One of the biggest demographic shifts underway in Indonesia is the growing middle class. Some 4 million people join the middle class segment each year, resulting in increased domestic consumption and, albeit at a slower rate, demand for financial products.
“Income per capita is growing and is approaching $4,000. This means that demand for financial services, such as insurance and banking, is quite significant. People are starting to ask for additional financial services like health and life insurance, and loss insurance,” says Muliaman Hadad, Chairman of OJK, the Indonesian Financial Services Authority.
“Over the next five to 10 years, there will be 120 million middle-income individuals.”
Hendrisman Rahim, President Director of
Jiwasraya, believes that the insurance industry will grow at least 20 to 30 per cent over the next five years.
A life insurance company with Dutch origins dating back more than 150 years, Jiwasraya (named 2013 Best Insurance Company in Indonesia by Global Banking & Finance Review) specialises in serving rural areas.
“In the big cities we compete with companies like Prudential; in the small cities in the rural areas, the market is only for us,” says Mr Rahim.
As salaries tend to be lower in rural areas, Jiwasraya issues micro-insurance, characterised by small premiums and small sums, yet with excellent service. The returns for the insurer are far from micro, however. Profits skyrocketed from IDR 13 billion (£678,750) in 2010 to an astounding IDR 394.1 billion one year later, thanks to a policy of efficiency, lowered costs (despite an increase in employee salaries) and better training and technology. In 2013, Jiwasraya’s profits surpassed IDR 457 billion.
Indonesia’s banking sector on the whole is fairly strong yet extremely profitable, with some of the highest net interest margin ratios among the 20 biggest economies. Indeed, listed in the Forbes Global 2000 list, there are three state-owned banks (Bank Rakyat Indonesia, Bank Mandiri and Bank Negara Indonesia) and two private ones (Bank Central Asia and Bank Danamon Indonesia).
Whilst numerous financial institutions are facilitating access to financial tools for local small and medium enterprises to help them grow and contribute to job creation and national economic growth, the government (especially through Commission VI, a section within the Indonesian House of Representatives responsible for trade, industry, investment, co-operatives, SMEs and state-owned enterprises) is working on the legislative side of things.
A microfinance law enacted in January 2013 and a revised cooperative law from late 2012 are helping small businesses to get ahead.
However, it isn’t only local SMEs that are being discussed. Traditionally only large, well-financed investors have ventured into Indonesia, where business processes can be slow yet the rewards big. The general feeling among the Indonesian political and business platforms is that it’s now high time foreign SMEs also invested in Indonesia.
“I believe it would be very interesting for Indonesia to find suitable partners for doing business and find solutions for the medium-sized companies, so that we move towards a people-to-people business which is morevaluable,” says Airlangga Hartarto, Chairman of Commission VI.
In 2013, total investments realised in Indonesia reached IDR 398.6 trillion, with FDI rising 26.1 per cent over the previous year’s figure to hit IDR 270.4 trillion. The biggest sources of investment were Singapore, South Korea, Japan, the US and lastly, the UK, which accounted for just 3.8 per cent of total FDI.
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