Why Indonesia is ready for more comprehensive P2P lending regulation

Indonesia’s P2P lending industry has fallen on hard times. After several years of relatively unchecked P2P lending expansion, regulators have decided to crack down on problematic industry players with an eye on heading off catastrophic failures. No doubt China’s experience in the 2010s is instructive for Indonesia, which does not want to see its own retail investors be robbed of their life savings in pyramid or Ponzi schemes.

Fintech firms in Indonesia’s microfinance sector have since July been required to submit their financial transactions to the Financial Services Authority (OJK) and file financial reports with the regulator.  The OJK began requiring these filings after the implosion of TaniFund, a major P2P lender, which had its operating license revoked by the regulator in May as it faced a serious liquidity crisis, with borrowers defaulting and loans and lenders not being repaid.

According to Indonesian media, Tanifund is being sued by at least three investors that allege the company is in breach of contract given stalled debt repayments. That litigation is probably the least of Tanifund’s problems when one takes into consideration it currently has an NPL ratio of 60%, according to Fitch Ratings.

Another P2P lender in trouble is the rural finance specialist iGrow, which is facing a lawsuit by 40 former retail lending partners who claim they lost more than US$33.4 million. It is surprising iGrow has ended up in this situation given it is owned by the large state-backed e-wallet LinkAja.

Despite the tougher business environment in Indonesia, the Southeast Asian country’s P2P lending industry is still predicted to grow by 5% to 7% this year, according to the Indonesian Fintech Lending Association. There are currently 98 licensed P2P lenders registered with the OJK, up from 30 in 2017. To date, P2P lenders in Indonesia have disbursed almost 67 trillion rupiah to 131 million borrowers.

At the same time, Indonesia’s P2P lending platforms are sanguine about continued growth in the industry. They believe they can fill the financing gap for MSMEs, estimated at 2,400 trillion rupiah by 2026.

Going forward, it will be important for the OJK to continue its crackdown on unlicensed lenders. They continue to proliferate despite the regulator’s efforts to shut them down. According to The Straits Times, the OJK said it has shut down 8,271 illegal online lenders since 2017, but market insiders reckon that the true number of unlicensed lenders exceeds the number detected so far.