Back in the middle of last year, Yonathan Juandro was faced with a quandary: how to raise US$20,000 ($27,660) to expand his small catering business fast.


At stake for his company, which then delivered lunch boxes to the offices of seven members of parliament in Jakarta, was the chance to net three more Indonesian parliamentarians – crucially ones with fatter budgets. The extra business would mean hiring more kitchen staff and buying more food. His monthly revenues stood to swell by half again to $150,000. But all of his capital was tied up in a gold trading business in Singapore and banks were weary.

“They were asking for original documents to appraise my car and other things,” Mr Juandro said. “It was going to take a long time.”

Instead, like small business owners in other markets, Mr Juandro went online to raise the loans from retail investors. Known better as peer- to- peer lending the model has a following in more developed markets such as Singapore and the U.S.

But in Indonesia the approach may have added significance as a promising solution to the country’s enormous pool of unbanked businesses. According to the Asian Development Bank, fully US$57 billion of the country’s borrowing needs by businesses goes unmet. Hardest hit are businesses such as Mr Juandro’s, which would normally borrow from family or use their own money. As it turned out he raised the money within days, to be paid back over six months with an interest rate of about 5% -- a touch below the benchmark rate set by the central bank.

“It was so cheap and fast,” said Juandro. “I had no idea these services existed.”

Mr Juandro wasn’t alone. Up until last year, Indonesia’s regulators were in the dark, too, at least that’s what Reynold Wijaya found when he sought to open what would be the country’s first peer- to- peer lending platform, Modalku.

Meaning “my capital”, Mr Wijaya, a Harvard MBA graduate, had launched Modalku in 2015 with his partner Kelvin Teo in Singapore. When the pair decided it was time to expand into Indonesia, their home country, they sent a letter to the nonbank financial services office of the Financial Services Authority, known better as the OJK.

Three weeks and two follow up emails later the pair got a response from the OJK’s research department asking for a meeting. But rather than a bureaucratic run around their interlocutor, Hendrikus Passagi immediately embraced the idea as a means of expanding the supply of capital for the country’s cash strapped businesses, Mr Wijaya recalls.

Mr Passagi shepherded their application through the agency, arranging meetings with key managers including the agency’s chairman, Muliaman Hadad. Most importantly the pair got a provisional green light subject to regular follow up meetings while the agency wrote the rules for what would become the emerging financial technology sector.

“This platform significantly reduces the costs, improves access to data and increases the speed of financing,” Mr Passagi said.

“I believe it can outperform banking. It’s ideal for a country like Indonesia where businesses are spread over many islands.”

But while it appears a boon to small businesses it is at heart a retail investment play. Lenders log onto Modalku or rivals including Investree or KoinWorks to trawl through the list of borrowers and assess their business model. If they like what they see the investors take a punt. Loan contributions can be as little as $10 for some platforms. Those funds are bundled together and deposited with the borrower.

It’s up to the platforms to offer up safe bets for investors. Loans are unsecured and lenders have no recourse to get their money back. So typical borrowers are those with sterling clients: members of parliament with a government expense account, say, or advertising companies for Nestle or Unilever.

“We look for companies with strong accounts receivables,” says Investree CEO and founder Adrian Gunadi.

Few borrowers though make the grade. Modalku says only 10% of applicants may access lenders through their platform.

At stake are fat yields for lenders and cheap and easy credit for borrowers. Modalku says yields average 17% a year. Borrowers with good profiles can raise money in hours. Mr Juandro said in January his catering business, Cynthia Catering, raised an additional $20,000 – this time in Singaporean dollars – in half a day, owing to his track record.

Modalku, Investree skirt capital adequacy regulations that apply to banks because they don’t lend money themselves merely arrange it. To weed out money launderer, a risk, Mr Passagi admits, regulators require lenders to open bank accounts, which then subject users to the usual vetting and monitor cash flow.

Even so, some deadbeat borrowers get through. Modalku says its nonperforming loans account for 0.005% of the $45 million it’s dispersed via its network though Investree says so far it’s suffered no defaults in less than a year of operation.

“There are a lot of fraudsters out there,” Mr Wijaya.

To be sure peer- to- peer lending is a drop in the ocean. Investree and Modalku together have only dispersed about $65 million so far. But the sector is growing fast. Lending volumes over Investree are growing by as much as $5 million a month. In five years the sector may cater to about 20% of the needs of the firms that normally go unbanked.

For Mr Passagi his efforts appear to have netted him a promotion. He will head OJK’s newly formed Fintech Licensing and Supervision department starting at the beginning of next month.

“We are catering to the businesses that banks wouldn’t normally touch but are still good risks,” says Mr. Gunadi of Investree.

“If we can expand to that level, it will be big help to this country.”

This piece was first published in the Business Times of Singapore. Click here for the original