Indonesia’s vast and young population sounds like a great market opportunity. But there is one catch. The majority of Indonesians don’t have the financial freedom to purchase goods and services beyond bare necessities.
Out of a population of 252 million, 28.6 million Indonesians currently live below the poverty line, according to the World Bank. Approximately 40 percent of all people remain clustered around the national poverty line set at IDR 330,776 per person per month ($22.6).
People at the “bottom of the pyramid” have a hard time getting access to loans because classic financial institutions don’t have much incentive to serve this segment – and they don’t offer the right products.
So-called microfinance institutions have sprung up to fill that gap. But some of their lending schemes, especially in Indonesia’s rural areas, have earned a bad rap. They might ask for high interest rates and have shady debt collecting methods.
Increasingly, young, technology-driven fintech startups have taken it upon themselves to address the issue, and they like to say they offer a better, fairer solution than “loan sharky” microfinancers.
Here’s a breakdown of three such microfinance sites in Indonesia. The first two give cash without collateral, while the third demands collateral, such as a motorbike or car.
UangTeman (Indonesian for “friend’s money”) offers loans from IDR 1.5 million to IDR 2 million (US$108 to $143) for 10 to 30 days, with an interest rate of 1 percent a day. It also has additional fees for extending the payback deadline (IDR 180,000; US$13), a fine for delays of IDR 50,000 (US$3.57), plus IDR 100,000 (US$7.10) for each day it’s delayed. On top of that, a late-paying debtor is asked to pay a fee of 10 percent of the total loaned to the debt collector.
UangTeman has been the subject of controversy due to its high interest rate. One percent may sound low, but here’s an example of how much a loan on UangTeman would cost you. Let’s say you take a loan of IDR 2 million for ten days – to get you through a rough time until the next payday. On the first day, you will pay IDR 2,000,000 x 1 percent, which means IDR 20,000. On day two, expect to pay IDR 20,020,000 x 1 percent, which makes your total loan on day two come out to be IDR 2.040.200. And so on until day 10. The total sum you will have to pay back is IDR 2,209,000 (US$158), over 10 percent more than what you borrowed.
Tunaiku is the money lending service of Bank Amar Indonesia. It gives out loans starting at IDR 2 million (US$143) up to IDR 10 million (US$713) for a period of time between 6 and 12 months. It takes an interest of 3 percent from the original loan. This means the interest will stay the same no matter when you pay back the loan.
But Tunaiku also asks for an administration fee of IDR 540,000 (US$39) and imposes a fine of IDR 100,000 (US$7.10) if you can’t pay back on time. In addition, there’s a 0.16 percent interest rate for each day you’re late. So the longer you delay paying back, the more you’ll eventually have to cough up.
Taralite offers loans depending on occasion, such as for a wedding, for education, or house renovation. The startup started out under the name Wedlite and only offered loans for weddings, but has since extended its range.
Let’s look more closely at the education loan it offers, which allows someone to borrow as much as IDR 300 million (US$21,390). The interest rate and duration of the loan depend on the type of collateral you put in. If your car or house is at stake, the interest rate will be 1 percent per month. If it’s your motorbike, the interest will be 2 percent. You can choose to pay back in monthly installments spread across a duration of one to three years. If your collateral is a house, you can take up to 5 years to pay back.
Other fees that Taralite slaps on are a bit sneaky. For example, if you want to pay back your outstanding loan before your loan period ends, that will cost you 5 percent of the remaining loan – think of it as a fine because you’re not paying the full interest rate Taralite could expect if you stay indebted for the full loan period.
Getting a Taralite loan isn’t as easy as with UangTeman or Tunaiku because you need to provide documents like an income slip, tax number, not to mention the documents needed to prove ownership of your collateral.
One metric to compare them all
Each of these three online lending services targets a different need. UangTeman’s mini-loans are meant to help people make it through a drought until the next payday. This category of loans is widely known as a payday loan, and it’s pretty controversial in Europe. UangTeman’s startup story on Tech in Asia also attracted comments from critics.
Tunaiku sounds like a better deal, but its high administration fee makes it unattractive, especially if the loan you need is comparatively small.
Taralite’s loans, especially the larger ones for education or starting a small business, perhaps fall into a separate category altogether because they address more sophisticated needs and require a number of documents people from very low income groups probably wouldn’t be able to provide.
It’s no wonder that the boom in lending options and insurances has spurred the rise of comparison sites like CekAja and HaloMoney. They claim to help consumers make smarter decisions when shopping for loans.
Still, a huge problem remains when comparing the wealth of offers, according to J.P. Ellis, founder of CekAja.
“The only true way to measure the cost of the interest is an annualized percentage rate (APR),” he told Tech in Asia. The APR also factors in additional fees. If all lenders state interest in terms of APR it’s much easier to compare offers accurately. In the US and the Philippines, lenders are required to state APR, J.P. says. He’s calling for a similar rule to be introduced in Indonesia. “It’s time Indonesian consumers are allowed this same level of transparency,” he said.
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