How Inclusive Technology Modernizing Microfinance in Indonesia

William Notowidagdo, Senior Vice President Of Engineering, Amartha

William Notowidagdo, Senior Vice President Of Engineering, Amartha

Microfinance has become a significant driver of economic development in Indonesia, where it plays a vital role in serving the unbanked and underbanked segments of the population. The Indonesian microfinance industry is made up of several players, ranging from traditional financial institutions to fintech companies offering innovative solutions to borrowers and investors.

The microfinance industry in Indonesia is highly regulated, with the Financial Services Authority (OJK) responsible for overseeing the industry and ensuring compliance with regulations. While traditional microfinance institutions still dominate the market, fintech companies are gradually gaining ground and revolutionizing the industry with their innovative solutions.

In 2023 the government of Republic of Indonesia has set a target for financing distribution to ultra micro entrepreneurs of IDR 470 trillion (around $30 billion) and is targeted to increase again to IDR 585 trillion in 2024. MSMEs continue to contribute to the gross domestic product (GDP) from year to year.

Of course, the growth that is expected requires intervention from technology. Traditional microfinance requires new technologies that enable more people to participate in financial services, even if they don’t have access to the bank accounts. It helps demystify the process of taking out loans and open accessibility to investment products that have never been available before.

Fintech, or financial technology, has been a game-changer in the financial industry, allowing more people to access financial services through various applications and platforms, such as online lending platforms, mobile banking apps, digital payment systems, and cryptocurrency exchanges. With constantly evolving industry and highly competitive market, fintech companies who are able to stay ahead of the curve and offer innovative solutions are more likely to succeed.

Many companies in Indonesia are modernizing microfinance by building digital technologies, using data analytics and AI to gain insights. With the needs to broaden access to the microfinance market, digital technology can create new financial products and services that are more convenient, accessible, and affordable than traditional financing options.

The insights that come from data and analytics can also be used to help in giving better understanding of what is needed by millions of customers, which is crucial in improving financial inclusion in the country.

When Amartha was founded, 13 years ago, the most common financial service that was available for rural customers was savings & borrowing institution called Koperasi. With the technology intervention, now it serves as a microfinance marketplace, an alternative investing and lending platforms that bridge urban lenders and underserved micro-entrepreneurs in rural areas across Indonesia. To open more accessibility for those who need access to finances, microfinance platforms also use digital strategies and alternative credit scores to assess borrowers' propriety according to business analysis and borrowers' personalities; providing security and efficiency for lenders to choose the borrowers according to their risk appetite, business category, and location.

Loan origination solutions use various technologies, including event-driven architecture, data analytics, AI, and machine learning, to streamline the process. Using an open banking APIs, it connects to external sources, including channel applications, systems of record, third-party apps, and data sources, making it possible to provide an efficient and effective loan origination process.

Digital technology such as APIs, AI, and machine learning play an essential role in modernizing microfinance in Indonesia. By building and running APIs as containers on a serverless secured cloud platform, business agility is enabled. Various business microservices interact with each other, external systems, or both through exposed APIs and messaging using an API gateway and an asynchronous messaging middleware.

The microfinance industry in Indonesia is highly regulated, with the Financial Services Authority (OJK) responsible for overseeing the industry and ensuring compliance with regulations

The latest data warehouse and pipeline technologies are used to create analytics insights technology to gain profitable results from data, no matter where it is stored or originates. The loan origination system uses multiple analytical insight microservices, such as customer credit rating, portfolio analysis, economic assessment, and customer behavioral models, all of which make use of AI and machine learning capabilities.

Enhancing our business processes perpetually is essential to ensure better customer satisfaction every day. Innovation begins with us constructing an automated business layer that gives valuable suggestions to help the company's production process redesign and transform. Data and AI are used to assemble, organize, and administer data, along with evaluating and instilling ideas into operations, procedures, and business microservices. Those qualities comprise process automation, robotic automation, content services, document processing, decision administration, workflow orchestration, and task management.

Through this transformative approach, this inclusive technology is opening doors for those who have previously been denied access to financial products due to high barriers and established norms.

In conclusion, modernizing microfinance in Indonesia using innovative technologies has become a significant step in improving financial inclusion in the country. With continued innovation, the country's underserved communities can access more financial services, which can contribute to economic growth and prosperity.