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Company in focus: Indonesia's BRI embraces an otherworldly banking model

Bank Rakyat Indonesia in June became the world's first bank to own a satellite, which will be operational in August.   © Antara

JAKARTA In mid-June, executives of Bank Rakyat Indonesia traveled over 18,000km from Jakarta to the northern coast of French Guiana in South America to witness the launch of a rocket that makes the bank the world's first with its own satellite.

BRI is Indonesia's biggest provider of small loans and its customers are strewn across some 3,000km of the world's largest archipelago.

As the launch approached, the BRI execs gathered at the Guiana Space Center were full of excitement, but the mood was also tense. The original launch date had already been pushed back several times by bad weather and technical glitches.

When the Ariane 5 rocket lifted off with BRIsat on board, people gathered in the control room were delighted -- and relieved. Asmawi Syam, BRI's president, called it "a new era in banking."

NOT STELLAR Back home, news of the successful launch and the satellite's parking in stationary orbit above Indonesia was splashed across the morning papers. Investors were less impressed. After hitting an all-time high of 13,275 rupiah in March 2015, BRI's shares slumped. On July 15, they closed at 11,500 rupiah.

BRI stock has gained only 1% so far this year, underperforming state-owned rival Bank Mandiri and Bank Central Asia, Indonesia's largest private-sector bank, which have each gained 5%. The broader Jakarta Composite Index is up 11%.

Ironically, the investor concerns stem partly from BRI's dominance, which translates into exposure and onerous overheads. Although the definition of small loans varies among banks, BRI is estimated to have half the market for loans of less than 200 million rupiah ($15,277). The Indonesian economy is dominated by small businesses. Deloitte, an accounting specialist, estimates there were nearly 60 million small and medium-size enterprises in Indonesia in 2014, compared with about 2.8 million in Thailand and 1 million in the Philippines.

Small loans are risky, but lucrative with proper management. The trick is to pick the ones that will not go bad. With a nonperforming loan ratio of 2%, BRI has become Indonesia's most profitable publicly listed corporation, logging 25.4 trillion rupiah in net profit in 2015.

There is enormous scope for growth in Indonesian banking. Less than 40% of adults have bank accounts, according to the World Bank. Joko Widodo, Indonesia's president, has been calling for banks to lower interest rates and make loans affordable for smaller businesses. BRI's high interest margins, which are four times larger than those the average bank in Singapore sees, are likely to come under scrutiny.

"The government is focused on SMEs and wants loans to be affordable," said Agus Pramono, head of research at local brokerage Danareksa Securities. "Banks that focus on SMEs will likely suffer more than banks that focus on consumers and corporates."

OLD PROBLEM, NEW SOLUTIONS Another threat to BRI's profitability is the digitization sweeping the banking industry. This has produced new business models aimed at disrupting traditional players. Such changes pose a particular threat to BRI, which still relies on a network of more than 10,000 bricks-and-mortar branches to reach customers.

BRI's decision in 2014 to invest $250 million in its own satellite is an attempt to meet these challenges. According to Asmawi, it will bring major savings. Many parts of the Indonesian archipelago have no fixed-line internet access. BRI has had to rent transponders from commercial satellite providers to run its ATMs, small terminals called electronic data capture (EDC) devices that process card transactions, and back office operations. By operating its own satellite, BRI expects to save 200 billion rupiah, or about 40% in annual transponder rental fees.

Cutting costs will free up money for BRI to invest in its conventional business and expand into untapped markets. The bank is already reaching customers in innovative ways. Last year it began a "floating branch" service that sends loan officers and security guards to remote islands by boat. It has a mobile branch service with a fleet of more than 600 vans. "We have the advantage of being close to traditional markets," said an account officer who leads a team of three. They circle a neighborhood of Jakarta in a van that handles 50-80 customers a day.

Bank Rakyat Indonesia uses vans and boats to offer banking services in remote communities. (Photo by Yumi Kotani)

In a country infamous for congestion, solutions are certainly in demand. "We want to reach out to places where there are no traffic jams," Asmawi said. BRI is investing heavily in branchless banking, which involves appointing third-party agents, such as small shops, which offer simple banking services. Instead of ATMs, BRI provides these agents with small EDC devices to carry out transactions. By March, BRI was operating some 21,300 EDCs, an increase of 77% over the previous year. The bank aims to appoint 75,000 agents by the end of 2016.

BRI established a nationwide presence in the 1970s, when it was appointed by the government to channel small loans to rural rice farmers. After racking up heavy losses, BRI shifted to a commercial banking model in 1984, applying advice from a think tank affiliated with Harvard University. BRI also received funding from the World Bank and USAID, the U.S. government's aid agency.

BRI's Unit Desa, a village banking network, was established as an independent profit center running savings and lending services. It has gained popularity among villagers who previously kept money under their mattresses. The bank became profitable by giving loan officers more discretion and rating them on the quality of their loans rather than the quantity.

While the bank has since diversified into larger corporate loans, about 80% of its branches still specialize in serving small businesses. The close ties between bank officers and customers are its biggest competitive advantage, according to Mohammad Irfan, a BRI director who oversees the microbanking division. "It may seem very simple, but nurturing a culture is not easy," Irfan said. "Anybody can buy systems or technology, but they can't buy culture."

HIGH-TECH CHALLENGERS Recent advances in technology challenge that view. In Kenya, a mobile money service called mPesa allows users to pay bills and transfer money by text message on their mobile phones. It has become much more popular than conventional banking in the East African country. In Indonesia, Bank Tabungan Pensiunan Nasional, a midsize lender specializing in small loans, is developing a similar model, and aims to go further by making loans available through mobile phones and agents. BTPN invested 380 billion rupiah in information technology in 2015, a fivefold increase from the previous year.

Startups have been disrupting established banks. Modalku operates an online platform that connects investors with small businesses looking for loans. Potential customers are screened using simple tests. "People who pass the test are four times less likely to default than those who don't," said co-founder Reynold Wijaya. The lender can also monitor the financial condition of the borrower by mobile phone to minimize the risk of default.

Meanwhile, BRI with over 55,000 employees as of last year, carries a lot of baggage. It generated 462 million rupiah in net profit per employee in 2015, less than Mandiri's 553 million rupiah and Bank Central Asia's 726 million rupiah, according to QUICK-FactSet.

Some analysts say BRI has been slow to embrace internet and mobile technology. The EDCs it uses for branchless banking, for example, are less convenient than mobile phones and have fewer functions. BRI may also see savings from its satellite eroded if the government follows through on a plan in the next few years to connect all Indonesian provinces using submarine cables.

Nevertheless, BRI believes its big satellite bet will pay off because the human touch still has a significant role to play in extending credit across the archipelago. So far, BRI is sticking with its model, which requires secure satellite communications. The much talked-about internet upgrades would certainly transform Indonesian telecommunications, but they will take time. BRIsat, by contrast, will be up and running by August.

BRI's satellite was built by Silicon Valley-based Space Systems/Loral. It will be operated by a team of more than 50 BRI engineers who have received training in the U.S. Staff from other BRI divisions are also being sent to the U.S. and Europe to study the latest trends in digital banking. Whether BRI can pioneer digital banking across the archipelago will be key to reviving its stock price.

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