pe project consolidated - final · 3 report 1 - indonesia - introduction the largest economy in...
TRANSCRIPT
Financial Inclusion Investment Landscape
Indonesia and Vietnam
Authors : Linda Hogel, Karim Mansouri, Iti Jain, Subu Wuppalapati, Amy Xu, Veronika Patkai
Venture Lab
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Foreword
Venture Lab and its investment objectives
Venture Lab is an investment initiative founded in late 2012 that provides seed capital and support to financial inclusion start-ups. It has 9 investments to date in Mexico, the United States, India, Kenya, and Indonesia, and is seeking to expand further in emerging markets, in particular in West Africa and SE Asia. Venture Lab is a subgroup of Accion, a pioneer in microfinance that has helped build microfinance institutions in 32 countries since 1961.
Brief Venture Lab is seeking research support to help determine the potential of a range of countries in West Africa and SE Asia as a focus for the fund. Vietnam and Indonesia have been selected as the markets for investigation for this report. This report provides a market assessment through the lens of population need and environment for financial inclusion technology-based products and services to thrive and have impact. It includes analysis of factors such as: bottom-of-the-pyramid need, penetration and affordability of banking services; microfinance penetration; mobile & banking related infrastructure; business environment, investment and innovation indicators, key players.
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Contents: Indonesia and Vietnam
Introduction
− Country introduction
Part 1: Financial inclusion
− Overview
− Drivers of low financial access and participation
− Mitigating factors
Part 2: Investment environment
− Ecosystem of incubators and accelerators
− Associations and programmes relevant to start-ups
− Examples of innovative start-ups
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Report 1 - Indonesia - Introduction The largest economy in South East Asia, Indonesia is an archipelago comprising of over 17,500
islands. It made a successful transition from authoritarian rule to democracy in 2004 and has since
enjoyed strong economic performance in various segments. With Indonesia’s investment coordinating
board (BKPM) easing restrictions on FDI in key sectors in December 2013, a boost is expected to the
economy. In recent years it made enormous strides in its macroeconomic management. Inflation has
fallen from double digits to single digits and government debt as a percentage of GDP is lower than
most advanced economies. The economy is transforming rapidly and is becoming more stable and
diversified. It has young population that is quickly urbanizing and growing, with an estimated additional
90 million joining the consumer base by 2030. However, an uneven distribution of growth across the
archipelago and rising inequalities between the rich and the poor are a concern for Indonesia.
Figure 0 Indonesia’s performance compared with other OECD and BRIC countries Source: McKinsey Global Institute Analysis – 2012 report on Indonesia; OECD data
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Part 1: Financial inclusion in Indonesia Overview
Indonesia has one of the lowest banking sector penetration rates in Southeast Asia. As per the most
current available World Bank statistics, only 20% of adults hold a bank account, and usage in terms of
savings and borrowing activity is even lower. This results in an aggregate picture where both coverage
and depth of the formal banking sector are among the lowest ranked in the region, with bank deposit
holdings and credit to private enterprises and individuals at 32% and 25% of GDP respectively.
To distinguish access from uptake, according to Bank Indonesia, less than 50% of the population has
access to banking services1. In a population of roughly 250 million, that translates to a number in the
vicinity of 90 million adults lacking access.2
One of the most under-served segments is micro-, small and medium-sized enterprises (MSMEs).
Employing 91% of the working population, less than 30% have access to credit3, and the segment
continues to grow, accounting for at least 30% of GDP growth in 20124, as well as a significant amount
of employment growth and valued-added growth. It has been suggested that only 40% of MSMEs are
1 “Financial Inclusion Development Policy in Indonesia” Bank Indonesia 2013 http://www.ilo.org/wcmsp5/groups/
2 Based on the CIA World Factbook 2011 figure, that 73% of the population is aged 15 years and older 3 “Indonesia’s banks seek exposure to micro-lending’s risky rewards”, AsiaMoney 2013 4 “Smart Policy: Why Islamic Banks Matter in Indonesia”, Djauhari Sitorus, CGAP July 2013
SOURCE: Global Financial Development Database (GFDD) 2013. The most current available data is for 2011. Countries are ranked by GDP per capita. *FI = Financial Institution
121%
51%
12%
32%
32%
100%
43%
Deposit-to-GDP ratio Bank private credit to GDP
108%
30%
106%
102%
24%
27%
25%Indonesia
Cambodia 4%
21%
PNG
Vietnam
Philippines 27%
20%
Thailand 73%
Malaysia 66%
Adults with a bank account
N/A
1%
8%
15%
15%
43%
35%
19%
19%
16%
11%
9%
11%
SavingBorrowing
Adults saving / borrowing at an FI* in the past year
N/A
Figure 1 Formal financial system access and depth. Countries ranked by GDP per capita Source: World Bank Global Financial Development Database (GFDD) 2013 (NB Dataset is from 2011. FI = Financial Institution)
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currently bankable5, often due to lack of financial records, deposit and credit history, or ease of access,
leaving a large segment potentially serviceable by more innovative or lower-cost-to-serve models.
Increasingly, MSMEs are likely
to also benefit from further
financial services to support
business activities and growth,
such as payments and e-
commerce services.
A final distinct category of need is in relation to remittance payments from migrant workers. According
to the World Bank, Indonesians received US$7.2 billion in remittances from overseas in 2012, equal to
about 1% of GDP. This makes Indonesia the 3rd largest recipient in Southeast Asia behind the
Philippines and Vietnam.6 A 2012 survey commissioned by the Gates Foundation, looking at both
domestic and international remittances, found that within SE Asia, Indonesians were most likely to use
informal cash payments rather than other methods of transfer. It found 57% of Indonesians were using
cash methods only, such as sending or receiving money through a family member or personally. 23%
used both cash and electronic means, and 4% electronic means only – the latter including transfers via
banks, mobile money, services such as Western Union, or a post office. A strong correlation was found
5 “Indonesia Banking Development” D.S Besar, Bank Indonesia June 2012 6 “RI ranks third on SE Asia remittance list” Jakarta Post April 29 2013
75 million under-served businesses
MSMEs employ
91% of working
population
Only
27% of MSMEs
have access to credit
SOURCE: “Indonesia’s banks seek exposure to micro-lending’s risky rewards” by AsiaMoney(2013). “Indonesia Banking Development” D.S Besar, Bank Indonesia June 2012Figure 2 MSME statistics Source data AsiaMoney 2013
Employment growth Value-added growth
2007 2008 2009 2010 2007 2008 2009 2010
4.5
3
3.5
3
2.5
2
1.5
1
0.5
0
7
6
5
4
3
2
1
0
Figure 3 Employment and Value-‐added growth by business size Source “Promoting SME Development in Indonesia” OECD 2012. Data: Indonesian Ministry of SMEs and Cooperatives
MediumLarge Small Micro
MediumLarge Small Micro
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between cash remittances and lower education and income levels, making this is another pertinent
segment for consideration in strengthening financial access and education. 7
Geographic distribution of need According to Bank of Indonesia analysis, the lowest access to banking financial services is in East
Indonesia (ie east of Bali and Kalimantan, in areas like Papua and West Papua, parts of Sulawesi,
Maluku and North Maluku), as well as in parts of Sumatra to the west and Central Kalimantan. The
most concentrated access, to the extent of being “overbanked”, is in west and central Java and Bali.
MSME growth appears to be strongest in the services and manufacturing sectors (based on SME
lending figures), which also align to overall growth drivers in the Indonesian economy. Geographically,
a significant amount of projected GDP growth is to be centred in small and medium-weight cities
outside of Java according to McKinsey analysis (see appendix).
7 “Remittances, Payments, and Money Transfers; Behaviors of South Asians and Indonesians”, Bill & Melinda Gates Foundation in conjunction with Gallup, May 16 2013
Banking services distribution
Figure 5 Regions of Indonesia (Overlay to above chart) Source: Wikipedia
Figure 4 Banking services distribution Source: “Financial Inclusion Development Policy in Indonesia” Bank Indonesia 2013 Data: SEKDA BI and Statistic Indonesia 2011.
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In terms of remittances, some of the key migrant-sending districts are Kalimantan, West Sumatra, West
Java, East Java and Lombok. According to slightly dated statistics (2007), in East Flores and Eastern
Java, remittance inflows far exceed regional government budgets, and in 2004, the contribution of
remittances to GDP in the East Javanese regions of Madang, Tulungagung and Blitar was 42 per
cent, 23 per cent and 13 per cent respectively.8 Main destinations for migrant workers are Malaysia
and Saudi Arabia, in 2011 hosting 40% and 25% of 6 million Indonesian citizens working abroad
respectively.9 75% of documented migrant workers are women working mainly as domestic help.10
Plantation and construction workers are also frequent in Malaysia, though a greater proportion of these
are likely to be undocumented.
Drivers of low financial access and participation There are several factors that contribute to this picture of low formal sector financial inclusion, namely:
• Geographic challenges and concentration of infrastructure. With around 17,500 islands and a
land mass of almost 2 million square kilometres (similar in size to Mexico, or 1/5 of the size of
China), one of the biggest challenges, outside of Java, is geographic dispersion. The island of
Java has 7% of land area, yet is home to nearly 60% of the population and a similar share of
GDP. Branch and ATM networks have tended to follow this concentration.
8 “Leveraging Remittances with Microfinance: Indonesia Country Report”, The Foundation for Development Cooperation, Dec 2007 http://www.fdc.org.au/data/Remittances/LRM_Indonesia.pdf 9 “After Malaysia, RI seeks similar pact with S. Arabia” The Jakarta Post, June 04 2011 10 “Labour migration in Indonesia” ILO http://www.ilo.org/jakarta/areasofwork/labour-migration/lang--en/index.htm
Pop. per sq. km1- 1011- 100101- 1,0001,001- 10,000> 10,000 Figure 6 Population distribution of Indonesia
Source USGS Maps
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Branch and ATM penetration is low by developed world standards (where ATMS numbers range from around 60 in Denmark to 200 in Canada per 100,000 adults), but are also lower than might appear within the SE regional context too, given concentration of services and geographic expanse. 64% of the population currently live in villages and infrastructure in many areas is notoriously poor. Banking services in more remote areas are typically limited to periodic visits by bank representatives traveling by foot, or carrying automated teller machines on boats. An example is Kepulauan Seribu, a strip of over 500 Indonesian islands, reachable only by boat. For 25,000 inhabitants, there are 1 bank and 3 ATMS.11
• High fees and interest. Indonesian commercial banks are among the least competitive and most profitable globally. Net interest margins are forecast to drop slightly in 2014 (from 5.8% in Sept 2013) due to rising domestic customer deposit costs, which remain the primary funding source, but are nevertheless significant. 12 Indonesia sees very low customer loyalty as a result, with 87% of
banking customers multi-banked, and high fees a key driver of attrition.13
Micro-loans are even more profitable than most, typically at
11 Spencer & Palaon “The Case for Branchless Banking in Thousand Islands, Indonesia” CGAP Jan 2014 http://www.cgap.org/ 12 "Outlook for Indonesia's banking system remains stable" Moodys Global Credit Research 19 Feb 2014. “Fitch: Indonesian Banks Resilient Against Financial Volatility” Reuters 12 Feb 2014 13 “Banking in emerging markets: Seizing opportunities, overcoming challenges” Ernst & Young, 2013
15.4%12.7%11.9%
15.1%
20.0%
Viet
nam
Mal
aysi
a
Phi
lippi
nes
Thai
land
Indo
nesi
a
Return on equity (2011) Net interest margins (2011)
Indonesia’s 5 largest banks have the highest return on equity among the world’s 20 largest economies – 23% compared to China’s 21% and US’s 9%
4.0%3.6%
6.3%
2.9%2.6%
Indo
nesi
a
Phi
lippi
nes
Viet
nam
Thai
land
Mal
aysi
a
Figure 8 NIM & RoE Source: GFDD 2013; AsiaMoney 2013
Figure 10 Branch and ATM penetration Source: IMF Financial Access Survey 2012
Figure 7 Branch and ATM penetration Source: IMF Financial Access Survey 2012
2
4
3
8
12
20
10
PNG
Cambodia
Indonesia
Malaysia
Vietnam
Thailand
Philippines
Branches per 100,000 adults ATMs per 100,000 adults
7
21
36
78
53
8
19
9
25% interest in Indonesia.14 For State-owned Bank Rakyat Indonesia (BRI), Indonesia’s oldest and largest bank, that is often lauded as the world’s most successful large-scale commercial microfinance provider,15 its micro-finance units according to some accounts have a “cash cow” status, that constrain them to focus on the top end of the microfinance sector in terms of loan size, collateral and risk.16
• Inefficiency. Indonesian banks are relatively inefficient even by SE Asian regional standards, with an 83% average cost-to-income ratio of in 2011. This decreased to 76.7% percent reported in April 2012, but Indonesian banks still lag regional peers. Inefficiencies can be attributed to high operating costs, in particular in labour, which reached 1.29 percent of total banking assets in 2012. They are also attributable to efforts to further penetrate the Indonesian market by opening new branches (see chart). Low efficiency combined with high profitability directly flows through to high interest-rate loans and high business financing costs.17
• High cost-to-serve segment. Another factor in cost is the high cost of reaching small and micro businesses and unbanked individuals in terms of infrastructure as well as credit risk. Beyond the cost to reach beyond urban areas, and of processing small loans, micro-lending is cost-heavy because it can require personnel to keep a close eye on its customers, due to the informal nature of
14 “Indonesia’s banks seek exposure to micro-lending’s risky rewards”, AsiaMoney 2013 15 Robinson, M. “Why the Bank Rakyat Indonesia has the world’s largest sustainable microbanking system, and what commercial microfinance means for development” BRI International Seminar, 2004. Siebel, H.D “The microbanking sector of Bank Rakyat Indonesia: A Flagship of Rural Microfinance in Asia”, Unversity of Cologne, Development Research Centre No 2 , 2005 16 “Indonesia Country Profile”, Asia Resource Centre for Microfinance 2004 17 “Indonesia lagging behind other ASEAN countries in banking”, New Straits Times 25 June 2012
Growth in branches (‘000)
2007
10%
2011
3.9 4.2
13.8
3.6
12.8
4.43.3
16.6
2010 20132012
14.8
4.73.4
18.3
10.9
2008
9.7
2009
BPRsCommercial Banks
Figure 9 CTI Source: GFDD 2013
69.0%54.8%51.0%
83.3%
Thai
land
Mal
aysi
a
Phi
lippi
nes
n/a
Indo
nesi
a
Viet
nam
Cost to income ratio (2011)
Figure 10 Growth in branches Source: Bank Indonesia
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account keeping and inventory tracking. The segment also has a relatively higher non-performing loan incidence, of 5-6% compared to <2% industry average.18
• Regulation. With respect to remittances and payments, restrictions exist in that only fully fledged commercial banks (and not rural banks – BPRs – or other microfinance institutions) are able to participate in the payments system in Indonesia or in deal in foreign currency. There are also special provisions for post offices to provide international money transfer services. Money transfer operators are permitted as long as they have a commercial bank as an agent.19
• Interest and awareness; credit worthiness; alternate informal models. Final contributing factors to low use of financial services are interest and education, as well as simply lack of credit-worthiness. Indeed, low use does not in all cases imply lack of access – For example, in a recent study to profile residents’ financial practices and the availability of banking services in three remote islands, half didn’t access the bank even when available on their island, and chose to store their cash at home or with an Arisan (a form of rotating savings and credit associations in Indonesian culture, which nevertheless has limits). Others accessed banking services indirectly – For example, over 100 business owners relied on a local money collector, who made daily rounds to collect cash, record the amount, and then make a lump sum deposit into her own personal bank account, her fee being the interest earned on the deposits.20
Mitigating factors to low financial access and participation
• Informal and Semi-formal Sector: Beyond formal banks, there is a wider semi-formal and informal
financial services sector that partially augments its services, including village-level financial
institutions, NGOs and community based lending (see chart). The micro-finance sector is relatively
well developed, led by Bank Rayat Indonesia (BRI) and several other commercial banks within the
formal sector, as well as a multitude of small micro finance institutions. The considerable presence
of government run pawn shops in what is considered the formal lending sector is also of note.
Nevertheless, when non-bank financial institutions and non-financial institutions are taken into
account, the number of households holding bank accounts lifts from 20% to 48% (2011)21, a figure
still considered low.
18 “Indonesia’s banks seek exposure to micro-lending’s risky rewards”, AsiaMoney 2013 19 “Leveraging Remittances with Microfinance: Indonesia Country Report”, The Foundation for Development Cooperation, Dec 2007 http://www.fdc.org.au/data/Remittances/LRM_Indonesia.pdf p5-6 20 Spencer & Palaon “The Case for Branchless Banking in Thousand Islands, Indonesia” CGAP Jan 2014 http://www.cgap.org/ 21 “Financial Inclusion Development Policy in Indonesia” Bank Indonesia 2013
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Figure 11 Overview of banking system Sources: Summarised from: Country Profile Indonesia – Asia Resource Centre for Microfinance
Despite this range of actors, the financial services market is still dominated by the banks and highly
concentrated at the top end – with the largest 10 banks owning around 70% of industry assets.
With 120 domestic banks in total, there is a long tail of small banks, which are difficult to regulate
and which may see further consolidation as a result. Indeed, the central bank has been
encouraging smaller banks with weaker capital positions to consider mergers.22 This dominance is
also seen in that Commercial and Rural banks, making up less than 10% of total outlets, are still
the largest lenders to MSME business with up to 50% of loan volume and 98% of value (see charts
overleaf).
• Financial Inclusion Policy Bank Indonesia and the Financial Service Authority (OJK) have both
have stated policies aimed at increasing financial inclusion. Broadly they speak of boosting
financial literacy education, strengthening financial infrastructure and developing more accessible
and affordable products. A very concrete step is a requirement the central bank is phasing in, for
institutions to direct at least 20% of lending to SMEs by 2018, which that for many banks will
require both investment in infrastructure and in credit risk capability23.
22 “Banking in emerging markets: Seizing opportunities, overcoming challenges” Ernst & Young, 2013; p26 23 “Bank Indonesia to Strengthen Policy on Financial Inclusion and Small-Medium Businesses
• BanksüCommercial BanksüRural Banks (BPRs)
• Village-level Fin. InstitutionsüVillage Credit Organization
(BKD, Badan Kredit Desa)
üRural Credit Fund (LDKP, Lembaga Dana Kredit Pedesaan)
• Rotating savings and credit association-ROSCA (Arisan)
• Credit Unions
• NGOs
• PawnshopsüPT Pegadaian
• CooperativesFormal Sector
(Regulated by National law)
Semi-Formal Sector
(Regulated by local govt law)
Informal Sector
Ownership & Support Service Focus
Government
Govt funded; administered via BRI* branches
Self-help groups run by communities, families
Independent
Non-government
Government-owned
Highly subsidised; channel for govt funding
Local government
Lending is prioritized to investment purposes for Commercial & working capital purposes for Rural banks
Mandatory savings required in order to borrow. Small loans with no collateral and fast processing
Savings schemes pool deposits and disburse to a different member each week
Fast and efficient finance, hold valuables as temporary collateral
Typical saving and lending services
Unsecured, character-based microfinance, increasing in size according to repayment performance
Private
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• Development of mobile money Similar to other emerging economies, mobile penetration in Indonesia is significantly more than penetration of traditional financial services. Low cost handsets, prepaid accounts, and a variety of small increment airtime purchase options have made mobile telephones affordable to a majority of Indonesians. There are an estimated 160 million unique mobile phone subscribers in Indonesia with the numbers still growing.
As in banking, the industry is concentrated, with four of the 12 mobile operators in Indonesia controlling over 90% of the mobile market share and 92% of revenue. For all the players, the ability to deliver broadband services is also becoming increasingly important.
Indonesia’s mobile money market is characterized by both bank-led and MNO -led product offerings. Several MNOs including Telkomsel, Indostat, PT XL have invested in mobile money platforms with Telkomsel and Indostat providing some form of broadband services. As more and more companies moved from SMS -> USSD -> GSM there is a potential for technology companies to provide and license this technology to MNOs and/or Banks.
Due to regulatory constraints (an agent could not perform a cash-out unless the outlet had a remittance license issued directly by Bank Indonesia), the mobile money market did not take off in a
Monday”, November 18, 2013 http://en.hukumonline.com/pages/lt528a7edc0c4ae/bank-indonesia-to-strengthen-policy-on-financial-inclusion-and-small-medium-businesses (Indonesian legal news)
Formal Sector
Semi-Formal Sector
Informal Sector
15 %Village-based
3% NGO
Community lending n/a
Loan volume Loan value
31% Cooperatives & Credit Unions
51 %Commercial & Rural banks
Pawnshops n/a
91% Commercial
banks
<1% NGO<1%
<1%9% Rural banks
n/a*
17.6M ~USD 640B
Figure 12 Loan volume, value and # financial outlets by segment Sources: Bank Indonesia, web search
85
187
Cooperatives
Pawnshops
253
Commercial banksOther
143
Financial outlets (‘000)
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big way in Indonesia until recently. In early 2013, these regulatory constraints have been eased. On May 2013, three of the major MNOs – Telekomsel, Indosat and XL – went live with a ground-breaking initiative that enabled their mobile money customers to send and receive money across each other’s networks. For the first time, mobile money platforms run by different mobile operators could talk to each other. With these changes, the mobile money market has seen a significant uptake and estimated to reach 52 million users with transaction volumes reaching $42bn, generating service revenues of almost $2bn by 2017.
Part 2: Indonesia’s Investment Environment
Overview
There are still huge opportunities that exist in Indonesia in mobile money, payments & e-commerce.
Some larger actors have started to develop the sector. The below gives an indication of the eco-system
of incubators, current investors, and support programmes.
The Indonesian ecosystem of incubators and early stage investors
• Project Eden is a company that provides pre-seed investment and that supports Indonesia local start-up ecosystem.
• Batavia Incubator The company targets seed stage start-up, and supplies seed funding capital to bridge to Series A funding. The target industry is internet/mobile services in Indonesia.
• Bandung Ventures Bandung Ventures makes seed-stage investments in the Bandung region.
• Grupara Inc. is a startup incubator company based in Jakarta that was established in 2011. It focuses on seed stage & early investment startups. Its seed investment ranges from $5,000 to $50,000, and early stage investments range up to $1.5m.
• East Ventures is an early stage investment fund in Indonesia and Japan and will start its third fund which will focus on Southeast Asia. The money will be put into startups in the consumer internet and mobile space, primarily from Singapore and Indonesia.
• Ideosource focuses on seed & early stage investment. It seeks companies and enterprises with emphasis on online content, media, advertising, e-commerce, payment and supporting infrastructures in web and mobile technologies. The company is one of Indonesia’s most active incubators.
• Cyber Agent Ventures specializes in the growing internet-related industry. It finances venture companies at various stages from the seed stage to early stage. CAV has 11 offices in 8 countries mainly in Asia, including Indonesia.
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• Merah Putih Incubators is a technology and digital incubator company in Jakarta that invests in seed fund. The incubation focus is on mobile, gaming, community base and e-commerce.
• GDP Ventures was initially established as a growth-fund to invest in more mature tech companies with an existing track record; however it has also invested in a well-funded e-commerce startup. It owns the incubator MeraPutih.
• Nusantara Ventures focuses on investment in new media and technology companies at early stage-high growth stage.
• InvestIdea focuses on accelerating early-stage web/mobile application and technology companies in Indonesia. The company provides seed and startup funding.
• Gree Ventures provides investments to early stage internet and mobile services companies, such as apps for smart devices, e-commerce, advertising technologies, or social services.
• Raja Capital is a VC that focuses on tech startups in the seed/early/growth stages in internet, mobile technology and software technology sectors.
• Simile Venture Partners invest in seed/early stage start-ups within the consumer internet and digital media sectors in the emerging markets, including Indonesia.
• Phenomen Ventures focuses on internet and tech phenomenon, ranging from seed to series C investment. It is based in Moscow, but invests internationally in 25 countries including Indonesia.
Associations and programmes in Indonesia that relevant to start-ups
• The Founder Institute is the world’s largest entrepreneur training and startup launch program, with a branch in Indonesia. It helps founders build technology companies. The Founder Institute aims to improve the rate of startup success by creating local startup ecosystems.
• Global Entrepreneurship Programme Indonesia (GEPI) The GEPI works in partnership with existing programs and links Indonesian entrepreneurs to global developments and investment prospects.
• Fintech Innovation Lab is an annual program run by the Partnership Fund for New York City and Accenture for early and growth stage companies that have developed cutting edge technology products targeted at financial services customers. Winners will receive support and ultimately present at Demo Day to potential investors.
• Tech in Asia Meetup The meetings are held several times during the year, in the format of inviting seasoned entrepreneurs and investors as guest speakers. Recent topics included tech trends in Indonesia 2014 and understanding investors’ mindset.
• Alliance of Venture Capitalists in Indonesia (AVCII)
The alliance was founded by eight VCs and incubators. The association aims to empower the members within the organization through resource sharing, and encourage growth within the tech entrepreneur community through workshops and education.
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Examples of innovative start-ups
• Doku Established in 2007, Doku is the first and largest independent electronic payment solutions provider in Indonesia. It provides electronic payment processing, online and in mobile applications, enabling e-commerce merchants to accept a wide range of online payent options from credit cards to emerging payment types. In 2013, Doku released its e-wallet product called DokuWallet which offers more payment alternatives to consumers.
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Report 2 – Vietnam – Introduction Vietnam is fast emerging as East Asia’s next miracle with economic policies that closely resemble those
of its ancient rival, China. Economic reforms have taken place in recent years, including: opening up the
economy to foreign direct investment, export orientation, special economic zones, privatization of small
and medium-sized state owned enterprises (SOEs), retention of state control over large SOEs with the
goal of developing them into national champions, and the recognition of an important role for the private
sector in driving growth.
Economic prospects for the future appear to be bright. Vietnam has all the key ingredients to become
part of the Asian “miracle”: a literate and motivated workforce; reasonably supportive policies;
integration in the world economy; the presence of a foreign threat, whether real or perceived, in the
form of China, which gives a powerful incentive to build a strong economy that can support national
independence; and the relatively minor role of natural resources in the economy, which places limits on
corruption and on the risk of overvalued exchange rates that discourage manufacturing.
Vietnam’s population is the third largest in South East Asia after Indonesia and the Philippines with the
current population at approximately 90 million people. The population growth is estimated to be 1.45
percent, if this rate were to continue into the future, Vietnam’s population would reach approximately
160 million by the year 2051.
Since opening up its market, Vietnam has been one of the fastest growing economies in Asia. Following
economic stagnation after reunification from 1975 to 1985, broad economic reforms (known as "Doi
Moi," or "renovation") led to to Vietnam becoming one of the fastest-growing economies in the world.
From 2004 to 2007, GDP growth averaged more than 8 percent. Although this figure has slowed
somewhat in recent years, Vietnam still achieved GDP growth of 5.4 percent in 2013 and is targeting
growth of 5.8 percent in 2014.
Vietnam’s GDP growth has been relatively stable while other ASEAN countries experienced negative
growth during the Asian financial crisis. However, Vietnam still lags behind many other Asian
economies on international competitiveness rankings with the majority of the issues due to limited
governance and transparency. However, many of the areas showing the largest gaps when compared
to other Asian economies such as infrastructure, and higher education & training, are well recognized
and various steps have been taken to address these shortcomings. The Vietnamese government has
launched initiatives to simplify start-up regulations, improve permitting processes, and reduce tax rates.
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These initiatives, although nascent, have already had an effect on the competiveness of the
Vietnamese economy and a continued rise up the ranking is expected.24
24 The World Bank judges Vietnam to be one of the ten most improved economies on competitiveness. See Taking Stock: An update of Vietnam’s recent economic developments, prepared by the World Bank for the annual consultative group meeting for Vietnam, Ha Tinh, June 8-9, 2011.
Figure 0 Vietnam lags behind other Asian economies on international competitiveness rankings Source: World Economic Forum global Competitiveness Report 2010-‐11
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Part 1: Financial inclusion in Vietnam Vietnam is expected to see a GDP growth of 6%-7% a year by 2015. Its rising household income, fast
growing customer base has created a fast-growing demand for financial services. However, the banking
sector’s penetration in Vietnam is still one of the lowest in Southeast Asia. As per the most current
available World Bank statistics, only 21% of adults (age 15+ years) hold a bank account in a formal
financial institution, and usage in terms of savings and borrowing activity is even lower. The statistics
clearly summarize that Vietnam is lagging behind rest of the South East Asia in terms of financial
inclusion and indicates tremendous opportunities for enterprises in this sector.
Access to financial institutions varies a lot for people with different income levels, professions and
education status. Vietnam is a predominantly rural country, about 65% of the country's population was
urban and 68.35% was rural. The access to financial institutions is even lower in the rural area where
only 16.5% have accounts in banks.25 Only 10.6% of lowest income group has access to banks while
only 4.5% of least educated section of society is served by financial services. A study done on banking
in emerging market by Ernst & Young 26 shows that financial services are mainly offered to the
unbanked by community based savings and credit groups in the poorest communities, some micro
finance companies and commercial banks continue to focus on wealthier people. The main financial
products offered are small loans and small deposit, saving accounts.
25 The Little Data Book on Financial Inclusion 2012: World Bank, Demirguc-Kunt,Asli and Leora Klapper, 2012. “Measuring Financial Inclusion: The Global Findex Database.” World Bank Policy Research Working Paper 6025, World Bank Washington, D.C. 26 Banking in emerging markets – Ernst & Young, Reference No. EYG No. EK0145 1301-1001637 BOS
121%
51%
12%
32%
32%
100%
43%
Deposit-to-GDP ratio Bank private credit to GDP
108%
30%
106%
102%
24%
27%
25%Indonesia
Cambodia 4%
21%
PNG
Vietnam
Philippines 27%
20%
Thailand 73%
Malaysia 66%
Adults with a bank account
N/A
1%
8%
15%
15%
43%
35%
19%
19%
16%
11%
9%
11%
SavingBorrowing
Adults saving / borrowing at an FI* in the past year
N/A
Formal financial system access and depth (Countries ranked by GDP per capita) Source: GFDD World Bank
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The access to financial institutions is even lower in the rural area where only 16.5% have accounts in
banks. 27 Only 10.6% of lowest income group has access to banks while only 4.5% of least educated
section of society is served by financial services. A study done on banking in emerging market by Ernst
& Young 28 shows that financial services are mainly offered to the unbanked by community based
savings and credit groups in the poorest communities, some micro finance companies and commercial
banks continue to focus on wealthier people. The main financial products offered are small loans and
small deposit, saving accounts.
Vietnam has also gradually opened its banking sector to foreign investments in 1990’s. Now both
foreign branches and domestic banks are permitted to provide the same banking services and are
subjected to the same deposit and lending rules. Vietnamese Banking Sector is composed of 5 State
owned commercial banks, 5 Wholly Foreign-Owned Bank, 5 Joint Venture Banks, 37 banks owned by
Private Sector, and 48 branches of foreign banks. There are credit institutions comprising 17 non-banks
and 13 financial leasing companies. Although the financial service provider market is crowded, these
institutes are faced with compressed margins. Compared with other countries, non-interest income in
Vietnam is relatively low, 15% compared to 36% in Thailand29. Products such as mortgages, credit
cards, and everyday accounts are not widely used in Vietnam, compared to other countries. Vietnam
financial institutions recently started developing fee-based products to offset falling credit growth and
27 The Little Data Book on Financial Inclusion 2012: World Bank, Demirguc-Kunt,Asli and Leora Klapper, 2012. “Measuring Financial Inclusion: The Global Findex Database.” World Bank Policy Research Working Paper 6025, World Bank Washington, D.C. 28 Banking in emerging markets – Ernst & Young, Reference No. EYG No. EK0145 1301-1001637 BOS 29 Vietnam Banking Survey 2013 KPMG
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focus on products such as cards and insurance and improve fee collection. Besides, they need to
identify cost savings in its operations to stay profitable.
Drivers of low financial access and participation
There are several factors that contribute to this picture of low formal sector financial inclusion:
• Lack of awareness about financial services: A survey30 by Nielsen showed that more than 50%
of respondents do not clearly understand the financial products like credit cards. Around 36%
don’t seem to a need for credit cards, and 19% didn’t know how to use them. Only 32 percent
said they maintain a transactional account and 31% use an ATM/debit card. Only 12% use
banks for deposit accounts. While the number of ATMs has climbed dramatically by 10 times in
5 years, only 50% of adults are using ATMs for withdrawals. As per the survey, 85% of
individuals do not put their savings in the banks as do not understand its benefits.
• Obstacles in accessing bank loans31: Many SME’s do not prefer to get bank loans because the
banks demand collateral and high interest rates and expect short maturity loans. The
procedures to get loans are also time consuming procedure, and require entrepreneurs to
present business plans. Stringent bank regulation and personal relationships also play a big
role in accessing bank loans.
Mitigating Factors: Financial Inclusion Technology in Vietnam
Banks are partnering with telecommunications companies to get access to new mobile banking
technology without significant investment costs. Technology is not only enable cost saving it will also be
important in reaching new customers without having to spend on establishing extensive branch
networks, and improving relationships and cross-selling prospects with existing customers.
Technology is also being used to simplify the procedures, and improve customer experience thus
attracting more consumers.
Vietnam is one of the fastest growing markets for technology and telecoms in particular as large
infrastructure projects continue to attract investment and consumers. The mobile market in Vietnam
consists of 135 million subscribers by mid-2012 and mobile penetration of an incredible 150%. Mobile
30 http://www.nielsen.com/us/en/newswire/2011/vietnams-banks-have-room-to-grow.html 31 SME finance in Vietnam, Nick Freeman and Le Bich Ngoc. Workshop presentation, Hanoi, 22nd May 2008
21
phone subscriptions increased from 75 million in 2008 to 130 million in 2012. The number of internet
users went from 27 million in 2010 to 30 million in a year, although only 3% use broadband at home.
Viettel Mobile 34%
MobiFone 27%
VinaPhone 26%
Vietnamobile 8%
Gmobile 2%
S-Fone 2%
E-Mobile 1%
In 2013, mobile money was rolled out in Vietnam. Regulatory reforms that are enabling mobile money
services are contributing to the growth of the industry in terms of number of deployments. Four
companies are now licenced to run mobile broadband services in Vietnam: Viettel, Vinaphone,
MobiFone and a consortium including EVN Telecom and Hanoi Telecom (See table above). Although
the usage of mobile payments is relatively low. Only about 1-2% of adults use mobiles for transactions.
Business Landscape
In the telecommunications industry, government-run companies still have a complete monopoly, with
market shares of at least 80%, while in the banking sector, which is still heavily regulated, state-owned
entities hold 10-40% of these markets. According to the World Bank, Vietnam has improved and eased
the processes for local firms to start a business, although it is still less progressive in improving its
business environment compared to other countries in South East Asia. Vietnam has initiated many laws
in order to ensure smooth functioning of the economy but it also needs to ensure transparency while
implementing them. Although the country is lauded for its efforts to open up business, corruption, weak
enforcement of laws and the lack of an independent judiciary often deter investment.
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Part 2: Vietnam’s investment environment
Vietnam witnessed a first wave of foreign equity investments during the 1990s, but after the 1997
financial crisis the majority of foreign players pulled out. Over the last few years, equity investors have
progressively returned to Vietnam and have established a large number of new schemes to foster
entrepreneurship in the country. The number of businesses registered in Vietnam is once again on the
rise. To speed up the formation and development of science & technology enterprises, the Ministry of
Science and Technology (MOST) has implemented many policies to support these businesses such as
exemption or deduction of corporate income taxes, reduced land rents, and easy access to financial
sources. The government aims to have 5,000 S&T enterprises by 2020.
The Vietnamese ecosystem of incubators and accelerators
Incubators and Accelerators – government initiatives
• Silicon Valley Vietnam – Powered by the Ministry of Science & Technology
SVV is a government-run project designed to set up two accelerators, one in Hanoi and one in Ho Chi Minh City. The project, launched in June 2013, aims to create incubators, accelerators and seed funding. The program lasts for 4 months and will bring mentors from across the ecosystem and from abroad.
• FIRST (Fostering Innovation Though Research, Science & Technology) – Partnership between the Ministry of Science & Technology and the World Bank
FIRST is a $100m project supported by the World Bank to foster research & development projects across four main areas, including biotechnology, materials science, robotics and IT and to encourage the development of technology enterprises in Hanoi & Ho Chi Minh City.
Incubators and Accelerators – private funding
Ho Chi Minh City
• Egg is the combination of an accelerator and an agency. It offers coworking space to startups and provides mentorship & access to a network of entrepreneurs.
• mLab (Mobile Applications Laboratory) is a worldwide project sponsored by Infodev (a global multi-donor program in the World Bank Group). mLab Vietnam offers regional mobile operators an incubation program that includes business mentoring, technical coaching, access to equipment & finance.
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• Skynet specializes in building a network of expertise and managers inside their own company while incubating and accelerating companies that come to them.
• The Start Network (Start Center) is a coworking space dedicated to technology startups and early-stage investors. The Centre also organizes workshops, networking events with entrepreneurs, mentors and investor, as well as a 3-month accelerator program. START (SAVVi TOPICA Accelerator for Resourcing Technology) is a World Bank funded collaboration between SAVVi, TOPICA Education Group and the John von Neumann Institute at Vietnam National University.
• Technology Business Incubation Centre (Ho Chi Minh City University of Technology), founded in 2010, is an incubator aimed at technology-based startups. The Centre offers office space, support networks and mentorship and has incubated 9 companies so far.
• Vuon Uom Vat Gia is an incubator financed by one of Vietnam’s biggest e-commerce companies. It was founded in 2011 and has accepted 5 startups so far. (Financing of up to $1m in promising startups.)
• YouNet was founded in 2008 to help social networking startups. The company has recently launched an accelerator program, which offers a package worth of $35k, including $5k cash and $30k in technical support, office space and intensive mentoring.
Hanoi
• 5Desire is an incubator and consulting company, started in 2010, that offers office space, organizes speakers & hackathons.
• CRC Incubator is an initiative of the Hanoi University of Technology, founded in 2004, that aims to support authors of scientific and technology innovations to create start-ups through infrastructure, equipment, funding and mentoring. (backed by the World Bank)
• FICO is an incubator primarily targeting students, run by Vietnam’s biggest technology company, FPT.
• Founder Institute is the world’s largest early-stage accelerator. In Vietnam it runs a 15-week incubation program that has graduated over 40 startups.
• Hatch.vn is Hanoi’s newest incubator (2013) that seeks to build a community of entrepreneurs. It provides mentorship, consultation and access to seed funding for startups and hosts a series of weekly and annual events, including the Hatch! Startup Fair.
• Hoa Lac High-tech Business Incubator (HBI), established in 2007, focuses on information & communications technologies, advanced manufacturing systems, biomedical technology, nanotechnology & the energy sectors.
• Hub.IT is a coworking space that provides a 6-month incubation program. It does not provide any seed finding but helps facilitate key skills for startups like public speaking, market penetration, and business modeling, with the support of a network of mentors.
• X-Incubator is a small incubator program. Each month 3 startups are chosen and will be provided with a small investment ($15). The incubator also provides resources & connections to help launch the business. The program lasts for three months, and has incubated three startups.
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Ho Chi Minh City & Hanoi
BTIC (Becamex Technology & Innovation Centre) provides support for technology startups through infrastructure, financial services and advisory. It operates 4 3-month batches a year, for up to 20 startups per batch, mainly in the cloud, mobile, health, media & internet sectors. BTIC also organizes an annual conference, a summer camp for entrepreneurs and regular hackathons.
Organizations that support & advise start-ups
• Cyclonize is a media platform for young entrepreneurs where they can share their startup ideas across the world.
• DEMO ASEAN runs an annual 3-day conference in Vietnam that focuses on introducing new IT products from both entrepreneurs and more established players to venture capitalist, investors and the IT press.
• Gekko Space is a coworking space in Ho Chi Minh City designed for entrepreneurs, freelancers and small business owners operating in Vietnam.
• Launch is a Facebook group started in 2010 that nurtures technology startups and has slowly exploded to over 13,000 members. The group organizes start-up coffees, pitching sessions and networking events.
• MyProClub (owned by PVNI) is a social platform that connects entrepreneurs, professionals, manager-owners and investors to exchange, collaborate & invest into highly potential business ventures in Vietnam
• Saigon Co-Working is a co-working space based in Ho Chi Minh City that also provides consulting services for startups.
• SAVVi (Strategic Alliance Vietnamese Ventures International): is a US-based subscription based global platform providing services to those wishing to do business in Vietnam
• Seedfund.vn is a consultancy firm that acts as a bridge between investors and startups; it helps startups raise capital, find and communicate with investors. Seedfund.vn also works with investors and ventures to find potential startups.
• Starthub.vn is an online project funded by the Silicon Valley Project that provides a central place for startup founders and tech lovers to come and chat about the latest news in the ecosystem while also getting access to a large database of startups (c.500 startups).
• Stardibi.com is an online community for startups, similar to Starhub.vn.
• StartMeUp: monthly event hosted by a group of young entrepreneurs to create a place where young entrepreneurs can meet, network and share their experiences.
• Twenty.vn is a new media company / blog providing the latest tech news in Vietnamese and also advises startups.
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• Viet Youth Entrepreneurs is a student-led organization that was founded in 2011 to inspire and empower young entrepreneurs and foster the Vietnamese start-up community. VYE organizes regular workshops, hackathons and the annual VYE Bootcamp, in collaboration with the Stanford Technology Venture Program and the Vietnam National University.
• Work Saigon is a Ho Chi Minh City based coworking space, creativity school and café aimed at young entrepreneurs.
Established venture capital firms in Vietnam for later stage investments
• CyberAgent Ventures is one of the most active investors in Vietnam investing in e-commerce startups.
• DFJ VinaCapital (part of the global DFJ network) is one of the oldest VC funds in Vietnam, focusing on later stage startups.
• IDG Ventures is Vietnam’s oldest VC firm that focuses on the technology, media, telecommunication and consumer sectors.
• Mekong Capital: Vietnam-focused Private Equity firm specializing in consumer driven businesses
• One Capital Way: an angel investment firm actively looking at promoting young startups for pre-Series A funding. It is led by 5Desire and undisclosed Silicon Valley angel investors.
• PVNI (Prosperous Vietnam Investment): venture capital fund focused on startups in education, food and beverage and cloud computing.
• Sumitomo is a newcomer actively looking to invest in Vietnamese e-commerce players (recently invested c. $2m in Tiki.vn for its series B round).
• VI (Vietnam Investments) Group: provides early-stage & expansion capital to industry-leading companies in the manufacturing, logistics, tourism, education & media sectors.
Examples of innovative start-ups
IG9 (incubated by BTIC)
IG9, launched in 2013, is Vietnam’s first crowd funding platform.
VinaPay (owned by IDG Ventures)
Established in 2006, VinaPay is a mobile top-up & payment platform, offering electronic transaction services to mobile operators, banks, retailer & end-users. The company recently launched Vcash E-wallet, an electronic payment service that allows users to send & receive money anywhere, top-up mobile accounts & game cards.
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Bibliography “Banking in emerging markets: Seizing opportunities, overcoming challenges Country reports” Ernst & Young, 2013 “Bank Rakyat Indonesia (BRI) to Add 571 Branches to Reach Rural Micro-, Small, Medium-sized Enterprises (MSMEs), Expand Agricultural Lending” Microcapital Brief February 18, 2014 http://www.microcapital.org/ Besar, D.S “Indonesia Banking Development”, Bank Indonesia June 2012 “Financial Inclusion Development Policy in Indonesia” Bank Indonesia 2013 http://www.ilo.org/wcmsp5/groups/public/---asia/---ro-bangkok/---ilo-jakarta/documents/presentation/wcms_216688.pdf Haryanti, D.M. “What does financial inclusion really mean?”, Jakarta Post – Opinion Pages, February 12 2014 Henstridge, De & Jakobsen “Is Indonesia’s Growth Sustainable? Drivers of Recent Growth” Oxford Policy Management 2013 “Indonesia’s banks seek exposure to micro-lending’s risky rewards”, AsiaMoney 2013 Johnston, D & Morduch, J “The Unbanked: Evidence from Indonesia” THE WORLD BANK ECONOMIC REVIEW, VOL. 22, NO. 3, pp. 517–537 doi:10.1093/wber/lhn016 Oct 22, 2008 “Leveraging Remittances with Microfinance: Indonesia Country Report”, The Foundation for Development Cooperation, Dec 2007 http://www.fdc.org.au/data/Remittances/LRM_Indonesia.pdf “Remittances, Payments, and Money Transfers; Behaviors of South Asians and Indonesians”, Bill & Melinda Gates Foundation in conjunction with Gallup, May 16, 2013 Robinson, M. “Why the Bank Rakyat Indonesia has the world’s largest sustainable microbanking system, and what commercial microfinance means for development” BRI International Seminar, 2004. Siebel, H.D “The microbanking sector of Bank Rakyat Indonesia: A Flagship of Rural Microfinance in Asia”, Unversity of Cologne, Development Research Centre No 2 , 2005 “Smart Policy: Why Islamic Banks Matter in Indonesia”, Djauhari Sitorus, CGAP July 2013 Spencer & Palaon “The Case for Branchless Banking in Thousand Islands, Indonesia” CGAP Jan 2014 http://www.cgap.org/
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Appendix: Additional Statistical Highlights Indonesia
Population Indonesia has a population of
247 million that is expected to
grow at a rate of 1.9% to 269
million by 2020 and 321 million
by 2050.. Indonesia has a very
young population with around
27.1% of the population aged
between 0–14 years and around
66.5% of the population aged
between 15–64 years.
GDP Indonesia is enjoying a strong economic growth in the recent past averaging around 5.4%
between 2000-1232. It is estimated to become the 7th largest economy in GDP terms by 2030 with more
than $1.8 trillion market opportunity in consumer services, agriculture and fisheries, resources, and
education33. While GDP per capita has also increased, it has not seen similar levels of growth as that
of GDP. This reflects the uneven economic growth in Indonesia with the GINI coefficient increase
32 Marketline’s country profile on Indonesia in 2013 titled: “Indonesia: In-depth PESTLE Analysis” 33 McKinsey Global Institute’s report on Indonesia in 2012 titled: “The Archipelago Economy: Unleashing Indonesia’s potential.”
Figure 2 Indonesia GDP, USD billions Source: World Bank Group, www.tradingeconomics.com April 2014
Figure 1 Demographic Distribution Source: CIA World Factbook -‐ 2013
28
from 30 to 38 during the same period.
Poverty rates Notwithstanding Indonesia’s impressive economic progress in the recent past, more than
46.1% of the population live under $2 a day of income. Poverty is relatively more prevalent in the rural
and relatively under developed areas of the archipelago than the more urban and developed islands of
Java, Sumatra and Bali.
Figure 3 Indonesia GDP Per capita Source: World Bank Group, www.tradingeconomics.com April 2014
Figure 4 Indonesia Poverty Rates Source: ‘Trends in Poverty and Inequality in decentralising Indonesia” OECD 2013
29
Global Competitive Index Indonesia is ranked 50 among 144 countries in terms of its Global
Competitive Index as of 2013. Even though it has seen a drop of its rank in the recent past (from 44 in
2011), it is ahead of most of its peers in South East Asia market. Inefficient Government bureaucracy,
corruption and inadequate supply of infrastructure are seen as the most problematic factors for doing
business in Indonesia. This is even more so in the relatively rural areas of Indonesia.
Figure 5 Indonesia Poverty Rates across various provinces Source: OECD Report dated 2013 titled ‘Trends in Poverty and Inequality in decentralising Indonesia”
Figure 6 Indonesia Problematic factors for doing business Source: OECD Report dated 2013 titled ‘Trends in Poverty and Inequality in decentralising Indonesia”
30
Figure 7 Hospitality, services and manufacturing dominate bank loans to SMEs Source: A. Mourougane “Promoting SME Development in Indonesia” Economics Department Working Paper No 995 OECD Oct 2012, p18 Data: Bank Indonesia (2011)
Figure 6 Services and Manufacturing are key drivers of growth Source: “Unleashing Indonesia’s potential”, McKinsey Global Institute Sept 2012
31
Figure 8 Dispersion of small and medium sized fast growing cities Source: “Unleashing Indonesia’s potential”, McKinsey Global Institute Sept 2012
Figure 9 Forecast share of GDP and population Source: “Unleashing Indonesia’s potential”, McKinsey Global Institute Sept 2012
32
Figure 10 Vietnam: population density Source: Encyclopædia Britannica Online. Web. 19 Apr. 2014
Figure 11 Vietnam GDP Source: www.tradingeconomic.com|World Bank. Web. 19 Apr. 2014
33
Figure 13 Vietnam GDP compared to other Asian countries Source: “Sustaining Vietnam’s Growth: The Productivity Channel”, McKinsey Global Institute Feb 2012
Figure 12 Vietnam GDP Per Capita Source: www.tradingeconomic.com|World Bank. Web. 19 Apr. 2014
34
Figure 14 Vietnam GDP Volatility compared to other countries Source: “Sustaining Vietnam’s Growth: The Productivity Channel”, McKinsey Global Institute Feb 2012