans of up to 500,000 rupiahs ($37).

Indonesia’s central bank also noted the rise of the mobile payday loan model, first in 2015 with micro-loans, and 2016 with electronic wallet and other online financial services. The domestic policy encourages loans of small and medium-sized enterprises, but also has supervision to enhance the people’s trust in P2P lending, which uses the digital signature to build the know-your-customer (KYC) system and grasp the public credit consumption data.

In part 2 of this article, we will analyze the key challenges & risks for foreign (especially Chinese) mobile payday loan companies operating in Indonesia, and how to manage/mitigate these.

 

Article is originally written in Chinese by Jialei Zhao; translation into English and content update by Kate Tran

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