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Angga Yudhistira’s dream was to set up an environment-friendly eel cultivation business. The assistant researcher at IPB Bogor University in Indonesia readied a business plan to make his dream come true but lacked the funding. He found a friend in Allianz Indonesia’s Trust Network Finance (TNF).
The financing initiative, introduced this year, offers small investments to help Indonesian micro-entrepreneurs grow their business. At the end of August, three days after receiving Yudhistira’s application, TNF disbursed his payment through a digital transfer. He spent it on eel seed.
Agung Nugrohob, a 31-year-old owner of a raw chicken stall in Bogor, has a similar story to tell. Tired of renting equipment, he used TNF funds to buy his own. He diversified his business by adding a frozen beef inventory and developed a side business as a distributor of small gas cylinders.
TNF’s business model differs from conventional micro-lending in that it starts to earn money only when someone’s business takes off, says Auxentius Cahyo Bintoro, manager of Emerging Consumer business at Allianz Indonesia.
It’s a small, but significant difference. Providing a grace period as short as two months - in which start-up founders like Yudhistira are free to suspend repayments – not only increases business investments in the short run and profits in the long run, but also brings down default rates, according to a study in the American Economic Review in 2013. “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 researchers wrote.
TNF has a grace period of three months, during which these entrepreneurs don’t have to make repayments..
Bintoro compares the approach to football scouts who identify and train young talent: they need just one promising youngster to become a major league player to win back all 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 the 100 becomes a professional like Thomas Mueller, playing for Bayern Munich and the German national team, you can easily recover the cost of training all the others.”
So far, TNF has provided investments to 60 entrepreneurs. Its unique financing approach is the first of its kind, with a trial period of a year. Target customers aged between 20 and 45 years already run a small informal business and want to scale up.
There is no interest charge nor is there a fixed repayment schedule. The beneficiaries don’t have 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 a startup chooses to return more than 100 percent of the initial loan, which is limited to 2 million rupiah ($154), TNF automatically grants a higher follow-up financing.
The initiative also differs by embracing the digital approach: all transactions use electronic money via a smartphone or tablet. The system is faster and more secure than using cash, Bintoro says. It ties in well with Allianz’s digitalization focus and provides a chance to offer financial services to many unbanked people in Indonesia.
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