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OJK to legitimize firms that credit-score the unbanked
Despite the potential benefits of increasing financial inclusion in the country, regulators need to pay attention to data privacy concerns emerging from innovative credit scoring (ICS).
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A craftsman draws a special Lebak batik motif at the Chanting Pradana gallery in Lebak regency, Banten, on Nov. 8, 2023. Many small and medium enterprises (SME) struggle to obtain bank loans because they lack a credit history. (Antara/Muhammad Bagus Khoirunas)
T
he Financial Services Authority (OJK) is in the process of drafting a regulatory framework for innovative credit scoring (ICS) firms that could determine the creditworthiness of individuals and business owners who have never held bank accounts.
An analyst noted that, despite the potential benefits of the tech-savvy business for increasing financial inclusion in the country, regulators need to pay attention to data privacy concerns and the possibility of discriminatory calculations by new credit scorers, which could harm potential borrowers.
The OJK has "recommended" 10 ICS companies that have spent some time in the regulatory sandbox, an isolated testbed overseen by the OJK, to graduate from the program and encouraged them to apply for the status of registered entities, noting that they could continue providing their services to consumers on a limited scale until a proper legal framework has been worked out.
"We are in the process of finishing a regulation, which would become the legal framework for ICS. Once the regulation is issued, those ICS firms can apply for a license through a process that will be set," Hasan Fawzi, the OJK's executive head for fintech innovation and digital asset supervision, said during a press briefing on April 2.
ICS firms provide alternative credit scoring mechanisms, mainly for individuals and businesses who do not have a credit history with banks or other financial institutions and whose information is not included in the OJK's Financial Information Service System (SLIK), which is typically used by banks as the basis for creditworthiness assessments.
Cooperatives and Small and Medium Enterprises (SMEs) Minister Teten Masduki previously lamented that many SMEs struggled to obtain loans due to a lack of collateral and credit history. He suggested banks use alternative credit-scoring schemes to assess SMEs’ creditworthiness.
"The main difference of ICS is the source of the data used. ICS use alternative data, such as e-commerce transactions, utility bills and social media behavior, which could reflect how people would [handle] loans," Hasan added.
