This is where Allianz Indonesia’s
Trust Network Finance (TNF) came in. The financing initiative, introduced in July 2016, offers small investments to help Indonesian micro-entrepreneurs grow their business. At the end of August, three days after receiving Yudhistira’s application via mobile phone, TNF disbursed his payment, which he plans to spend on eel seed.
Agung Nugrohob is another example. The 31-year-old owner of a raw chicken stall in Bogor was tired of renting equipment. He used TNF funds to buy his own and help diversify his business by adding a frozen beef inventory and develop a sideline as a small gas cylinders’ distributor.
TNF’s business model differs from conventional microlending in that it only starts to earn money when someone’s business takes off, says Auxentius Cahyo Bintoro, emerging consumers’ manager with Allianz Indonesia.
Debt contracts that require early repayment limit the potential of micro-finance Erica Field
This is a small but significant difference. Providing a grace period as short as two months, in which start-up businessmen like Yudhistira are free to suspend repayments, increases short-run business investment and long-run profits but also default rates, a
study by Erica Field and colleagues found. “The results indicate that debt contracts that require early repayment discourage illiquid risky investment and thereby limit the potential impact of micro-finance on micro-enterprise growth and household poverty,” the authors write.
Bintoro compares the approach to football scouts who find and train young talented players: they just need one to become a major league player to win back all of their investment. “Imagine Bayern Munich football club holding a youth camp for 100 young talented players. They pay for these kids’ food, accommodation and coaching. If one of those 100 becomes a professional like
Thomas Müller, playing for Bayern Munich and the German national team, then you can easily replace the cost of training all the others.”
So far, 60 people have invested with TNF, which is currently in a one-year trial period. Target customers are between 20 and 45 years old, already run a small informal business and want to increase its size.
TNF aims to appeal by complying with the principles of Islamic finance: Indonesia has the world’s largest Muslim population yet plays a minor role in the
global Islamic banking industry. The investment program is in line with these principles by not charging interest. There is no fixed repayment schedule either.
E-MONEY IS KING
Investees don’t need to deposit any securities and are free to decide how much profit they give back to TNF, depending on the success of their business. If start-ups choose to return more than 100% of their initial loan, which is limited to 2 million rupiah ($154), TNF will automatically grant a higher follow-up loan.
TNF also differs from the norm by shunning cash: all transactions use electronic money. Investees carry out financial transactions digitally via a smart phone, which is faster and more secure than using cash, according to Bintoro. Here TNF hopes to capitalize on a growing trend for digital financial services (DFS). In Indonesia, DFS offers opportunities for an estimated 110 million unbanked customers to access banking services and products, according to a
TNF’s investment program is divided into four phases. During the selection phase, which lasts one to two years, TNF provides entrepreneurs with limited investment to trial their business plan. During the mentoring phase, lasting one to three years, a business coach helps execute the business plan, while TNF supports investees financially with increasing investment amounts.
Stage three is formalization. When an investee’s business is large enough, TNF helps them get a business license and recommends them to banks to win larger credits to grow their business. At this moment, TNF takes a minority share in the newly legalized company. That’s when the real equity investment begins.
Finally, when some of the entrepreneurs will have managed to significantly scale up their businesses, TNF sells its shares and the “training camp” has paid off.