Happiness on Loan

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Borrowing money through informal networks is not unusual in Indonesia. Though completely unsupervised and predatory in nature, these type of loans are pervasive and have touched the lives of many of the poor in rural areas. On this episode of Indonesia In-depth, we look into the borrowing culture in Indonesia. From banks, agents, peer-to-peer apps to informal neighbourhood loan sharks, in discussions with Senior Financial Specialist from World Bank Indonesia, I Gede Putra Arsana, and an expert of behavioural economics from the Institute for Economic and Social Research at the University of Indonesia (LPEM UI), Dr. Chaikal Nuryakin. 

Here are some of the main takeaways:

The Problem with Banks and Financial Inclusivity

  • 49% of Indonesian adults hold bank accounts according to the 2017 World Bank FINDEX. The percentage was drastically lower only five years ago, so there appears to be a big increase and the number continues to rise annually.

  • With that said, although the number of those with bank accounts has risen, that doesn’t mean that people actually use them. One of the reasons for this is that since 2014, the government transitioned from a system of cash handouts for the poor to bank transfers, requiring the receivers to have a bank account. Most of these accounts are used solely to withdraw these social benefits, rather than used for other financial services.

  • In addition to often not meeting minimum saving requirements, these individuals can feel intimidated by the formal banking process along with unfamiliar office environments.

  • As a result, the financial inclusion rate hasn’t increased in parallel with the growing number of bank accounts. This “under-banked” segment of society then rely on informal financial services to fulfil their financial needs, particularly loans.

  • On the other hand, those that have bank access and actually use the lending services, often face constant intimidation and sometimes violent debt collectors, employed by the banks themselves.

Banking Agents 

  • In the effort to reach more rural, poor and under-banked individuals, a consortium of state and public banks have created agent-based banking services supervised under the Financial Authority (OJK), called Laku Pandai. The goal of this service is to increase financial inclusivity. Contrary to banks, Laku Pandai agents are located in small kiosks in local neighbourhoods or in villages, rather than in financial establishments. Their banking processes are simple with no monthly fees. Account balances are limited to a maximum of Rp20.000.000 or USD$1,430.

  • Although their services have had a positive impact, a study by Chaikal Nuryakin from 2-3 years ago shows that the agents have yet to fully provide their services in remote villages as Laku Pandai efforts remain overly concentrated in populated rural areas.

  • Laku Pandai continues to use these limited outreach methods as it is prevented from partnering with telecommunication players as Bank Indonesia’s regulations prohibit such players from providing banking services.

Online P2P Services 

  • The rapid increase in the use of smartphones and widespread penetration of the internet in recent years has allowed for peer-to-peer (P2P) lending to explode in Indonesia bringing with it, both positive and negative impacts. P2P lending is conducted via mobile apps and allows for users to receive funds in their accounts nearly instantly after fulfilling minimal requirements such as taking a photo of their I.D. card.

  • P2P apps provide both productive (business) and consumptive (consumer) loan services.

  • One positive aspect is that P2P borrowing has become the first step for many borrowers to establish a credit history which could be applied to banks or other finical institutions in the future.

  • The productive loans services, which are aimed at generating capital for businesses, have helped some Micro Small Medium Enterprises (MSEMs).

  • P2P consumptive loan services, which are used for daily consumption needs, have deeply penetrated urban and suburban markets in Indonesia and have become somewhat controversial as many users have found themselves in debt holes as a result of compounded interest rates, experienced data privacy violations from P2P apps and difficulty differentiating legal and illegal P2P apps.

  • Consumptive P2P services have also faced difficulty penetrating more rural areas not due to a lack of mobile internet penetration but, because of long established traditional neighbourhood loan sharks call “Mama Inang”.

 Mama Inang

  • The Mama Inang remains the go-to loan provider for rural areas. These men or women are members of a village or neighbourhood that act as informal lending providers. As they are from the local community, they are friendly and have deeper knowledge of the borrowers’ personal life.

  • Mana Inang provides borrowers with cash for unexpected needs such as celebrations, ceremonies or health bills while using personalized interest rates. As they know the community well, have a recognizable face and are personable, they are not seen as a threat and are able to latch on to the borrowers for a long time, even for life.

  • Unlike with P2P apps, the Mama Inang has built a relationship with the potential borrower and is often considered a friend or even an extended member of the family and borrowers often don’t realize that they are being taken advantage of.

  • At the end of the day, many rural people resort to informal loan services provided by Mama Inang, not only because they are more available in the most rural areas but also because they are surprisingly “better” than the other options.

Saving Culture

  • P2P loan services will not be able to induce saving culture among consumers because it can only provide lending as it’s not a bank that can offer those services.

  • To fulfil consumption needs, saving is what can help many people from taking loans in the first place and save them from a potential ordeal dealing with the various types of loan sharks mentioned above.


  • Although government has made many efforts to include the rural population into a more formal and supervised lending institutions and the use of technology in this sector has been supportive of this effort, many of the poor and rural population still resort to the highly unsupervised informal loan sharks and Mama Inang, however problematic they are.

Shawn Corrigan