Indonesia’s growing consumer credit market

The burgeoning purchasing power of Indonesia’s middle classes and the increasing role of alternative lenders such as multi-finance institutions are generating growth in the archipelago’s consumer finance market.

As of April, consumer finance levels had risen to Rp252trn ($19.2bn), which was already more than the Rp247trn ($18.8bn) registered for all of last year, according to figures provided to OBG by the Indonesian Financial Services Association (IFSA).

Buoyed by increased interest in tapping credit for purchases such as white goods, motorcycles and cars, the transaction value in the consumer finance segment is expected to rise from $5.4m this year to $185.6m by 2020.

Market potential

Such growth projections reflect a rise in consumer confidence spurred by central bank-led lending incentives, which together have helped private consumption account for more than 50% of nominal GDP since the global financial crisis of 2008-09.

In June Indonesia’s Consumer Confidence Index as reported by Bank Indonesia, the country’s central bank, had reached 113.7 points, its highest reading since March 2015, and far higher than the average of 94.50 throughout the 2000-16 period.

Meanwhile, the current economic environment, which has seen a lower-than-expected 4.92% GDP growth in the first quarter of the year, saw purchasing power weaken amid inflation and rising prices.

Consumers have attempted to expand their purchasing power by using short-term loans, according to a report released by Euromonitor International late last year, which noted short-term consumer lending posted double-digit growth in 2015 as opposed to long-term lending which saw single-digit growth.

Some consumer segments, however, were more resilient than others. Consumer electronics, for example, was estimated to have grown at an annual rate of 34.7% in May, according to local media, a trend supported by a strengthening rupiah in April.

Domestic travel has also seen growth, particularly among the middle classes, with the Central Statistics Agency pointing to the increase in airline tickets as a sign of strong purchasing power.

The role of multi-finance

Multi-finance companies, which offer loans to the middle- and lower-income segments, serve as alternative lenders and are facilitating increased access to consumer financing.

According to industry stakeholders, the growth of multi-financing and credit options are empowering middle-class Indonesians.

“Consumer credit is actually helping many Indonesians own assets such as cars and motorcycles,” Suwandi Wiratno, chairman of the IFSA, told OBG. “They need to survive, not to walk to school or work, because there simply is not currently enough public transportation.”

However, despite significant potential in the consumer finance market – the number of middle-class and affluent consumers in Indonesia is expected to double to 141m by 2020 – industry stakeholders say it is a challenging market.

“The industry is very fragmented,” Francis Lay, president-director at BFI Finance, an Indonesian multi-finance company, told OBG, “Companies typically only focus on financing a specific activity, such as cars, motorcycles or equipment. This has meant that while some finance firms have survived, others haven’t, and this depends very much on having a good balance sheet, capitalisation, execution capabilities and a well-organised risk management assessment.”

Regulatory framework

In a bid to boost economic activity, in June the central bank revised a number of regulations, effectively decreasing down payments on cars and motorcycle purchases and increasing the maximum loan-to-value ratios for home purchases.

Despite this recent easing, however, there is a growing recognition among industry stakeholders that greater access to a variety of financing options, as well as a more streamlined process, could change in the next few years, according to Lay.

“The government has tried to convert the multi-finance industry towards having the same regulatory framework as the banking industry. In the past, for example, there was little regulation about how to measure non-performing loans, whereas the government now wants to use the same measurements as banks,” Lay told OBG.

Experience from the 1997-98 financial crisis have also led the government to implement measures designed to develop a more mature credit reporting system.

Last year Indonesia’s Financial Services Authority (OJK) revealed it would establish a new credit reporting system called the Financial Information Service System (SLIK). Proponents say the SLIK, expected to be fully functional in 2018, will usher in a new era in the country’s credit reporting system, by enabling private credit bureaus to check against its secure database.

A maturing credit market, however, may also lead to more discerning consumers, according to Euben Paracuelles, an analyst at Nomura, a financial holding company.

“Because of the slowdown in growth, loan demand might not be there, even if the terms are a little more favourable now,” he told international media, while noting a decline in demand for items such as cars and motorcycles. “It’s not because people can’t afford it. It’s because they’re more cautious.”

Enter fintech

While more savvy consumers and stricter regulations could curb short-term credit growth, the spread of so-called fintech, which uses innovative technology in financial services, could deliver a new range of customers to multi-financing firms.

“I think fintech can help the financing industry in three ways: public relations campaigns can facilitate broader reach as well as increasing credit profiling and providing a different approach to risk management. For example, we work with several fintech companies that in some cases pre-approve credit for the customer, and pass that assurance onto us,” Lay told OBG.

Industry stakeholders also point to fintech as a means of creating financial inclusion, by extending financial services to the “missing middle”, in other words, enterprises with monthly revenue of between Rp10m ($763) to Rp100m ($7630), as well as unbankable individuals, according to press reports.

In April the OJK announced it was preparing to release regulations governing fintech companies by the end of the year.

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