Regulating P2P Lending

Industry players are generally optimistic about the new regulations, but believe more needs to be done

By Karmila Bain
Tuesday, January 31, 2017

Financial technology (FinTech) in Indonesia is growing rapidly, with many startups trying to address the issue of the unbanked – those people who don’t have access to banking services. One sector within FinTech in particular showing visible progress is peer-to-peer (P2P) lending.

Peer-to-peer lending connects the lender directly to the borrower through an online platform provided by the P2P lending companies’ websites with different credit analyses and varying interest rates.

The rapid development of P2P lending has attracted the attention of not just the public, but also the Financial Services Authority (OJK) and Bank Indonesia (BI).

At the end of December 2016, the OJK established new regulation, POJK no 77/2016 on FinTech. This outlines four fundamental requirements for the sector: minimum capital requirements, interest rate provisions, consumer education and consumer protection.

Under the regulation, foreign capital should make up no more than 85 percent of the business. The minimum capital requirement for each P2P lending company is that it should have Rp 1 billion before it is registered. In addition, Rp 2.5 billion rupiah of minimum capital is required when the company receives its business license.  A maximum limit was also set on the loan amount, at Rp 2 billion for each borrower.

The players’ response

“The object of the new regulation from the OJK is to support the peer-to-peer lending companies. It all makes sense,” Ajisatria Suleiman, the Executive Director of the FinTech Association, told AmCham Indonesia, adding that the association was ok with the minimum capital requirements.

“If the company cannot find such minimum capital, then why bother to create such FinTech in the peer-to-peer lending sector?” he said, adding that the association was in favor of strict regulations.

“According to the rules, all players must have licenses from the OJK, and this helps to eliminate ‘fake’ P2P lending businesses. It’s natural selection,” he said.

The association believes the regulation should not stop new lending companies starting up, because the regulation makes it clear that to build such financial technology requires enough capital for not only running the business for in two or three months, but for several years.

Echoing the association, Investree, a leading P2P lending company in Indonesia, also applauded the OJK’s regulatory efforts, pointing out that the industry actively took part in the draft process.

“The new regulation from the OJK already balances with the current conditions of the P2P lending business,” Adrian Gunadi, co-founder and CEO of Investree, told AmCham Indonesia.  

“It does support technology startups and has the correct regulatory stance. It just what we expected.”

Conventional banks and P2P

One issue emerging with the rise of P2P lending is how it will shape the relationship with conventional banks. P2P lending, similar to any FinTech, provides flexibility that conventional banks cannot provide.

Investree aims to empower unbanked individuals and communities and small and medium sized enterprises (SMEs) that have no access or eligible collateral to gain banking services. P2P lending offers the borrowers low interest rates and the administrative side is simple.

P2P lending offers borrowers speed and affordability by taking only hours, or at the most a few days, to reach the borrower. Investree, for example, says its best time is 65 minutes from receiving the application to sending the money.

Investree and other members of the association agree it’s best to grow together with conventional banks, each using their own strengths, targeting different marketplaces and products offered.

“Ideally, to grow together we should play in different target markets,” said Gunadi. “Banks have power in the legal system, good databases, reputation and branding. While Investree’s strength is speed, innovation, and transparency.”

He also says P2P lending is complementary to banks, rather than a competitor.

“We believe that banks will not see us as competitors, but as complementary while we are targeting the unbanked population, people who are too costly for them.”

What’s next?

Both the FinTech Association and Investree agree that there is still significant work to be done to support the development of P2P lending specifically, and FinTech generally.

“First, a plan to create electronic certification to strengthen the investor’s position and avoid mismanagement of any P2P platform that could threaten the reputation and credibility of the existing financial industry,” said Aji.

“Second, coordinate with PPATK [the Indonesian Financial Transaction Reports and Analysis Center] regarding the Know Your Customer (KYC) system so it’s easier to apply to new startup companies. The last is the verification of data security for financial technology. So far, there are accessible payment methods, but they are not yet official.”

Gunadi told AmCham Indonesia he agreed with the association that these criteria need to be considered to further accelerate P2P lending development.  

“Certification is needed in order to acknowledge who is credible and who isn’t, for P2P lending companies,” he said.  “Second, sharing data is important. Last, we hope that in the future we can establish a FinTech office in the OJK.”

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