The Rise and Regulation of Digital Credit: Lessons from Indonesia

This paper examines the rise of fintech lending in Indonesia, using a dataset of more than 139,000 individual credit records representative of the full spectrum of consumer loans in the country. The analysis reveals that fintech lending has become deeply embedded in Indonesia’s financial landscape, with more than 40 percent of borrowers holding at least one fintech loan at the end of the sample period. While digital lenders have expanded financial inclusion by reaching significant numbers of previously unbanked households, they remain limited in their geographical reach, primarily finance consumption, and account for only a small share of total consumer credit. Over time, a substantial share of borrowers transition from high-interest fintech loans to more affordable conventional credit. However, this expansion of access brings new challenges: default rates among borrowers who obtain their first loan from a digital lender are 5 to 7 percentage points higher than among borrowers who start with non-fintech loans, and elevated default risks persist even after borrowers graduate to lower-interest rate conventional credit. The paper concludes by assessing the effects of recent regulatory reforms --such as interest rate caps and harmonized reporting standards for digital and conventional loans-- and offers policy recommendations to maximize the benefits of digital financial inclusion while safeguarding credit market stability and financial consumer protection.