Fintech offers Indonesia’s ‘unbanked’ a lifeline; but regulators struggle to stay ahead

The rapidly expanding array of fintech companies is proving a challenge for regulators around the world.

This is a particular problem in developing countries where small businesses play a large role in the economy, but avoid traditional banks.

But Monash Business School has played an important role in helping Indonesia develop its newly-introduced regulations around its burgeoning fintech industry, to ensure better access to foreign investors and to allocate funds domestically.

In Indonesia, a significant proportion of the population are “unbanked”, as the country’s island geography makes it difficult for people to access financial services. Only 36 per cent of Indonesians have a bank account, while many micro-businesses operate using cash and the local money.

However, the number of new fintech businesses in the country has doubled in the last year. The growth of peer-to-peer lenders in particular has given people new access to loans and credit. But regulation of the sector has lagged.

Monash Business School’s Australian Centre for Financial Studies (ACFS) worked with the Indonesian government to design new financial system rules – the first time the ACFS has signed a Cooperation Agreement with a regulatory authority.

ACFS researchers worked with a team senior of Indonesian regulators for three months to ensure the regulations were in place for a December deadline.

“Indonesian President Joko Widodo made a commitment late last year that they would have fintech regulations in place by the end of 2016,” says Professor Rod Maddock.

Indonesia’s regulators have faced pressure to develop rules quickly to protect consumers. The new regulations are designed to encourage people to use the financial system and allow operators to start operating once registered, but before fully licensed.

Fintech businesses can operate in a range of ways online through facilitating payments, lending and financing, financial management and as exchanges.

Indonesia’s regulations in Indonesia address one type of fintech business, peer-to-peer or platform lending. Peer-to-peer lending matches potential investors with borrowers. The online platform means loans can be divided among many investors, who take on the credit risk, rather than the operators.

The operator may manage the collection of loan repayments and distribute them to the investors. While investors may be provided with certain details relevant to assessing the credit risk of the borrower, the identity of the borrower remains anonymous.

Indonesia’s regulations will allow operators to start business once registered but before fully licensed within a year. Under the new rules, fintech operators must ensure borrowers are Indonesian, interest rates should take into account “reasonableness and the development of the national economy” and documents must use simple language.

There are also risk and compliance conditions: operators must lodge their capital with a bank and have separate accounts for client’s money; and all activities must be able to provide an audit trail.

“The big difference with the Indonesian regulations compared to Australian laws is that the regulator has an obligation to try and help new forms of financial platforms set up,” Professor Maddock says. “They have a pro-competition and pro-finance bias.”

However, a few areas under the new rules still require further detail. Indonesia’s rules require the platform to be a “sole purpose activity”. The rule prevents financial institutions which has shares in the platform also being investors in loans.

Preventing market operators from also being customers is designed to discourage unscrupulous behaviour and prevent “self-dealing” behaviour at the expense of other customers. But this also may inhibit additional funds being injected into the platform and limit growth.

There is also no restriction on who can invest through the platform and how much they can invest, which can ignore whether retail investors are able to adequately assess the risks.

There are also no interest rate limits, though experience has indicated that platforms tend to reject these borrower applications due to their high risk of default. Maximum or minimum lengths of time for loans which has meant most loans are for short terms which can tend to attract higher interest rates.

However, the approach adopted is close to best practice, says Professor Maddock.

“There are some stronger educational and national-interest features than one sees in developed economies and some weaknesses in consumer protection, but these can be expected to be dealt with as the regulator gains experience with the sector,” he says.

Published on 19 Sep 2017