P2P loans provide Indonesian SMEs with valuable access to credit. But a string of complaints against illegal lenders has cast a veil on the country’s fintech sector.
Through Preetam Kaushik
Since 2018, two hashtags have gained popularity on Indonesian social media – #korban_pinjaman and #korban_fintech. A direct translation of these tags in English would read: “#victim_loans” and “#victim_fintech”.
The hashtagged phenomena are a symptom of rapidly growing issues in the Indonesian fintech scene. According to The Jakarta Post, peer-to-peer (P2P) lending has become third plus sector complained about in Indonesia in 2018.
About 14% of all complaints received by the Indonesian consumer watchdog Yayasan Lembaga Konsumen Indonesia (YLKI) in 2018 were related to online loans. The situation is so bad that even industry bodies have recognized the problem. Kuseryansyah, Executive Director of Indonesia Fintech Lending Association (IFLI), admitted there is a “dark side” to fintech in Indonesia.
Fintech is often seen as the light of technological advancement in the ASEAN region, with Indonesia’s fintech sector being among the regional leaders. So what went wrong? The key to understanding the problems lies in the nature of the complaints.
Online lenders behave like loan sharks
According to social media posts and data compiled by the YLKI, an overwhelming majority of consumer complaints relate to debt collection tactics used by online lending transactions.
Many of the tactics described are blatantly criminal, with cases of online harassment, misuse of personal data, and extremely high interest rates being imposed on late payments. The abuse of personal data by lenders is also a particularly heinous practice employed by lenders in some cases.
Horror stories of borrowers harassed and abused online, their photos appearing in fake adult ads, circulate in the media. In other cases, lenders have threatened to post compromising photos of defaulting customers online if they don’t pay off debts on time.
The lenders did not limit their harassment to the customer. There is verified stories family and friends of borrowers receiving messages from lenders or their debt collectors on social media platforms like Whatsapp and Facebook. Driven to despair, some borrowers have even committed suicide.
Most of the perpetrators are illegal lenders
According to official estimates from the Indonesian Financial Services Authority (OJK), there were over 1,000 active P2P lenders in Indonesia in 2019. A tenth of these are considered legitimate businesses and are registered with the authorities (around 127).
The rest are all illegal lenders, many of whom have suspected criminal links. Some are from abroad. About 40% illegal lenders come from China. In 2017, the Chinese P2P lending market suffered severe contractions following an official crackdown on illegal lending. Many Chinese operators have shifted their attention overseas, with the huge Indonesian market providing an easy target.
Since the upsurge in consumer complaints in 2018, the OJK has put an end to nearly 900 illegal transactions. But it’s easy for lenders to build new websites, apps, and social media profiles to keep attracting customers. The OJK is embroiled in a mole game, trying to shut down illegal lenders while others appear online.
Authorities take a cautious approach
The scale of the fintech market in Indonesia is formidable. There are nearly 300 million individual consumers and 60 million small and medium-sized enterprises (SMEs). But less than 30% of the population has access to credit, leaving a huge void for perfect loans for fintech and P2P lending.
According to the OJK, the annual demand for credit from SMEs in the country was 998 trillion Rupees (approximately US $ 96 billion).
The OJK and the Indonesian government are counting on the new fintech sector to close the credit gap and propel the Indonesian economy. The focus in recent years has been on facilitating the growth of P2P lending in Indonesia, with minimal regulatory pressure.
Pandu Aditya Kristy, CEO of MEKAR, a P2P lending start-up, credits the regulatory support provided by the OJK. “I don’t think P2P lenders need to worry about regulation. In general, the current regulations have been accommodating for the company, ”says Kristy.
New debt collection and consumer protection regulations would allow tough penalties against predatory lenders
The OJK is understandably reluctant to impose heavy regulation on the industry, given its immaturity and the potential economic benefits it offers.
Despite its distant approach, the Indonesian government is ahead of its Chinese counterparts in regulating the domestic fintech sector. In China, the disastrous collapse of the P2P lending market was attributed the lack of government regulation and control mechanisms. Learning from the lessons of the Chinese, the OJK quickly sketched out the regulations in the early days of P2P lending.
They released the first set regulations governing P2P loans in the country in 2016 and have regularly reviewed them.
The vast majority of complaints have been directed to illegal lenders. The legitimate startups that have requested registrations are mostly up to date on compliance. They even created self-imposed limits on interest rates (0.8% per day) to avoid predatory lending.
But it is clear from the complaints that the authorities have failed to adequately protect consumers. Debt collection tactics and consumer data protection laws require urgent attention. The OJK and the Indonesian government must strengthen existing regulations to curb abuse of consumer rights.
“While current regulations have supported the growth of the P2P industry, we need stricter regulations that can be used by law enforcement to prosecute illegal fintech players,” says Kristy, echoing to a general feeling shared among the legitimate players in the P2P lending industry.
Further measures are also needed to limit overseas access to the Indonesian P2P lending market. It will be a difficult task in the modern, digitally connected world.
There is no doubt that the Indonesian government views P2P lending as a powerful engine of economic growth for the country. But it needs to do more to create a safe and reliable industry for consumers and legitimate businesses.
The presence of illegal and predatory lenders harms the FinTech industry as a whole by eroding consumer confidence and increasing public mistrust. In a market which is already grappling with perceptions of public safety and security, and which still depends on venture capital and foreign investors, this could be very damaging.