It is essential to establish a comprehensive roadmap for the development and strengthening of fintech lending services in Indonesia. — The Jakarta Post
THE financial technology (fintech) lending industry in Indonesia has experienced significant growth in recent years because of the adoption of technology-based solutions and the increasing demand for accessible financial services.
As of October this year, there were 101 licensed fintech lending companies or platforms in Indonesia.
By September, the outstanding financing provided by the fintech lending industry had grown by 14.28% annually, reaching a total of 55.70 trillion rupiah (US$3.59bil) with a 2.82% non-performing loan ratio.
According to data from the Financial Services Authority (OJK), there have been 4,548 complaints regarding fintech lending from 2020 to 2022.
Most of these complaints are related to the behaviour of collection officers, accounting for 35.29% of the total complaints.
Other complaints included loan restructuring or relaxation, external fraud such as scams and hacking and the misuse of personal data.
Long-term plans
To ensure the long-term sustainability and stability of the industry, it is essential to establish a comprehensive roadmap for the development and strengthening of fintech lending services in Indonesia.
The OJK has issued regulations for fintech lending that all platform providers must adhere to, as outlined in the 2023 to 2028 roadmap for technology-based joint funding services.
This roadmap should prioritise the establishment of a robust regulatory framework to govern fintech lending activities.
It should include licensing requirements, transparency provisions and data protection measures to mitigate potential risks and enhance consumer protection.
The roadmap should also focus on enhancing financial literacy among borrowers and promoting collaborations between fintech lenders and traditional financial institutions.
By partnering with traditional banks, fintech lenders can benefit from existing infrastructure and expertise, while traditional banks can leverage fintech lenders’ technological capabilities to streamline loan applications and improve customer experience.
These collaborative efforts will drive innovation and expand financial inclusion throughout the country. Additionally, it is crucial to establish strong risk management practices and creditworthiness assessment mechanisms to maintain industry stability.
The roadmap should emphasise the development and utilisation of credit scoring models that incorporate alternative data sources to provide accurate assessments of borrowers’ creditworthiness.
This will enable responsible lending practices and reduce default rates. Furthermore, the roadmap should encourage the provision of fintech lending services to underserved populations.
These include micro, small and medium enterprises, rural communities and individuals without access to traditional banking services.
Partnerships with government agencies and non-profit organisations can address the specific needs of these groups by providing financial education and tailored loan products.
Investment in technology infrastructure is also essential for the sustainable growth of the fintech lending industry.
The roadmap should prioritise the development and adoption of advanced technologies, such as artificial intelligence and machine learning to enhance underwriting processes, detect fraud and facilitate loan disbursement.
Fostering a culture of innovation and collaboration within the industry will attract further investment and drive the creation of cutting-edge solutions that cater to Indonesia’s unique financial landscape.
In the initial implementation stage of the roadmap, the OJK will determine the reference interest rate for fintech lending, which was previously autonomous under the Indonesian Joint Funding Fintech Association.
Fintech loans
The OJK has decided to gradually decrease the maximum interest rate for fintech loans, differentiating rates for productive and consumptive loans.
Loan disbursements for the productive sector are currently set at 30% of the total portfolio and are targeted to reach over 70% in the next five years.
In this initial phase, consumer protection efforts are being implemented by limiting the number of fintech lending platforms or applications accessible to consumers to a maximum of three platforms.
This measure aims to maintain credit quality and the health of fintech companies, emphasising caution and considering borrowers’ ability to repay.
Meanwhile, from the perspective of the governance of fintech companies, the OJK requires gradual strengthening of capital.
By the end of this year, all fintech lending providers must meet the minimum capital requirement of 2.5 billion rupiah, up from a previous one billion rupiah.
Furthermore, in 2024, the minimum capital requirement will be increased to 7.5 billion rupiah, and by 2025, it will reach 12.5 billion rupiah.
The OJK also mandates that companies collaborate with insurance institutions to share credit risk burdens.
In conclusion, the roadmap for the development and strengthening of technology-based joint funding services in Indonesia’s fintech lending industry from 2023 to 2028 holds significant potential for sustainable growth and financial inclusion.
By ensuring a robust regulatory framework, fostering collaboration, implementing effective risk management practices, promoting financial literacy and investing in technological infrastructure, the industry can flourish while safeguarding the best interests of consumers and the Indonesian economy as a whole.
With the careful implementation of the roadmap’s key components, Indonesia can position itself as a leading fintech lending hub in the region. — The Jakarta Post/ANN
Darmo Wicaksono is senior economist at the international department of Bank Indonesia. The views expressed here are the writer’s own.
