Macroeconomic Perspective

Indonesia's GDP has been largely steady since the start of the year 2019. In the last 14 quarters the country managed to stay in a range of 4.9%-5.3%. The GDP growth is projected at 5.1% in 2019 and is expected to recover at 5.2% in 2020. In light of the stability in the exchange rate, lowered oil prices and steady energy prices, inflation fell to 2.6% in the first quarter of 2019, which is the lowest since 2009. Global tensions are not expected to derail the Indonesian economy, but policy trade-offs may be necessary to maintain growth. The study predicted a current account deficit (percentage to GDP) of approximately 3% for 2018, but that figure was expected to fall to between 2.5% and 2.6% in 2019.

Analysis from the World Bank points to a similar possibility, as it found that while macroeconomic conditions in Indonesia have improved since mid-2018, the US-China currency war does threaten the health of the Indonesian market. With the devaluation of Yuan, investment risks have increased and is set to have drawbacks for the Indonesian economy in the long term.

Digital Economy Vision

The "2020 Go Digital Vision" is Indonesia's formal roadmap to stimulate digital innovation in the nation's economy. The programme is centred around promoting a stronger e-commerce system that can support transactions across a wide range of industries, from small businesses to agriculture and fisheries. The nation is targeting US$130bn in domestic e-commerce transactions by 2020. According to BayCurrent Consulting, this roadmap involves blending political, economic, social and technological advances to promote digital growth. On the political front, the BayCurrent Consulting report identified digital-friendly policies, stronger digital content laws and shifts in taxing for digital businesses as key components of the plan. On the taxation front, for example, there is a new Import Duty Exemption from US$100 to US$75 per day. On the economic front, BayCurrent points to strong GDP growth as a sign of digital progress, especially as services made up nearly 44% of the nation's GDP in 2017.

The nation's Digital Economy Vision is creating considerable potential, but also comes with barriers such as limited infrastructure - particularly in terms of transportation and IT systems - that are creating a deep digital divide in the nation. While barriers exist, an A.T. Kearney study found that digitisation could add US$1 trillion to Indonesia's GDP by 2025. Indonesia is moving quickly to apply these digital advances to the financial services industry.

A Global Risk Institute report explained that the Bank of Indonesia Financial Technology Office (OJK) has established a regulatory sandbox to drive rapid innovation in the financing sector. These types of advances lay the groundwork for alternative lending and fintech innovation. In Indonesia, more than 20% of borrowers have applied for a peer-to-peer loan and more than 50% plan to do so in the next year. This is ahead of India, Thailand and China while also being well above the global average.

Financial Services Sector and the Move to Fintech

Digitisation is happening quickly in the Indonesian financial services sector. A McKinsey & Company study found this trend began in 2014 but has accelerated as consumer behaviours are pushing financial services firms to react. In particular, the transition to digital financial services is accelerating as consumers embrace diversified product and service relationships with banks. In 2014, the average consumer used 2.2 services, the figure climbed to 2.7 services in 2019. This is lower than for developed regions in Asia, but still shows positive momentum. Indonesian banking customers are also turning to consistent use of digital banking services as monthly use of digital banking has grown twice as fast as in other emerging markets. Furthermore, 56% of non-digital bank customers plan to engage in digital banking in the next six months - the second-highest figure in Asia, behind only Myanmar and ahead of India, Malaysia and China.

All of this is leading to a rapid rise in the peer-to-peer lending market, as Ken Research found there are more than 100 platforms currently registered within the OJK and another 100 in the pipeline.

While digital technologies are fuelling opportunity in the Indonesian banking market, the sector is also facing its share of challenges. According to KPMG, the regulatory pressure on firms is escalating quickly, forcing institutions to take a particularly careful approach to finding the right balance between capital management, risk and growth. In particular, firms are tasked with increasing transparency while working to deal with heightened competition.

Access to Finance

Fintech innovation is combining with policy developments to improve access to finance in the nation, but the barriers that need to be overcome are strong. A study from the Organization for Economic Cooperation and Development (OECD) found that just 16% of the adult population had borrowed money from the banking sector in 2016. Instead, more consumers tended to turn to their personal connections when they needed money. Furthermore, just 14% of Indonesians were considered financially literate at the time.

Improving access to financial services has been a priority for the nation. Consumer access to finance is not the only area where growth is needed. A Brink report analysing Indonesian Banking Statistics data found that while SMEs make up approximately 99.9% of Indonesian businesses, they accounted for just 19% of credit allocated by the banking industry in October 2018. While access to finance is lacking in some areas, disruption from the multi-finance and fintech sectors are creating new opportunities.

To counter these issues, Indonesia's Financial Services Authority is introducing new rules that alter its single presence policy. According to Bloomberg, the new regulation will allow for easier foreign bank investment in local lenders, encouraging consolidation in the industry and fuelling efficiency gains.

Regulatory efforts that improve financing efficiency across the industry through strategic M&A activity are designed, in part, to drive greater access to financing products.

Increased access to financing is also evident in the emergence of fintechs in Indonesia. AwanTunai was able to secure US$4.3m in Series A funding, allowing for increased lending targeting micro-businesses and similar ventures, Reuters reported. These developments highlight the link between increased access to financing resources and the larger health of Indonesia's lending sector. Gaps in access to financing have held the industry back, but diversification in size and types of lenders gaining market share shows growth potential.

THE MULTI-FINANCE AND FINTECH INDUSTRIES

Policy efforts aimed at economic stimulation to increase access to finance are leading to growth in Indonesia's multi-finance industry. A study from AFSA World pointed to year-over-year industry growth in a variety of segments including:

• Asset - 5.05%
• AR Fin - 5.17%
• Sharia Fin - 31.27% (decline)
• Loan - 2.3%
• Equity - 11.4%

The multi-finance industry is gaining this momentum as Indonesia works to:

• improve access to financial services, particularly in rural communities and for SMEs;
• reform industrial processes;
• get ready for how financial services must shift in light of the Industry 4.0 movement; and
• accelerate national economic growth.

As Indonesia's policy environment shifts to support these goals, fintech disruptors and peer-to-peer lenders have a strong opportunity to find a powerful place in the multi-finance sector. According to Lexology, increased regulatory attention on the multi-finance sector is leading to a shift. As peer-to-peer lending platforms are prohibited from providing on-balance-sheet loans, many are starting to take over multi-finance companies to expand their product portfolio. This is leading to a growing blend between fintech, peer-to-peer and multi-financing companies, something that could make the sector more attractive for new entrants.

Islamic Banking

According to a report from The Malaysian Reserve, Shariah banking assets have broken out of the 5% market trap it was mired in, setting the sector up for rapid growth. One major lender said it expects a second consecutive year of doubledigit expansion. More than 90% of Indonesia's population is Muslim, creating widespread demand for financial services that are delivered in ways that align with Shariah law. As of November 2018, Islamic banks controlled assets amounting to approximately 5.7% of the banking industry.

Leasing Landscape

The growing move toward financial accessibility and service diversity in the nation is leading to growth opportunities in leasing segments. For example, the Indonesian financial services authority has removed down-payment requirements for vehicle loans by multi-finance companies. These types of policy strategies could promote a growing leasing environment and expand access to a wider range of lending services in the nation.

The growing financing sector is also creating opportunity. According to The Jakarta Post, Astra Credit Companies, the leading auto financing organisation in Indonesia, went into 2019 expecting a 7% to 10% increase in loan disbursements as well as a 5% increase in profits. This is a key step forward for the industry, as the report noted that the annual growth breaks a four-year slump for the lender. However, there is a divide in the industry. According to Ken Research, the Indonesian auto finance sector will experience rapid growth between now and 2021. This expansion is occurring while the market is split between a small portfolio of major companies and a large number of small, niche financing providers.

New entrants emerging in the auto financing space are an example of this trend, as KB Capital acquired an 85% share of Sunindo Parama Finance to gain a foothold in the Indonesian lease and financing sectors, the Korea Times reported.

Indonesia's auto leasing market is going through a similar growth phase, Frost & Sullivan found. Up to this point, the nation's auto leasing landscape was facing a major challenge in broadening the market's reach. Small businesses seeking operating leases are dominating the segment. However, the market is beginning to expand.

Frost & Sullivan found growing mobility needs in the nation are creating more demand for leasing. Furthermore, more corporations are starting to favour leasing options as a way to provide automobiles as a staff benefit. At the same time, high vehicle acquisition costs are fuelling a shift toward leasing as an alternative to new vehicle purchases.

At the start of the study's research period, 2017, Indonesia was the largest auto leasing and car rental market in Southeast Asia. Moving forward, the growing customer base for auto leasing is expected to boost the market through 2022. CONCLUSION. Digitisation is fuelling a period of rapid change and growth potential in Indonesia. The nation faces challenges in the fallout from the global trade war and a growing need for regulatory and policy advances in response to digitisation. While these challenges are significant, the blend of technological and service advances taking place in the nation create significant opportunity, leading to generally positive expectations for economic and financial services growth moving forward.