Indonesia’s banks are in a strong position, enjoying the steady GDP growth and high levels of liquidity. Despite some potential hurdles, international banks are including the country in their expansion plans. Kimberley Long reports.

Bank Danamon

As the third largest country in Asia by population and with gross domestic product (GDP) growth forecast to continue at a steady rate of 5%, Indonesia has a lot going in its favour. While there are risks forecasted in the coming year, the international community is looking at how it can capitalise on the country’s upward trajectory, and in doing so give the country an economic boost.

However, these positives come with concerns over Indonesia's macroeconomic environment. Fitch Ratings’ 2019 Outlook: Asia-Pacific Emerging Markets Banks report has revised Indonesia’s sector outlook from 'stable' to 'negative' as a result of the rise in interest rates during 2018, with the expectation of a squeeze on bank profits.

“In response to the increased US Federal Reserve rates, Indonesia’s central bank [has] increased rates [by] 175 basis points since the start of 2018. We’re beginning to see that lead to tighter margins, which we expect to continue,” says the report. “However, any further rate increases are unlikely to cause too many issues. While they may impact on profits, the banks should be able to manage another increase of up to 50 basis points, in line with Fitch’s expectations for Indonesia’s rates in 2019.”

Presenting the points to look out for in 2019, the Fitch report cautions on the loosening of underwriting and regulatory standards, saying: “Tighter competition amid commodity price stabilisation could lead to a weakening of underwriting standards, which banks had tightened since the commodity downturn in 2013. Looser regulatory macro-prudential measures to spur growth could also lead to a build-up of credit risk.”

A growth prospect

Overall, however, market watchers see stability amid this turbulence. “Exchange rate volatility is likely to continue to be an issue in 2019. Indonesian banks have about 15% of loans in foreign currencies,” says Gary Hanniffy of Fitch’s Indonesia analytical team. “While this is higher than some neighbouring countries, it is not excessive. Most of the banks have foreign exchange deposits to match the level of loans. The risk is moderate overall, and banks should be able to manage any changes.”

And for the country as a whole things are looking positive. “Indonesia’s rating was upgraded to BBB at the end of 2017. The rating outlook is 'stable', which indicates that it is likely to remain the same in 2019,” says Mr Hanniffy. “Across the board the ratings on banks are still on stable outlook. Banks with international parents or sovereign backing have support, and the standalone banks are still looking stable.”

The stability of Indonesia is making it an interesting growth prospect for Asia’s major banks. Japan’s MUFG has extended its reach into the country through its own corporate banking operations, and expanded into the retail space through investment in Bank Danamon, Indonesia’s sixth largest bank by assets. In August 2018, MUFG increased its share in Bank Danamon to 40%, becoming a controlling stakeholder.

MUFG is looking to leverage the benefits of being a foreign parent bank, and has the funds to invest into growing businesses in an expanding market. “Danamon has strengths in small and medium-sized enterprises, plus its retail business. It also has good automobile financing through its subsidiary Adira Finance,” says Daisuke Ejima, general manager of MUFG Bank’s Jakarta branch.

Operating in this way allows MUFG to be present under its own name in the country and focus on its key corporate businesses. “While we focus mainly on the large corporate segment, serving both Japanese and Indonesian corporates, we can probably expand the value chain more on the upstream, which is [the] supplier side, as well as the downstream distributor side,” says Mr Ejima. “Together with Danamon, we can also approach the personal transaction level, including salary payment, credit cards or personal insurance.”

Global recognition

It is this desire to branch out into new areas that is fostering growth in Indonesia's banking sector. The incumbent banks have the benefit of already offering an extensive product suite. “We continue to support the business development of our subsidiaries with vehicle financing, remittances, sharia banking, securities, general and life insurance, and venture capital,” says Jan Hendra, corporate secretary of Indonesia’s Bank Central Asia (BCA). “Our aim is to provide comprehensive financial solutions for customers.”

Mr Hanniffy says the domestic banks, i.e. without international backing, are operating at a high level. “On a standalone basis BCA is highest rated among the banks at BBB [by Fitch], followed by Bank Rakyat Indonesia [BRI] with BBB-,” he says. “These banks benefit from high levels of capital and low-cost, deposit-dominated funding profiles.”

For his part, Mr Ejima says the international banks are aware of the struggle they have to compete with domestic bank dominance. “There is ample liquidity in banking, which is leading to a battle between the banks to win a bigger share of the business. Local banks in particular are very strong on liquidity,” he says.

The scramble to digital

As an expanding emerging market, the Indonesian economy is in the process of evolution as it strives to modernise. The domestic banking business is facing many of the same challenges, caught between the growth of online banking and continuing to serve its full customer base. Unlike other countries moving towards digital, Indonesia has additional geographical issues. Providing a connected service across 17,000 islands is no small task.

While many metropolitan areas are well served by 4G connectivity, beyond them connection speeds in the country can be slow. In May 2018 it was reported that only 55% of rural villages have 4G access. Almost 45% of Indonesia’s population lives in rural areas.

Even with parts of the country struggling to get consistent internet service, BCA has seen a sharp uptick in the use of digital services. “With the ongoing advancement in digital technology, BCA has seen a significant shift in customer transaction preferences in recent years, seeing more than 15 million [digital] transactions per day,” says Mr Hendra. “Transactions through digital channels contributed 98% of BCA’s overall transactions in the first three quarters of 2018.”

While some local banks are going digital, their offerings are staying within what customers can already access. Bank Tabungan Pensiunan Nasional launched its mobile banking channel, Jenius, in 2016. The app is an extended version of an online banking account, in that it can only be used by bank account holders, although it does allow for peer-to-peer cash transfers.

But millions of people still languish with no access to a stable, high-speed connection. In order to continue serving its core customer base, BCA is committed to expanding its branch network. “BCA leverages digital technology to expand its products and services in accommodating customer needs, and improve operational efficiency,” says Mr Hendra. “Meanwhile, branches remain effective channels to strengthen customer relationships and facilitate large [value] transactions.”

When the technology does become available, consumers are eager to learn more. “Payments methods are shifting with the technology, and all the banks are focused on this,” says MUFG’s Mr Ejima. “There is such a large domestic market in Indonesia [and] banks have to keep up with the pace of change. Indonesia is an emerging economy but the people are very diligent and keen to learn. They adopt new technology very quickly.”

Worth a gamble

As banks across the world search for yield, looking beyond their borders for opportunities is one solution. “The Japanese market is so saturated we have to explore opportunities overseas,” says Mr Ejima.

With this in mind, some players are willing to take a risk in entering a new market. Replicating its successful Indian digital banking model, Singapore’s DBS launched its Digibank bank-in-a-phone concept in Indonesia in 2017.

“Despite the size of the country, just four banks are used by 85% of the population,” says Leonardo Koesmanto, executive director, head of digital banking, at DBS Indonesia. “Our aim is to attract digital native millennials, starting with those in the big cities. Digibank is currently operational in four cities, with plans to expand to another this year.”

To set up an account via the app, customers input their mobile phone number and e-mail address and register with their electronic identity card and tax identification number. Customers then meet with a Digibank vendor in one of a number of verified coffee shop locations in several metropolitan areas to verify their biometrics. Mr Koesmanto explains the bank is aiming to have 3.5 million users in the first five years. In the 16 months since launch, Digibank has signed up 400,000 users.

As with MUFG, DBS has seen Indonesia as a potential growth market. “DBS has 85% of the banking population in Singapore,” says Mr Koesmanto. “For the bank to grow it has to move into new markets, and those with large populations have the greatest attraction. At DBS we are bullish on the prospects for Indonesia.”

Indonesia’s digital banking landscape is seen as ripe for development by the fintech community, especially as a way to bring in the unbanked. For example, mobile phone network Telkomsel entered the payments space with the launch of the Tcash electronic payments platform. The platform is even open to users of rival networks. Payments can be made cross-border to Singapore through a collaboration with Singapore Telecommunications’ electronic wallet Dash to serve overseas workers.

Ride-hailing service Go-Jek, one of Indonesia’s first start-up unicorns, has rapidly expanded its services to include courier services, at-home hairdressers and its payments platform Go-Pay. As the company evolved into a lifestyle brand, the payments service allowed customers to pay for their various services through the Go-Jek app.

Reaching the unbanked

Go-Pay enables customers to top up their mobile phone and pay their electricity bills, as well as making transfers to other Go-Pay accounts and withdraw funds from their bank account. A number of vendors also accept payments made from Go-Pay, including McDonald’s.

As well as adding funds to the Go-Pay  account through their online bank account or at convenience stores, customers can add money to their account by giving cash to a Go-Jek driver.

Go-Pay CEO Aldi Haryopratomo says the digital offering of the incumbent banks and their impact on financial inclusion cannot be overlooked, pointing to the 2017 Global Financial Inclusion Index from the World Bank which found account ownership among Indonesian adults had risen to 50% in 2017, up from 40% the previous year.

“I believe that together we can do better,” says Mr Haryopratomo. “Go-Pay’s mission is to develop Indonesia’s economy from the bottom up, including bridging access to finan-cial in-stitutions for the previously unbanked.”

Go-Pay works in collaboration with social enterprise Arisan Mapan, founded by Mr Haryopratomo in 2009. Arisan is a type of peer-to-peer microfinancing service that operates through a form of rotating credit widely used in Indonesia.  

Arisan Mapan provides services to 2 million people, mainly living in unbanked rural communities. They can use Go-Pay to pay into their Arisan, and their utility bills. The service is available in regions where Go-Jek vehicles are not in operation, showing how the business has become distinct from its taxi service origins.

With the spirit of collaboration in mind, Go-Pay has teamed up with 28 financial institutions to help reach underserved communities in Indonesia. In addition, it is working with the ministry of finance to launch a microfinance digitisation programme that allows the distribution of cashless micro loans. As Indonesia continues to see its income grow and its population increase in wealth, those institutions willing to innovate now look likely to see their courage pay off.


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