Growing pains for Indonesia’s P2P lenders

Written by Kapronasia || November 16 2021

Indonesia’s peer-to-peer (P2P) lending sector has grown expeditiously in recent years, with significant benefits for financial inclusion in Southeast Asia’s largest economy. Put simply, P2P lenders can serve markets that incumbent lenders cannot. However, risk is also higher in every way because P2P lending lacks a robust regulatory regime. The challenge for Indonesia’s Financial Services Authority (OJK) is striking the right balance between encouraging healthy industry development and preventing malfeasance and excessive borrower delinquency.

Over the past year, Jakarta has stepped up efforts to crack down on unlicensed P2P lenders, the country’s president has called for a pause in the issuance of new licenses and the OJK also has announced its intention to boost minimum capital requirements for P2P lenders sixfold: to IDR 15 billion from IDR 2.5 billion. 

Indonesian regulators know what can happen when P2P lending in a large, underbanked developing economy is allowed to grow for too long unsupervised. It need only refer to China’s experience. Had Beijing acted earlier, before some of the worst scams unfolded, China’s P2P lending industry might have survived. However, Chinese regulators ultimately felt shutting the industry down was the safest bet. 

In Indonesia’s case, the country needs P2P lending for financial inclusion more than China did. Only about 20% of China’s population is unbanked, while in Indonesia’s case that figure is about 66%. Simply banning P2P lending does not make sense for Jakarta. 

The OJK will thus aim to put the bad actors out of business and encourage some consolidation among other firms. Better capitalized P2P lenders are less likely to run into financial trouble. In a November research note, Fitch Ratings notes that Indonesia has shut down 5,000 unscrupulous lenders since 2018. More than 1/3 (1,800) of them were shut down in the first nine months of this year. Unlicensed lenders are known for their aggressive collection methods and ultra-high interest rates.  

Some registered lenders have shut down amid regulatory tightening and the pandemic-hit business environment. In December 2019, registered P2P lenders hit an all-time high of 164. By the end of August, that figure had fallen to 116. 

Nevertheless, the industry continues to grow briskly, indicating strong demand for alternative lending services despite pandemic-induced business uncertainty and the falling number of licensed lenders. According to data cited by Fitch, outstanding loans in Indonesia’s P2P lending sector rose to IDR 26 trillion by the end of August from IDR 5 trillion at the end of 2018.  

Meanwhile, NPLs in Indonesia’s P2P lending sector have improved considerably since reaching climbing to 4.8% in 2020. As of the end of August, the NPL rate for the industry was just 1.8%.