If growth in consumer lending in the past 5 years is any indication, any prediction that Indonesia’s consumerism will continue to drive the banking and finance sector is not entirely off-base. From 2001 to mid 2005, bank loans to finance consumer buying grew by 40% yearly o­n average.

However, consumer-financing companies – as another influential player for quenching consumer demand for new vehicle – have been faced with the need to find a new source of fresh capital to loan. A new business arrangement – joint financing – has therefore gained popularity as a prudent but effective method for banks and consumer-finance companies to expand their loan portfolio.

Such is the central idea presented by Hendrik Timadius, General Manager of Sigma at “The Brave New Business of Consumer Financing” seminar o­n August 24, 2005, at Marriott Hotel. Aiming to build better comprehension of the trend in the consumer-financing market, the seminar highlights a slew of prominent figures including Ngalim Sawega, Head of Sub Directorate for Public Banks (of Department of Finance); Dennis Firmansjah, Secretary General of APPI; o­ngki Dana, Managing Director of Bank Permata; and Hendro Wenan, who as the Director of Verena Oto Finance, presented his company’s experience in implementing multi-finance core processing system.

Back to Hendrik’s presentation, banks – overwhelmed by the increase in liability as a result of extraordinary growth in funding (savings, checking, time deposit) – are faced with the new challenge of being more discriminating than ever in credit/ loan disbursement and expansion to minimize credit risk.

The discerning gap separating the untapped supply of fund (banks) and the unsatisfied demand for cash to loan (consumer-finance companies) complement each other perfectly, creating a new partnership where banks and consumer finance work closely and prudently to channel the available capital to a market with the highest possible return but with manageable risks.

“For example, we have seen banks such as BCA placing stock ownership in BCA Finance, Bank Danamon acquiring Adira Finance, and BII with WOM Finance. Other banks like Bank Permata and Bank Mandiri prefer AR (accounts receivable) financing, indirectly delving into the market by supplying consumer-finance companies with capital to loan,” Hendrik says.

Strategic influence to the economy

Joint financing has gained grounds in recent years as Indonesia’s economy returns to the pre-1997 economic malaise performance. Aside from the supply-meet-demand advantage, the benefits are deeper into the strategic fundamentals of Indonesia economy more precisely by stimulating the grassroots sector – micro, small, and medium enterprises.

“Consumer lending contributes to the economy by inducing consumption, stimulating economic output and overall growth. Similarly, working-capital loans for small businesses facilitate the expansion of small and medium enterprises as the agent who supplies consumer appetite with demanded goods and services” explains Ngalim Sawega.

With regard to the SMEs, the Asian economic crisis was a awakening o­n not to dismiss small business as irrelevant to the long-term growth

of the economy – despite the relatively minuscule size compared to multinational conglomerates. “With its little reliance o­n imported materials, foreign currency, as well as foreign debts, SMEs turned out to be much less vulnerable to economic downturn,” Sawega says.

In reality, consumer-finance companies really put the money where their mouth is. Last year, total amount of financing by consumer-finance alone reached more than 44 percent from Rp. 60.3 trillion to Rp. 87.1 trillion, based o­n data from the Directorate General of Financial Institutions. A major portion of the amount – Rp. 67.9 trillion or 86.1 percent of total – was contributed by consumer financing.

Further facts of how joint-financing has begun to take effect can be seen by local banks as the number o­ne source of funding to consumer-finance companies: Rp. 20.8 trillion in 2004 – an increase of 41 percent from Rp. 14.7 trillion the year before. With total 2004 funding topping Rp. 78 trillion, the banks’ contribution commanded about a quarter.

Business logics

Compared to the traditional scheme of direct loan allocation, joint financing is shorter in learning curve and time horizon – allowing consumer-finance companies to expand their portfolio with much smaller investment.

“And even though the gross margin will certainly be smaller as both parties have to split the returns, there is the advantage of lower credit risk,” says Hendrik.

His analysis is reflected by o­ngki Dana of Bank Permata: “Since 2000, sales of motor vehicles have reported incremental growth both for cars and motorcycles. In consideration of this trend, we project that annual volume of credit will surge to more than Rp. 100 trillion in the next 3 years.”

“People are now more mobile than ever but public transportation doesn’t keep up with this trend. Hence the high

demand for better transportation,” adds Dennis Firmansjah of APPI. “The growth is also affected by replacement of old cars or motorcycles, more efficient car manufacturing facility, as well as more affordable cars.”

According to Dana, since long ago banks have found end-user financing to be attractive for a number of reasons – the most important being wide and diversified customer base, spreading credit risk, reliable collateral, good resale value of collateral, measurable credit risk, and adequate risk-to-return ratio.

“It is o­nly imperative for banks to find an entirely new way to acquire new asset to expand loan portfolio. The 97-monetary crisis sheds a light o­n the fact that banks were too dependent o­n the performance of consumer-finance companies, having no control over the quality of the portfolio and debtors information. We shouldn’t let this happen again.”