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Finance | Indonesia's Microfinance Sector Overview: Key Component for Sustainable Growth

Indonesia's microfinance sector performed healthily throughout 2015 with almost all financial institutions recording significant credit growth. The volume of microcredit disbursed by the country’s largest state-owned bank, Bank Mandiri, for example, rose to 42.48 trillion IDR as of the end of December 2015, up 22.9% over December 2014.

Indonesia's Microfinance Sector Overview: Key Component for Sustainable Growth
According to data from the Ministry of Cooperatives and Small and Medium Enterprises, the number of SMEs in the country reached 55.2 million, consisting of 54,559,969 micro enterprises.

The Financial Services Authority (OJK) also noted that Indonesian banks in general have complied with the OJK rules that mandate them to allocate 10% of their loan portfolio to small and medium enterprises (SMEs) in 2016 which will be increased to 20% in 2018. The Indonesian government’s support for SMEs continues to improve too as evidenced by an increase in the allocation of the People's Business Credit (KUR) or small business loans from 30 trillion IDR in 2015 to 120 trillion IDR in 2016. In addition, OJK’s decision to allow multifinance companies to disburse KUR will enhance the people's access to small business loans. Such a strategy is in line with President Joko Widodo’s efforts to bolster the SME segment through simplifying processes in relation to starting a company and obtaining licenses (See Indonesia’s 12th Economic Policy Package is Unveiled to the Benefit of SMEs).

Decent growth

The year 2015 was an exciting period for the Indonesian microfinance industry. Almost all banks, both state-owned and private, posted a significant growth in microcredit disbursement. According to Bank Indonesia (BI), SME loans grew 10.1% in 2015 to 739.8 trillion IDR as of December 2015 compared to 671.7 trillion IDR as of December 2014. On a monthly basis, SME loans recorded an increase of about 1% per month.

The SME loans consisted of 164.9 trillion IDR for micro enterprises, 215.9 trillion IDR for small enterprises and 359.0 trillion IDR for medium enterprises. About 537.2 trillion IDR of the loans are for working capital and 202.6 trillion IDR are for investment.

Indonesia’s largest state-owned bank, Bank Mandiri, for example, managed to disburse microcredit to the value of 42.4 trillion IDR in 2015, up 22.9% year on year from December 2014. This equates to 56% of the bank’s total SME lending which reached 75.78 trillion IDR and 1,112,385 borrowers.

Bank Rakyat Indonesia (BRI), which focuses on microcredit and allocates 35% of its total credit portfolio to the SME sector, also enjoyed a similar growth in 2015 of 17% over the previous year. The bank managed to post high profits thanks to its huge volumes of microcredit that offers net interest margin (NIM) of at least 8%.

According to data from the Indonesian central bank, the growth of microcredit continued into the first quarter of 2016. As of February 2016, SME loans accounted for 18% or equivalent to 728.97 trillion IDR of a total credit portfolio of 3,998.09 trillion IDR. State-owned banks remained the dominant force in SME financing by disbursing 82.61 trillion IDR in total. This is followed by the regional development banks (BPD) with total microcredit loans equating to 48 trillion IDR, private banks with 282.41 trillion IDR, and foreign banks as well as others accounting for 15.93 trillion IDR.

BRI was also a major contributor to the microcredit growth. In the first quarter of 2016, the bank’s microcredit grew 22.2% from 91.8 trillion IDR in 2015 to 111.2 trillion IDR and contributed 31% of its total loans of 361.2 trillion IDR. Other banks, including private banks, are also aiming to increase their microcredit portfolio in 2016. Bank Tabungan Pensiunan Nasional (BTPN), for example, has set a target to increase its SME loans by 50% in 2016. In 2015, the bank disbursed microcredit and SME loans amounting to 8.73 trillion IDR and 6.86 trillion IDR, respectively.

A similar strategy was undertaken by Bank Negara Indonesia (BNI). In 2015, the state-owned bank disbursed a significant amount of loans to the SME sector with a total value of 42.2 trillion IDR. These loans were either disbursed directly to the SMEs or through cooperation with other financial institutions. The bank’s linkage programme in 2015 has successfully disbursed loans of 3.2 trillion IDR whereby rural banks (BPR) accounted for the major share of 50%.

The OJK recorded that banks in general have complied with its rules that mandate them to allocate 10% of their loan portfolio to small and medium enterprises in 2016 which will be increased to 20% in 2018.

Small business loans in Indonesia have bright prospects due to the sheer size of the SME market. According to data from the Ministry of Cooperatives and Small and Medium Enterprises, the number of SMEs in the country reached 55.2 million consisting of 54,559,969 microenterprises, 602,195 small enterprises and 44,280 medium enterprises. In Indonesia, SMEs account for 99.99% of the total number of existing businesses and absorb 97.24% of the labour force as well as contributing 57.48% of the country’s GDP.

Shariah-based microfinance

Although the Islamic finance industry recorded growth of 6.1% in 2015, it still lags behind its conventional counterparts (See Indonesia's Islamic Banking Industry: Bright Prospects Ahead Despite Constraints). Its contribution to microcredit growth is even smaller because the share of SME financing among Islamic financial institutions is only between 5-10% despite its natural inclination towards this type of cooperative style lending. The majority or 90% of Islamic microfinancing has been channeled to motor vehicle loans as opposed to the SME segment. 

To spur the growth of SME lending among Islamic banks, the OJK has offered incentives to relax the core capital requirements for Islamic banking if their SME financing accounts for 20% of the total loans. However, a constraint to shariah compliant microfinance growth is the relatively high level of non-performed financing (NPF) among Islamic banks which reached 4.73% whereby the SME sector accounted for 43%. This has made Islamic financial institutions more cautious in providing financing to small businesses that are considered to be at higher risk.

Indonesia’s largest Islamic bank, Bank Syariah Mandiri (BSM), for example, disbursed loans of 70.37 trillion IDR in 2015, an increase of 5.1% from 66.94 trillion IDR in 2014. Its microfinancing, however, only accounts for 3.5 trillion IDR or only 5% of its total loan portfolio.

KUR: New growth driver

Indonesia’s microfinance sector got a boost in 2015 after the government allocated 30 trillion IDR for the People's Business Credit (KUR) and cut its interest rate from 22 to 12%. Until the end of the year, the total amount of small business loans disbursed reached 22.75 trillion IDR or 75.85% of the total target.

There were three state-owned banks and a private bank involved in KUR disbursement in 2015. The three state banks are BRI, Bank Mandiri and BNI. Meanwhile, the private bank is Bank Sinarmas which disbursed loans for Indonesian migrant workers.

KUR Disbursement in 2015 (in trillion IDR)

KUR Disbursement in 2015 

In 2016, the Indonesian government increased the KUR disbursement target to 100 - 120 trillion IDR at an even lower interest rate of 9%. In addition, the government now allows multifinance companies and cooperatives to be involved in KUR disbursement. The OJK has set a low target of 1.2 trillion IDR for non-bank institutions during their first year of involvement. Some 70% of this year's KUR allocation have been awarded to three state-owned banks. BRI gets an allocation of 67.5 trillion IDR, Bank Mandiri of 13 trillion IDR, and BNI of 11.5 trillion IDR.

The remaining 11.24 trillion IDR will be disbursed by 16 financial institutions, including seven Regional Development Banks (BPD): West Kalimantan, East Nusa Tenggara, Yogyakarta, South Sulawesi, West Sulawesi, Central Java and North Sumatra. Two private banks, namely Maybank and Bank Sinarmas, who will disburse KUR for migrant workers.

Currently, the Indonesian government is also considering providing KUR to SME venture capital firms so as to finance start-up companies. This was conveyed by the Minister of Communications and Informatics after President Joko Widodo asked the ministry to allocate state budget funds to finance start-up companies as part of his efforts to boost national competitiveness.

Microinsurance: The next big thing?

In addition to microfinance, microinsurance also grew quite rapidly in 2015 (See Indonesia’s Insurance Sector; A Stable Outlook). This is in line with the implementation of the OJK regulation requiring insurance companies to have a microinsurance portfolio of 5% of total premium income. This step was taken to increase microinsurance penetration in Indonesia which will in turn increase the number of insured citizens in the country. However, Indonesian insurance companies are still having trouble selling microinsurance despite its very low premiums. This is because potential microinsurance customers are those from low income backgrounds and to date still lack the financial literacy to understand insurance products. 

Further obstacles include the low premiums of microinsurance of less than 50,000 IDR which leads to low revenue despite its huge costs. In addition, increasing the awareness of the importance of insurance among the low-income segment is a major challenge, especially at a time when disposable incomes are under pressure and insurance becomes less of a priority. Nevertheless, the OJK noted that the number of microinsurance policy holders in mid-2015 had reached 9.82 million. This is an increase of 66.72% compared to the same period in 2014 of 5.89 million.

In terms of premium revenue, microinsurance generated an income of 876.3 billion IDR in mid-2015, or growth of 678.24% compared to the same period in 2014 of 112.6 billion IDR. In addition, microinsurance claims grew 1,155% from 40.79 billion IDR in mid-2014 to 512.2 billion IDR in mid-2015. Its loss ratio during the same period is 58.45% higher than the same period in the previous year of 36.21%.

Challenges and opportunities ahead

In general, the Indonesian microfinance industry has bright prospects due to the fundamentals of the country in that the majority of businesses in Indonesia are SMEs. Moreover, the sector is still experiencing significant capital constraints and requires the help of state and private financial institutions to thrive.

The government's move to increase KUR allocation and cut its interest rate can provide additional liquidity to the microfinance industry to disburse loans to the SME sector. Unfortunately, some lenders still demand collateral due to the high level of NPLs and NPFs among SMEs. As a result, many SMEs are still unable to access this optimised financing source.

Looking ahead, the microfinance industry is expected to innovate by offering simpler, faster and cheaper microcredit as was done by the microinsurance industry. If this materialises, it could create a huge multiplier effect on the national economy as a whole. 

Global Business Guide Indonesia - 2016

icone share

Indonesia Finance Snapshot - Banking

Contribution to GDP: 2.87% (2016)
Return on Assets: 2.30% (Q4 2015)
Number of Commercial Banks: 120; 4 State/Partially State Owned, 10 Foreign, 16 Joint Ventures, 32 Non Foreign Exchange, 35 Foreign Exchange, 26 Regional Development Banks (August 2015).
Number of Islamic Banks & Units: 13 Banks, 32 Units (2016)
Total Assets: 6,244 trillion IDR (Q3 2015)
Government Bodies: Bank Indonesia, Ministry of Finance, Financial Services Authority (OJK).
Relevant Law: Bank Indonesia Regulation No. 14/8/PBI/2012 on Share
Ownership in Commercial Banks limits ownership by a single local/foreign financial institution to 40%, by a non financial institution to 30%, and by an individual to 20%. Larger stake is possible with the approval of Bank Indonesia.