Food stall owner Izzudin Zidan relies on online lending platforms to get quick loans for his business in Jakarta. - COURTESY OF IZZUDIN ZIDAN
JAKARTA: Indonesia is aiming for more oversight of the fast-growing peer-to-peer (P2P) lending industry, which has benefited many individuals and small businesses seeking modest sums from as low as 500,000 rupiah (US$30).
Since July, financial technology firms in the microfinance sector have been required to submit their financial transactions and file financial reports to the Financial Services Authority (OJK).
The move came about following the recent exit of major P2P lender TaniFund after the OJK revoked its operating licence in May, due to a liquidity crisis that ensued as borrowers defaulted on loans and lenders were not repaid. The industry regulator is conducting investigations into fraud allegations against TaniFund and two others, Investree and iGrow.
There are currently 98 licensed P2P lenders registered with the OJK, compared with 30 in 2017. To date, P2P lenders in Indonesia have given out loans totalling 66.9 trillion rupiah to 131 million borrowers, from 284.2 billion rupiah in December 2016.
P2P apps allow users to transfer and receive money speedily, using digital platforms or mobile applications without going through intermediaries such as banks. Financial transactions can be verified and completed in a matter of minutes.
Izzudin Zidan, 43, who runs two food stalls selling fried chicken and tempeh in Jakarta, has borrowed small sums of up to 500,000 rupiah from P2P lenders to buy cooking oil, flour and other ingredients for his business.
“I needed only an app and then applied for the loan with my identity card. I got the money a few hours later. It was so fast,” the father of two told The Straits Times.
He was able to repay each loan within a month, incurring hefty monthly interest rates of as much as 40 per cent. Commercial banks would charge lower interest rates of between 7 per cent and 8 per cent a year, Izzudin noted.
While Indonesia’s P2P lenders can potentially receive good returns by loaning out small amounts, they bear bigger risks as their money is not protected by the Deposit Insurance Corporation, which guarantees bank deposits of up to two billion rupiah per person in case the banks go bust.
As at May 2024, P2P platforms disbursed about one-third of their loans to micro, small and medium-sized enterprises (MSMEs), according to Agusman, chief executive of supervision at the OJK. Individuals made up the bulk of borrowers.
The OJK aims to increase the component of MSMEs to between 50 per cent and 70 per cent by 2028, said Agusman, who like many Indonesians goes by only one name.
Interest rates vary depending on the platforms.
Modalku, a P2P digital lending platform that connects local MSMEs with lenders, said it charges borrowers up to 3 per cent interest monthly or 36 per cent a year, while its lenders enjoy returns of up to 17 per cent a year. In comparison, retail banking customers can earn interest of between 2 per cent and 3 per cent per year on their fixed deposits.
In 2023, the OJK instructed licensed P2P lenders to reduce their daily interest rates to a maximum of 0.3 per cent in 2024, and 0.1 per cent in 2026. Lenders had been charging up to 0.4 per cent since 2021, and as much as 0.8 per cent before that.
New industry measures will be laid out later in 2024, OJK director-in-charge of micro-financing Edi Setijawan said, in order “to apply prudent principles and ensure consumer protection”.
Almost half of Indonesia’s adult population, or 97.7 million, do not have bank accounts, according to World Bank data, as many live in remote areas in the sprawling archipelago spanning 17,000 islands and three time zones. Thus, online lending platforms would be a financial lifeline for these users.
Despite a more stringent operating environment, the P2P lending industry is set to grow by 5 per cent to 7 per cent in 2024, according to the Indonesian Fintech Lending Association, an organisation that supports P2P lending and online funding for fintech entrepreneurs.
And P2P lending platforms are optimistic about continued growth in the industry, aiming to fill the financing gap for MSMEs which commercial banks and other financing institutions are unable to. That gap could amount to 2,400 trillion rupiah by 2026, said Modalku country head Arthur Adisusanto, citing data from global consulting firm EY-Parthenon.
360Kredi’s chief executive Kuseryansyah said the mid-sized P2P lender, whose borrowers include farmers and food stall owners, anticipates handling 1.3 trillion rupiah worth of loans in 2024, up 30 per cent from two years ago.
While P2P platforms in Indonesia have thrived in recent years with rapid developments in mobile technology and the widespread use of smartphones, some issues of concern have emerged. Examples are the proliferation of unlicensed lenders, lack of financial literacy among borrowers, and questionable debt-collection methods.
The fast-growing industry and lure of easy gains have led to a mushrooming of unlicensed players seeking to cash in. The OJK said it has shut down 8,271 illegal online lenders since 2017, but experts believe the number of unlicensed lenders exceeds the number detected so far.
Fintech expert Hendrikus Passagi said that a far-reaching impact of the illegal lending platforms is personal data theft. “The business of illegal online lenders is beyond lending money. They try to collect digital data (of borrowers) as much as possible,” he warned.
One way to tackle illegal online lenders is for the authorities to closely monitor financial transactions and take action, said Dr Hendrikus, a former OJK director for regulation, licensing and supervision.
“The Bank of Indonesia, for instance, can prohibit the use of e-wallets by illegal lenders, while the OJK can order banks to have comprehensive ‘know your customer’ assessment. If there is evidence that a bank account is set up and used by illegal lenders, it must be closed down,” he added.
Desperate for cash, coupled with low financial literacy, some borrowers bite off more than they can chew, experts say.
There is a tendency for people in Indonesia to turn to informal loans – for example, borrowing from family, friends and loan sharks – when they face financial hardship, said Nailul Huda, director of digital economy at the Centre of Economic and Law Studies. The emergence of the P2P lending platforms has only exacerbated this deeply entrenched culture, he said.
“Financial literacy (among Indonesians) is still low... People are not aware that apart from being able to access loans quickly, they have obligations to fulfil (repaying the loans),” he said. And then they are caught in a bind, he added.
Over the years, the OJK has seen cases where cash-strapped individuals take out multiple loans from dozens of P2P platforms at the same time, which they fail to repay. As a result, the regulator implemented a rule earlier in 2024 that limits the number of platforms an individual can access for loans at any one time.
There are also concerns arising from the overly aggressive methods of debt collection, including harassment and threats of violence. The OJK has tried to address the issue with rules in 2023 to limit mobile phone access by lenders to just microphone, location and camera. In some instances, these apps have collected data including contact list information, and some lenders have used this to track down and intimidate errant borrowers.
One such example was a 50-year-old retail employee, who wanted to be known only as Anna. She took out loans totalling 10 million rupiah from six P2P lenders in 2018 to pay for personal expenses including her studies.
When she was late making repayments, the lenders called her multiple times daily, gained access to her WhatsApp contacts and spammed her family members.
One online lender, to whom she owed 1.8 million rupiah, even caused the mother of two to lose her job after contacting her boss about the loan.
Still, food stall owner Izzudin said that despite issues plaguing the platforms and higher interest rates, he will continue to borrow from P2P lenders because of convenience and speed.
“It’s complicated to borrow money from banks because of the various requirements they demand. With online lenders, it’s so simple and easy. If I have urgent need for money, I’ll just borrow from them,” he added. - The Straits Times/ANN
