Responsible Business: Online loans for the underbanked

This article first appeared in Enterprise, The Edge Malaysia Weekly, on July 10, 2017 - July 16, 2017.
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In 2013, Aidil Zulkefli was running his first financial technology (fintech) start-up called Kreditaja.com, a financial product comparison portal. One of the most common complaints the former Indonesian lawyer received was how difficult it was for people to get loans because financial institutions imposed very specific, inflexible and stringent requirements.

“Indonesia is home to more than 250 million people and of this number, 203 million earn between US$150 and US$300 a month. However, 78% of the population remains unserved by the mainstream financial institutions. Just imagine how big the country’s underbanked population is,” says Aidil. 

When he crunched the numbers, he discovered that the microlending market was 4% (US$11.6 billion) of Indonesia’s commercial lending market and it was dominated by traditional microfinance institutions. So, he founded UangTeman, which literally means “money friend”, to provide safe and transparent financial relief for underbanked Indonesians. 

The country’s first digital microlender provides loans of IDR1 million (RM322) to IDR4 million to individuals for up to 30 days. “It is a short-term loan and we give borrowers the flexibility to pay us back whenever they want as long as they do not exceed the 30-day period. This way, we effectively give clients the flexibility and power to borrow an amount that the banks won’t lend and pay us back within the time frame,” says Aidil. 

UangTeman uses an algorithm to determine borrowers’ creditworthiness based on their internet surfing history, social media data and devices they use. Collateral is not required and it only takes between two hours and one day to have the loans approved — far shorter than the one to three weeks required at local banks and traditional microlenders.

Aidil says people can apply for loans to meet any of their financial needs — health, education, entertainment, furniture, vehicles, or just to get by. “People in other countries do not think that financial inclusion is a problem simply because smartphone penetration is high. But in Indonesia, smartphone penetration is higher than financial inclusion. You can easily get a US$40 smartphone in Indonesia, but you will not be able to get a US$400 loan as easily.

“For example, a lot of our borrowers are Go-Jek (ride-hailing service) riders. They are very savvy when it comes to using their smartphones to get customers. But they have to borrow from UangTeman to get by because it is impossible for them to get credit from banks, especially for smaller sums, such as to pay for their children’s tuition fees or for minor accidents.”

UangTeman’s business, which was launched in 2015, grew 300% last year. Its nonperforming loan (NPL) rate was less than 3%, compared with the banks’ national average of 6%. 

“When I first came up with the idea, people told me that it was impossible to do online microlending in Indonesia. They said our business would easily go bust. I set out to prove them wrong. The people, process and technology we use have allowed us to survive and thrive,” says Aidil, who hopes to raise the socioeconomic standards of Indonesians with his business model.

Improving financial access

Starting something new and cash-based such as UangTeman has definitely been challenging, especially when it comes to working with the regulators. Aidil realises that he is working in a grey area — not illegal, but not one that requires a licence either. 

“We work very differently from commercial banks, so regulations are always a cause for concern. Therefore, we engage with the regulators very regularly,” he says. 

“In fact, the people with the Financial Services Authority (OJK) know me very well now. Since we were the first to carry out this business, we initially did not have a good relationship with them. 

But now, we are quite close.”

The other challenge for Aidil is engagement with investors. He says the problem with investors in fintech is that they tend to look at investments through the lens of e-commerce. E-commerce is popular with investors because it is easy to understand and companies in this sector tend to grow quickly.

“An e-commerce company can grow 25% month on month quite easily, but it is not the same thing for a lending business. This is financial services and not selling diapers online. Therefore, it does not make sense when investors demand month-on-month growth of 20%. In fact, there have been cases in the UK and the US where online lenders grew very quickly, but ultimately failed,” says Aidil.

Today, UangTeman has more than 5,000 users on its platform and has given loans to more than 20,000 absolute accounts (active accounts where the users have taken at least one loan before), with a typical lending amount of IDR3 million. The company does not allow people to apply for more than one loan at a time.

“There are lenders that will allow you to take multiple loans. But we require our borrowers to pay off their outstanding loans to be eligible for another round. While this may not be the most profitable idea for us, at the end of the day, it is not just about making money. It is about our role and responsibilities too,” says Aidil.

Borrowers are required to pay off their loans within 30 days. If they do not do so within the time frame, the company will take action against them. 

“It depends on the circumstances. If they do not pay us back because they are unable to, we will work something out with them. We are called Uang Teman for a reason,” says Aidil.

“But if they do not pay us back because they simply do not want to, that is fraud. And we will have to recover the money from them. So, we will get licensed debt collectors or other ethical bodies to do so. Thankfully, late payments have only happened a few times — a rate of less than 10% of the total loans we have given out.” 

Bigger and faster

After two years proving the concept, UangTeman has become one of the prominent fintech players in Indonesia. It now has a presence in Jabodetabek, Yogyakarta, Solo, Magelang, Klaten, Bandung, Surabaya, Semarang, Bali, Makassar, Palembang, Lampung, Jambi and Balikpapan. 

It has not been an easy ride for Aidil. First, he had to convince the Indonesian public that the business was valid. “When we introduced the online microlending concept, a lot of people thought we were operating a data theft business. People did not think loans could be approved online,” he says.

“But we did not give up. We just kept on banging the idea that we could lend them money, get success stories out there, validate the idea and eventually, it would catch on.

“There were a lot of questions, a lot of controversy and a lot of days spent crying in a corner. That is the reality of building a first-mover business such as ours. 

“Today, people trust UangTeman and they are happy that such an option exists. That is one thing I am very proud of, that we were the pioneers and we managed to change people’s perception about this.” 

UangTeman is no longer the only player in the Indonesian digital microlending market. Other players have entered the fray after witnessing how well it has done serving the huge market segment. 

However, Aidil says does not see the new entrants as a threat to his business. “While they may say the approval rate is easier or something like that, the reality is that their NPLs are over 20% while ours is only 3%. That is because we actually focus on running a responsible and sustainable business.”

He hopes to speed up the loan approval process by the end of the year. Currently, the service level agreements can take a few hours to a day, but he aims to bring this down to mere minutes. “It is not impossible. In fact, to me, nothing is impossible. Hopefully, we will be able to grow bigger and serve more people who need our service in Indonesia.”