IFC INCLUSIVE BUSINESS COMPANY PROFILE PT Summit Oto Finance COMPANY BACKGROUND Country: Indonesia Based in Jakarta, PT Summit Oto Finance (OTO) is one of the largest motorcycle financing companies in Indonesia. Sector: Finance OTO was initially established in 1990 as PT Summit Sinar Mas Finance, a joint venture between PT Sinar IFC’s Investment: $120 million in long-term Mas Multiartha and Sumitomo Corporation. Sumitomo debt financing Corporation, an integrated trading company based in Japan, owns 99.53% of OTO directly and indirectly through Summit Auto Group and PT Sumitomo Indonesia. As the majority shareholder, Sumitomo Corporation provides low- and middle-income consumers primarily in Java support to and controls all aspects of the business, from and Sumatra, and is currently expanding to rural regions. management and treasury to financial and operational With over 10,000 employees and 8% market share, OTO needs. has capitalized on the strong growth of the Indonesian In 2003, OTO shifted its focus from corporate leasing to domestic motorcycle market, and maintains its position motorcycle financing exclusively, and changed its name as one of the leading players in the motorcycle financing to PT Summit Oto Finance. OTO provides financing to business. DRIVERS FOR OTO’S INCLUSIVE BUSINESS MODEL •• Strong demand for motorcycles •• Gap in access to motorcycle finance, especially among low-income groups •• Opportunity to capture first-mover advantage in rural areas In many emerging markets such as Indonesia, motorcycles difference is a lack of access to financing in the country, are the primary family and work vehicles and a principal as the main customer groups generally have insufficient means of transport for low-income groups. The Indonesian savings to purchase motorcycles in cash. motorcycle market is the world’s third largest after China Demand for motorcycles and a lack of access to financing and India, accounting for about 10% of global demand. to buy them have created a market opportunity for OTO, Since 2004, national motorcycle sales have increased at an particularly in Java and Sumatra. Now, the company is 11.5% compounded annual growth rate. Upgrades (e.g. from seeking first mover advantage by expanding into rural two-stroke to four-stroke engines) and business applications areas in Kalimantan, Sulawesi, and Aceh, which are not yet (like two-wheeler taxis) are expected to fuel even greater served by many financial institutions. In these areas, roads demand. tend to be less developed than in cities like Jakarta, making Nevertheless, market penetration in Indonesia remains low motorcycles an even more effective means of transportation compared to neighboring countries. One reason for the than other vehicles. 1 IFC INCLUSIVE BUSINESS COMPANY PROFILE OTO’S INCLUSIVE BUSINESS MODEL With good fuel efficiency and low acquisition and maintenance costs, motorcycles are widely used by low- income groups in Indonesia for both personal and business transportation. OTO focuses exclusively on new motorcycle financing through small loans to low- and middle-income borrowers. Nearly 99% of its more than 1.5 million active borrowers are application. OTO Credit Marketing Officers (CMOs) also talk individuals. The vast majority earn $150 to $300 per month to people in the applicant’s neighborhood. To maintain a and do not have bank accounts. Approximately 99% of structured appraisal process, CMOs are required to complete them have only primary education and typically run micro- a standardized form for each applicant, verifying that he enterprises, or work as low-level employees. The average or she has a credible and stable revenue source and a initial loan amount per customer is $1,315. permanent residence. The form also tracks the size of the down payment made to the dealer (the minimum should be 20% of the total net motorcycle price per regulation from the Ministry of Finance) and the size of the monthly loan OTO has successfully engaged a large pool of unbanked borrowers in a viable way by basing its business strategy on the microfinance model OTO has successfully engaged a large pool of unbanked borrowers in a viable way by basing its business strategy on the microfinance model. Its approach relies on an effective understanding of its borrowers and close, continuous customer contact, rather than formal underwriting processes. Because its borrowers are typically the owners or employees of micro enterprises, they often do not have good records and are unable to produce salary slips or other documentation to validate their incomes. As a result, client due diligence includes a mandatory visit before each credit decision is made—usually within 24 hours of receiving an © OTO 2 IFC INCLUSIVE BUSINESS COMPANY PROFILE © OTO repayment relative to the applicant’s income (preferably less Upon approval, loan proceeds are disbursed directly to the than 30%). In an effort to reduce the risk of fraud prior to dealer following delivery of the motorcycle to the customer. final loan approval, OTO has equipped each of its CMOs with The loan repayment period is typically 36 months, during mobile devices to ensure that the information collected by which time OTO retains the title as collateral. them is correct. OTO has a national market penetration strategy built on a robust distribution network and strong partnerships. The company has 173 branches spread across the country, and cooperates with more than 4,000 authorized dealers of leading motorcycle brands—it is not captive to any In an effort to reduce the particular manufacturer. OTO has entered into additional partnerships to support its collection efforts. For example, it risk of fraud prior to final has established payment and collection arrangements with loan approval, OTO has the country’s largest microfinance institution, Bank Rakyat Indonesia; the commercial banking system’s ATM network; equipped each of its CMOs and the Indonesian Post Office network. with mobile devices to ensure that the information collected by them is correct 3 IFC INCLUSIVE BUSINESS COMPANY PROFILE RESULTS OF OTO’S INCLUSIVE BUSINESS MODEL •• Increased mobility of people and goods, enabling greater access to markets and services •• Significant job creation along the motorcycle value chain, from manufacturing to sales to service •• Sustained improvement in OTO’s business performance In Indonesia, motorcycle finance has done more than enable relatively inexpensive to purchase, operate, and maintain, consumption. First, it has helped develop a credit culture making them especially well-suited for individuals with among large numbers of low-income customers with little limited incomes. Motorcycles can also be used to generate to no previous exposure to the formal financial system. In income, by working or trading. the process of repaying motorcycle loans, these customers Motorcycle financing has also played a critical role in have built credit histories that will enable them to access enabling the motorcycle industry to grow and create jobs other formal financial services in the future, moving closer along the value chain, from manufacturing to distribution to to full financial inclusion. Second, motorcycle finance has sales, and finally to after-sales service. increased mobility among low-income groups. Mobility As a reflection of the value it has created for Indonesian is an essential component of economic opportunity, as it society, OTO has maintained sustainable growth. From increases productivity and may enable people to take higher 2004 to 2011, OTO’s consumer financing receivables grew paying jobs located farther from where they live. It also at a compound annual rate of 39.5%, and in terms of asset expands access to goods and services that may be available quality, OTO’s accounts more than 90 days past due stood at more cheaply, or at a higher level of quality, farther away. 1.87% at the end of 2011. Currently, OTO’s rating assigned by Compared with other mobility solutions, motorcycles are the local rating agency Pefindo is at the level idAA flat. IFC’S ROLE AND VALUE-ADD IFC’s Investment: $120 million in long-term debt financing Investment Year: 2009 to 2011 • Unlike many other financial institutions, which are majority-owned by banks, OTO has no easy access to low-cost financing or to fixed long-term rupiah loans. IFC’s funding is designed to match the repayment and interest rate profile of OTO’s loan portfolio, helping improve its asset-liability structure and reduce its market risks • IFC is facilitating expansion of OTO’s motorcycle lending especially in underserved locations • With this investment, IFC is strengthening Indonesia’s limited Non-Banking Financial Institution (NBFI) sector. With lower operational costs than most banks, NBFIs can more efficiently finance low-income individuals and SMEs, making them critical to financial inclusion (Published August 2012) For more information, visit ifc.org/inclusivebusiness and otofinance.co.id 4