For 51%, It’s Worth Living Dangerously in Indonesia

(Bloomberg Opinion) -- New-age financiers: Looking to do some good while earning a 51 percent yield? Indonesia’s the place.

The nation of 260 million people is the perfect venue for fintech startups, from digital-credit-card providers to peer-to-peer lenders. Only half the over-15 population have bank accounts, while a paltry 2 percent hold credit cards.

Traditional banks aren’t keen to enter the “subprime” consumer and micro-lending space. They already earn an average net interest margin of 5.1 percent. Why branch out in a country that lacks credit bureaus to collate data on the risk of lending to individual borrowers?

For 51%, It’s Worth Living Dangerously in Indonesia

The government has been supportive, so far. As part of its 2020 Go Digital Vision, the country spelled out regulations on e-lending as early as January 2017. Foreigners can own up to 85 percent of e-lending startups, compared with a maximum 49 percent for e-payment providers, which don’t extend credit.

PT Bank Tabungan Pensiunan Nasional Syariah, which follows the model of Bangladesh’s Grameen Bank, gives us a glimpse of how profitable micro-lending can be. The publicly traded lender typically makes one-year loans of 1 million to 2 million rupiah ($69 to $138) at a flat interest rate of 30 percent, equivalent to an effective annual percentage rate, or APR, of 51 percent.

With Indonesia early in its credit cycle, default rates are low. Only 3.3 percent of P2P loans were classified as questionable in September, according to the regulator. The number of borrowers using such platforms has surpassed 7 million.

For 51%, It’s Worth Living Dangerously in Indonesia

Fintech companies use different metrics from banks. For example, digital-credit-card providers such as Krevido will look at a customer’s opening and closing balances rather than monthly income to assess whether she’s a spender or saver. They will also use social data built from contact lists: If a friend defaults, the customer is seen as a riskier borrower too.

Once a startup reaches sufficient scale, these cost-effective due-diligence processes ensure most of its net interest margin will show up in the bottom line. 

But e-lending in a developing nation comes with great risks. These often begin with the government, which in Indonesia is getting cold feet. 

Getting an e-lending license there is a two-stage process. Oddly, a startup can begin making making advances as soon as it registers with the Indonesian Financial Services Authority. But it must obtain a business license within a year, or forfeit this right.

This may be an issue for the country’s mushrooming number of fintech startups. Blocked at home, hundreds of Chinese P2P operators have landed in Jakarta this year. Any tightening of the e-licensing regime could threaten them. Indonesia has already taken such action: Late last year, foreign-funded startups from GrabTaxi Holdings Pte to Tokopedia PT saw their e-money operations suspended.

Consumer protection concerns could also trim those fat yields. After a $1 billion New York listing in October last year, China’s Qudian Inc. ran into trouble after disclosing that most of its micro consumer advances exceeded the government’s 36 percent cap on private loans. Qudian’s shares are down more than 80 percent from their IPO price.

Laxly regulated, e-lenders tend to have looser credit-risk standards than banks. In China, when a borrower defaults on a payment, a bank marks the entire loan — principal and interest — as bad. Some P2P lenders will consider only that payment to be in default. That means their bad-loan ratios could be misleadingly low.  

Only 94 million Indonesians have bank accounts, barely a third of the population. The market potential for e-lenders is clear. The party is sure to be fun, but how long will it last?

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

©2018 Bloomberg L.P.