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An Overview of Indonesia's Financing and Leasing Environment

By Hidenori Kuroki, Senior Advisor NETSOL Technologies, Inc.

An Overview of Indonesia's Financing and Leasing Environment

By Hidenori Kuroki, Senior Advisor NETSOL Technologies, Inc. on 17-05-2018

Macro-Economic Perspective Despite the increased market volatility that has followed in the wake of the 2009 global recession, Indonesia has maintained an impressive GDP growth rate of 5-6%. Although the country's commodities sector has declined significantly over this period, the government has taken steps to decrease their dependence on raw material (minerals, oil, and gas) exports to compensate for lowered revenues from this area. At the same time, Indonesia has looked to spark further development in its manufacturing industry, which has necessitated a massive investment in local infrastructure.

As of 2015, the government has pledged $450 billion towards improving transport, logistics and telecommunications networks across the country. However, current estimates show that the state budget will be able to cover only around 5% of this sum. The government hopes to make up a significant portion of the remaining funding through foreign partnerships (China is a crucial strategic ally in this regard).

The government is also looking towards global investors as another key source of financing. At an invitation-only gathering in Switzerland, Indonesia's minister of State-Owned Enterprises encouraged existing and prospective investors to bring more capital into these government-run organizations. Ports operator Pelabuhan Indonesia II has already managed to raise $1.6 billion through a secured global bond issue, while airport management group Angkasa Pura I has raised a further half a billion for upgrades to national airports.

Financial Services Sector

Indonesia's own financial sector is still ill-equipped to fund these ambitious projects. Although the government has taken steps to deepen local capital markets, these markets are still relatively shallow and segmented. The country's bond and stock markets in particular feature a strong foreign presence (38% of government securities held by foreign investors) which makes them particularly sensitive to shifts in the global markets. The shortage of domestic funding means that banks remain the primary source of financing in the country.

Currently, these institutions make up around 74% of financial service sector (FSS) assets, with three government-owned banks (Bank Mandiri, Bank Rakyat Indonesia, and BNI) contributing at least half of those assets. Twenty-six regional-owned development banks make up another large chunk of those assets. There is also a diverse array of privately owned banks operating in the region. This includes nine branches of foreign-owned banks, 12 joint ventures between Indonesian and foreign-owned banks, and around 1630 micro-finance providers.

As a whole, the capital sector is profitable and well-capitalized but there are looming challenges on the horizon. The recent economic slowdowns in the ASEAN region have decreased asset quality and increased the level of non-performing loans particularly in key manufacturing and commodities sectors. While larger banks have sufficient liquidity to overcome any potential threats, smaller banks, that retain a more significant portion of their investments in volatile short-term markets, are far more vulnerable to these trends. The Indonesian government has implemented more robust regulatory measures to strengthen risk management processes across the FSS. These measures include Basel III implementation and new legislation for insurance providers, as well a comprehensive crisis management and resolution framework.

Moving forward, the objectives for Indonesia's financial services sector are clear:

  • Encourage foreign participation in domestic banking and financial markets to improve funding capacity.
  • Make regulatory reforms more effective by clarifying objectives and responsibilities for financial service providers.
  • Implement bail-in schemes to reduce the threat of economic meltdown during systemic crises.
  • Strengthen capital markets by widening the diversity of financial products available to business and personal users. Work to stabilize the overall market infrastructure to reduce price volatility and attract more investment from both domestic and foreign sources.
  • Increase access to finance through credit schemes for entrepreneurs and SMEs (this is the stated objective of the country's National Financial Inclusion Strategy)
  • While Fintech is still in a nascent stage, crowdfunding, P2P lending and online mobile payment tools are becoming increasingly popular amongst the countries emerging middle class. The supervisory framework must be expanded to account for greater digitization in the financial services sector.

Access to Finance in Indonesia

Less than 40% of Indonesia's population has access to formal financial services, and only about 20% of these individuals have ever borrowed from a bank. The country's SMEs make up a significant part of this unbanked population. Although small to medium-sized businesses make up an estimated 99% of the economy, very few have been able to leverage support through the country's banking institutions. This lack of accessibility has been a critical impediment to the development and diversification of the domestic economy.

Over the years, the government has introduced a variety of lending programs (KIK/KMKP, KUK) to increase lending to these businesses. However, these schemes largely failed to live up to their objectives due to high default rates and a reluctance to lend on the part of banks. A more recent government guaranteed loan program has been more successful, resulting in disbursements of up to $1.5 billion across the country. Even here, a majority of funding has been provided for consumer lending rather than business financing purposes. In addition, many banks still ask for further collateral to mitigate the risk of default in these agreements.

The Multi-Finance Industry

When it comes to reaching Indonesia's unbanked, multi-finance providers offer an increasingly popular alternative to traditional banks. These organizations offer a variety of lending products including: consumer financing, debt factoring, leasing, and credit card services. Unlike banks, multi-finance companies will not accept or maintain deposits, and as a result they are subject to less regulatory oversight. This flexibility, allows multi-finance companies to underwrite loans in a matter of days. Multi-finance customers tend to be of a lower socioeconomic status, these individuals will generally not have the collateral or supporting documentation that will grant them access to traditional financing. Due to higher risk of default, multi-finance providers will usually charge a higher interest rate than their banking counterparts.

The top 20 companies in this space command about 65% of the sector, but each company specializes in a specific niche, segmented by either geographical area or products (heavy equipment, automotives, and startup capital).

Car leasing has generally been the primary growth driver in multi-finance, as car sales have more than doubled between 2009 and 2015. However, there are still only 13.7 million cars and a further 99 million bikes on the road in a country of over 260 million people. The market penetration of heavier 4WD vehicles is particularly low at just 5%. If the Indonesian economy continues to develop at its current pace, then this sector has considerable room for development in the coming years.

Experts are also looking towards heavy equipment leasing as an additional growth driver for multi-finance, however any expansion will be linked to pending progress in the manufacturing and commodities sectors. Between 2013 and 2016, heavy equipment leasing fell by 7% due to declining sales and price volatility in crude oil and coal sectors.

Islamic Banking

Over 87% of the Indonesia's population identifies as Muslim, making it the most populous Muslim nation in the world. These demographics make the country a prime environment for Islamic financing. The main benefit of these products is that they share risks and rewards between the lender and borrower in a far more equitable manner. In Islamic financing, the lender is not entitled to interest payments if the related product or partnership does not turn a profit. All of these loans are backed by some firm assets since Islamic principles advice against any ambiguity in transactions or contracts.

These features are particularly appealing to individuals who cannot qualify for traditional financing, or those who lie outside the reach of Indonesia's banking networks. While these people may not be willing to seek out funding at onerous rates through alternative finance providers, they may well be willing to buy into a system that offers more transparency and flexibility for the borrower.

Despite the appeal of Islamic financing, Indonesia has been slow to integrate Sharia-compliant products into its banks. Indeed, it was only after the banking system's collapse in 1998 that these products first gained widespread acceptance in the country's FSS. As a result, Islamic financing still contributes only 5.8% to the overall banking assets in the economy. Although this figure represents a consistent year-on-year increase, it still pales in comparison to 51% and 24% market capitalization of Sharia financing in Saudi Arabia and Malaysia respectively.

Currently, the largest providers of these products are Sharia Banking Units at Indonesia's government banks. However, the government is looking to spin these branches off into dedicated Sharia banks in the near future. At the lower end of the scale, microfinance providers such as Baitul Maal Wat Tamwil (BMT) have managed to connect with a growing portion of the country's unbanked population through their collaborative and socially minded approach to financing. These organizations should help to encourage wealth accumulation and social mobility amongst Indonesia's poorest communities, which in turn should help to close the country's widening inequality gap. As this segment matures, they will begin to qualify for more sophisticated financing products from conventional sources.


Over 520 Fintech companies have been founded in Southeast Asia in the last decade, with 200 operating (31 licensed e-payment providers and over 60 P2P lending companies) in Indonesia alone. At the most basic level, Fintech allows companies to provide financial services to users through any connected device. These services may be limited to digital wallets for online and offline payment, but can extend to include virtual currencies, stock market trading, investment, personal finance and most importantly for SMEs, commercial lending. Unlike banks or even multi-finance companies, Fintech providers do not need to subject borrowers to any lengthy risk assessment processes. Instead, these lenders can take advantage of the wealth of alternative data sources offered by new technology. Rather than relying on site visits, and reference checks, these businesses can run reams of relevant information, by analyzing information from user's digital footprints such as telecommunications data and social media through machine learning software to develop real, actionable credit ratings for their customers. These features make Fintech an extremely attractive financing option for capital-deficient businesses and consumers across Indonesia.

ModalKu a P2P lending marketplace that launched in 2016, has managed to disburse over $36 million in just two years of operation. While part of this success is certainly down to the accessibility of funding in this sector and the comparative lack of regulatory restrictions. A significant part of Fintech's popularity is down to Indonesia's increasing smartphone adoption. There are currently 100 million smartphone users across the country, which means that Fintech products are accessible in regions where banking networks have not yet arrived.<'p>

Indonesia's Fintech sector has also seen large investments from both domestic and international investors. Digital wallet provider Go-Pay has brought in more than $2 billion in investment across three rounds of funding while P2P marketplace Tokopedia has secured over $1 billion in funding from AliBaba. Not to be left behind, Bank Mandiri has also sunk significant amounts of capital into startups such as Amartha and Koinworks. Off the back of these trends, President Joko Widodo plans to build up Indonesia into Southeast Asia's leading digital economy over the next decade.

Indonesia's Leasing Landscape

Over the past 5 years, Southeast Asian countries have seen sustained growth in their leasing markets and Indonesia's economy has kept in line with these trends. Part of this growth is down to the increased foreign investment coming into the nation, while the country's growing middle class (52 million people, account for 43% of overall household consumption) has also increased demand for consumer financing products. As mentioned previously, the automotive market is a key growth driver in the leasing industry. Over the next two years, passenger vehicle growth is estimated at 6.8% and commercial vehicle growth is estimated at 3.5%. At the same time, leasing for construction and mining equipment remains a key economic contributor. Over the past decade investments in: tin, gold, coal, copper, and bauxite mines as well as timber, palm oil and rubber plantations have brought in approximately $5 billion in annual revenues. While this expansion has shown signs of slowing down in recent years due to the decline of Indonesia's commodities sector, increasing infrastructure investments and manufacturing sector growth marks equipment leases as a high potential growth area.

Finance leases remain the primary funding instrument choice for corporations, SMEs and individuals. Most finance providers do not offer operating leases. Those who do, will prefer to amortize the value of underlying assets over the duration of the lease agreement by charging a sizeable discounting rate. This allows these arrangements to fulfill the criteria for off-balance sheet financing.


As a rapidly evolving economy, Indonesia's financing environment shows promising signs for lenders and borrowers alike. However, the success of existing and emerging asset financing instruments will depend on the government's ability to increase the market knowledge and access for the country's vast unbanked population. At the same time, the government must take clear steps to ensure that their infrastructure goals are accomplished over the next 5-10 years; otherwise much of this economic development may be hamstrung by logistical bottlenecks.

Written By:
Hidenori Kuroki, Senior Advisor NETSOL Technologies, Inc.

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