Peer-to-peer (P2P) lending is poised to grow along with the current rise of Indonesia’s digital financial services sector. More than three-quarters of Indonesia’s 270 million population are within the reach of financial services, up from just under 60 percent in 2013, according to a 2019 data from the Financial Services Authority (OJK).
P2P lending operations can claim some credits for the expansion, now boasting with 27 million accounts.
The COVID-19 pandemic may boost the P2P business. But the rise may not be smooth, unless we come up with a series of regulations to protect consumers from fraudulent operators. Until that happens, P2P users can use discretion to protect themselves.
China, which is leading the world on P2P, has introduced Interim Measures on Administration of the Business Activities of Peer-to-Peer Lending Information Intermediaries after tantamount of frauds and reports by P2P consumers. The regulation shifted the nature of P2P lending platform from pooling capital to strictly as information intermediaries for lenders and borrowers.
Indonesia fits the profile of high P2P penetration, given the size of the population.
The internet coverage at 64 percent in 2020 is still increasing. The number of underbanked and unbanked people is high at 92 million and 47 million people respectively, the highest in Southeast Asia.
As many as 70 percent of all micro, small and medium enterprises cannot access the financial services to obtain capital, said Muhammad Cholifbani, the director of financial services and state-owned companies at the National Development Planning Ministry.
The stage is therefore set for P2P to grow.
OJK recognizes this by issuing Regulation No. 77/POJK.01/2016 on Information TechnologyBased Lending Services (LPMUBTI), which following on China’s P2P regulation, bans P2P lending platforms from pooling capital and requires them to file trimonthly report to OJK, among other things.
By bypassing intermediaries, P2P lenders can offer higher deposit rates in comparison to conventional banks, some even for more than 12 percent while conventional banks offer 4-7 percent per year.
Another major advantage that P2P companies never fail to highlight in their ads is the fast process of borrowing, without collateral. One P2P platform KoinWorks, offers to loans of up to Rp 250 million (US$17,000) under this scheme.
These factors combine to push P2P lending higher and higher, even with the current pandemic.
OJK said P2P jumped to Rp 116.97 trillion in July, a staggering 135 percent increase from a year earlier.
P2P lenders are reaching out to many who do not have access to conventional banks or they are illegible because of their circumstances, which banks refer to as subprime borrowers. The borrowers› profile is an essential aspect in loan considerations, apart from its deposit rate.
The current economic slowdown has only doubled the risk.
P2P nonperforming loans of 7.99 percent is more than double the 3.22 percent by conventional banks in July 2020, according to the Indonesian Joint Funding Fintech Association (AFPI).
As other financial instruments increase their borrower’s criteria to avoid risk, the P2P lending platforms› nature of providing loans instantly makes it even more enticing.
Business is so lucrative during the pandemic that P2P operation is mushrooming. Since March, when the pandemic began to hit Indonesia, OJK has worked with Satgas Waspada Investasi or Investment Readiness Task Force to block 574 illegal P2P platforms from operation.
Current OJK regulations are only applicable to registered P2P platforms.
Since they are outside OJK jurisdiction, these unregistered P2P operators could easily misuse data or their clients or practice unethical debt collection.
The task force has done its part to in blocking 2,591 illegal platforms in the last three years. Still their number keeps increasing, to suggest that the task force needs to have more power.
OJK director for fintech regulation, licensing and supervision
Hendrikus Passagi says Indonesia needs to come up with a fintech law to give legal clarity and foundation to stop illegal P2P lending.
Regulators are at the early phase of preparing the law, gathering views not just from financial experts but also from consumers. The idea of getting fast money through P2P lending has contributed to the current condition.
Many borrowers are drawn by the instant service of P2P to transfer cash to their bank account and disregard the consequences after. Lenders for their part are drawn by the high interest rates, ignoring the fact that it means higher risk. Combine, they increase the risk of P2P lending.
The P2P lending scheme is essentially a method of lending to other people through an online platform with little information as to who the borrowers are. They rely on sophisticated artificial intelligence to provide the information. But often this is not enough.
A more proactive lenders and borrowers› intuition can make all the difference.
Performing simple tasks, such as accessing OJK’s report on illegal P2P platforms, reading the Terms of Condition (ToC), understanding what users agreed upon, and carefully sharing users’ personal data, can save them from P2P frauds.
Such knowledge is important as users enter into an unchartered territory, where regulations and protections barely exist. In this tough time, a right approach from regulators and users› thoughtful point of view will allow the people to reap benefits of P2P and avoid risks.
Researcher at a government institution. The views expressed are his own.
Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.