Indonesia’s GDP fell by 2.1 per cent in 2020, its first full-year contraction since the 1998 Asian financial crisis, after growing 5 per cent in 2019. Various international institutions including the IMF, World Bank, and the Organisation for Economic Co-operation and Development (OECD) have forecast 2021 growth to rebound by 4-5 per cent, with OECD on the upper end of that range at 4.9 per cent.

For years, Indonesia has been enjoying what the OECD calls a “demographic dividend,” where those aged between 15 and 65 account for close to 70 per cent (around 185 million) of the country’s 270 million population. 

This large working population percentage outstrips both middle-income and OECD averages but is expected to peak this year and remain stable for the next decade before it falls off. 

Indonesia thus does not have a long runway to leverage this demographic dividend and turn its economic fortune around.

The nation’s young working adults have supported GDP growth of 5 per cent annually over the past decade, but this was interrupted by Covid-19, which also erased some of the poverty reduction gains in the 2010s when more Indonesians entered the middle-income class.

In the coming year, the effects of the government’s Economic Recovery Plan (PEN) plan will bear out for Indonesia’s MSMEs. Notably, the plan expanded the extremely popular KUR microcredit program to more business sectors, in addition to new interest subsidies, postponement of repayments for up to six months, and a higher ceiling limit.

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A youth financing gap

Indonesia’s working youth and young entrepreneurs - both millennials and Gen-Z - were on a robust trajectory before Covid-19 upended the startup ecosystem and caused investors to keep their powder dry.

However, the pandemic also accelerated digital adoption across Indonesia, which had previously seen tech startups targeting those in urban areas due to connectivity and smartphone adoption. With the need to take commerce, health, and even education services online en-masse due to widespread work-from-home orders affecting millions of Indonesians, digital literacy increased exponentially and rapidly.

Indonesia’s young entrepreneurs now have a larger addressable market of customers, a market that is incidentally more tech-savvy than before. However, this group of entrepreneurs still faces the same -- if not larger -- barriers to formal financing as older business owners: lack of collateral, credit history, or business skills and experience.

A 2020 report by UNDP titled “Youth Adoption of Digital Devices and Digital Business Solutions” found that the full potential of young people as an engine of inclusive growth remains untapped in ASEAN due to their lack of access to formal financial services. 

This “youth finance gap” has slowly decreased in recent years, with the percentage of Indonesian youth using one or more forms of financial services, rising from 37% in 2014 to 51% in 2017, with that number surely higher today.

Understanding millennial-owned MSMEs

In Indonesia, the rise in Jakarta’s prominence as a startup hub means that an ASEAN-leading 35.5 per cent of its youth aspire to be entrepreneurs. Contrast this with Singapore, another startup hub, where only 17 per cent of its youth see themselves starting a business.

The entrepreneurial spirit burns particularly bright in Indonesia, and financial institutions would do well to take note. A key part of the disconnect between traditional bankers and millennial borrowers or millennial-owned MSMEs is the know-your-customer (KYC) quotient. Here, financiers need to make the effort to understand how this new crop of entrepreneurs spend and use money.

The typical brick-and-mortar MSME has quantifiable, consistent assets, liabilities, and expenses. These include rent, staff wages, and company vehicles. However, young, digital-first entrepreneurs today are more flexible, using online tools such as pay-as-you-go cloud computing models and third-party office applications (think Slack or Facebook Workplace).

Offices are now replaced by remote working or part-time co-working spaces, while full-time employees are often traded in for independent contractors or freelancers from the ‘gig economy.’ Most importantly to bankers, young entrepreneurs have a shorter credit history and thus provide less insight into their creditworthiness. 

Bridging the digital gap

Due to this disconnect, millennial entrepreneurs have been drawn away from formal financing to more accessible, less restrictive forms of financing (albeit with higher interest rates) such as crowdfunding, P2P lending, or merchant financing provided by super-apps or e-commerce platforms. 

Despite providing lower interest rates, formal financial institutions that refuse to evolve and bridge this gap will be playing catch-up when it comes to this massive new borrower market.  Financial institutions specialize in KYC processes and risk management and thus have a larger database from which to build AI-backed financing models for digital lending products. 

Alternatively, banks can hook their digital lending solutions up to platform partners, especially those that boast large MSME user bases such as Grab, Gojek, Tokopedia, and Traveloka. These platforms excel at attracting young entrepreneurs, but often lack the focus to craft more sophisticated financing for customers, beyond invoice financing.

Access is also key to tapping the millennial-owned MSME market, and with digital-first MSMEs now using multiple solutions for their different needs, banks can leverage open banking ecosystems to make their solutions agile and connected to third-party partners. 

To successfully capture millennial-owned MSMEs as borrowers, banks need to aggressively formalize partnerships with new fintech companies (right this moment). To be specific, this means alternative credit score providers, P2P lending platforms, and niche fintech players that focus on supply chains in various industries.  

Banks can then tap into their new partners’ databases of information. This will help when building up credit profiles from sales records, while adding value for partners with competitive, low-interest products. With access to more customer data, banks can use AI to conduct credit analysis and scoring, tailoring financing to a young entrepreneur’s specific needs.

Giving millennial-owned MSMEs optionality on various digital platforms increases the engagement points between traditional financiers and founders. In turn, this builds trust and creates a pipeline for future, specialist financing products. 

The writer is the Executive Vice President of Bank BRI, Indonesia's largest MSME lender by assets.