Institutional investors such as banks and investment management firms are increasingly flocking to peer-to-peer lending platforms in Indonesia to deploy their funds, as they hunt for higher returns amid a lacklustre and uncertain equity market environment.
What is driving institutional capital in this fast-growing space is the huge demand from Indonesia’s largely under-banked borrowers, and higher returns offered by P2P lenders. As of January 22, 2020, there were a total of 164 P2P companies registered by the Indonesian market regulator Financial Services Authority (OJK), against 88 such entities at the end of December 2018.
According to market participants, the P2P platforms offer easy access for both investment and lending options.
Apart from individual investors, P2P players have started registering more interest from institutional entities. Akseleran, for example, noted that 20 per cent of its total number of lenders are institutional investors.
“But from Q4 last year, the numbers have picked up to around 35 per cent, and we target this year that institutional lending will constitute around 35 per cent of the total lending,” said Chief Marketing Officer Andri Madian. Akseleran, an SME-focused lending platform in Indonesia, closed an oversubscribed $8.55 million Series A funding led by Beenext late last year.
OJK started regulating P2P lending at the end of 2016. According to the regulator’s data, between December 2018 and December 2019, it recorded a 192 per cent growth y-o-y in the number of P2p lender accounts, comprising both individual and institutional accounts.
The number of accounts rose to 605,935 by December 2019, from 207,507 in December 2018, with 82.5 per cent of them located in Java Island. The number of accounts in 2018 had also nearly doubled, from 115,939 at the beginning of the year.
Modalku co-founder and CEO Modalku Reynold Wijaya, citing data by PwC, noted that 74 per cent of Indonesia’s MSMEs do not have access to funding. The company notes Triodos Investment Management and Bank Central Asia as institutional investors that channelled loans through Modalku.
Echoing this challenge that the smallest business owners face is KoinWorks CFO Mark Bruny. “We’re helping our unbankable, underbanked clients…to grow the business. As their businesses are growing, they will then potentially, eventually migrate into the banking system, they will graduate into the banking system,” he said.
Indeed, aside from higher investment return, institutional investors usually look at P2P lending platforms to connect with micro, medium and small enterprises as they look for a new distribution channel, Mandiri Capital CEO Eddi Danusaputro added.
For individual investors, participating or lending through a P2P platform can allow them returns of up 10 per cent compared to prevailing bank deposit interest rates hovering in the sub-7 per cent region.
“If individual investors are looking for higher return, P2P lenders can give them an average return of 10 per cent,” said Mandiri Capital CEO Eddi Danusaputro.
At a macro level, the rise of P2P lending as an alternative investment option could also be a result of options drying out at the public market – a situation that was was caused by the scandal involving state-owned life insurance Jiwasraya. Due to mismanagement, Jiwasraya recorded a default on its product JS Saving Plan, an event that dampened public investor confidence in the market.
However, the P2P industry is still not that mature compared to the stock market in terms of risks associated with its operations. “When the P2P industry says its default rate is low, we don’t know if that’s the real number,” a market observer said. Also, there are 25 P2P lenders who have obtained the ISO risk management certification to date, per OJK data.
Akseleran agrees that the main challenge is to maintain the default level at the lowest possibility. “And it will depend on the credit assessment capability from the P2P lending players,” Madian observed.
From August 2019, Akseleran implemented credit insurance for almost 80 per cent of its loans, protecting 85 per cent of the lenders’ principal in the event of default.